According to Harvard Business Review, more and more services are transferring to a subscription business model. In the beginning, only newspapers and magazines, gyms, and telecommunications companies used the model. Nowadays, a diverse range of products and services use a subscription-type business strategy.
Subscription marketing is a business model to gain recurring revenue through a monthly or annual subscription fee. Customers who subscribe to a business enter an agreement to receive a product or service regularly. One example of a popular company that uses the subscription business model is Netflix.
Netflix and other similar companies use SaaS or software-as-a-service; it is a distribution model that allows customers to use an application; these applications give customers access to software without downloading anything to their devices. Other companies use the traditional subscription model, which ships products to customers’ doorsteps, usually monthly.
Customers and subscription-based services
Forbes discusses the four main factors that drive customer subscription. They are price, convenience, personalization, and curation.
Price is one, if not the most important, reason customers take monthly or annual subscriptions. For example, Costco gives customers the chance to buy one-of-a-kind items at lower prices if they pay a yearly fee.
Another reason is convenience; customers do not need to continuously contact or go to a product or service provider for items or services they know they will consume monthly. Suffice to say, customers can simply subscribe one time and get the products and services monthly without worrying about anything. This kind of convenience is an advantage, especially in this fast-paced world.
As an example, the Dollar Shave Club earned multi-million dollars because of the convenience brought by a subscription-type business model. Most people regularly use razors, but they do not want the hassle of constantly going to the grocery to buy one piece of it. With Dollar Shave Club’s subscription model, customers automatically receive the item without worrying about it.
Personalization, on the other hand, gives customers a feeling of being seen. Companies usually send offerings based on specific customers’ tastes; they can do this because they already know what customers usually avail of from their monthly subscriptions.
Lastly, one of the main reasons why Netflix and Spotify are big in a subscription is curation. Most customers love that these applications can suggest the right playlist or watch list based on what the customers have previously listened to and watched.
Why businesses must shift to subscription business model
For some companies, turning into a subscription company is not necessary. For instance, Amazon is not a subscription company, but it uses a subscription-type pricing model for specific items in its online marketplace. Such items include those that are used regularly by people, including household and personal hygiene items.
By smartly adapting to a subscription pricing model, Amazon solidified itself as a multi-billion dollar company. This is one of the reasons why a company must shift or use a subscription-type model; it increases a company’s profitability.
It’s what the customers want.
Aside from recurring revenue, subscription services are what the customers want and need. For every kind of business, this is the goal: to satisfy customers’ wants and needs. In the US, more than half of adults are already paying monthly or annually for online services; this can even increase with premium features introduced by companies through their applications.
Besides convenience, customers want functionality and flexibility in their subscriptions. People like to have options, and that applies to subscription services, too. To deliver flexible subscriptions, a company can offer three-tiered packages that include basic, middle-level, or premium-level subscriptions. Companies can also allow subscription customization so customers can pick what services or products they get monthly.
Aside from customer convenience, a subscription-based model is convenient for companies, too. A company is already ensured of the customer, so there’s less pressure on marketing. All a company needs to do is to ship the products or provide the services to its customers.
Subscription-based services and GDPR
As subscription-based services essentially collect data from consumers, companies who use the model have a responsibility: they need to ensure that the customer’s personal data and information are protected. This is why a SaaS agreement is mandated through GDPR; essentially, SaaS suppliers enter a data processing agreement to comply with GDPR.
What is GDPR?
The General Data Protection Regulation (GDPR) is a privacy law drafted by the European Union; it encompasses all organizations that collect data and information from people included in the European Union. When this privacy law is violated, the GDPR can impose fines against the organization.
With more and more people subscribing to this type of service, personal data information protection is vital. Even the biggest subscription companies like Amazon and Netflix have to comply, too.
In the end, the subscription type model is a great business strategy to reach more customers and gain more profit. But the model has some risks that can be addressed by carefully studying it before shifting to it.