Business tips

How to manage a subscription business model

The subscription business model has grown rapidly in recent years with e-commerce, entertainment and media industries all adopting it as an alternative to one-off purchases. Here are guidelines for small business owners on running a successful subscription business.

From Netflix to Dollar Shave Club, monthly and annual subscription services are all the rage right now in the industry. Consumers get convenient access to unique products and services where they don’t have to pay upfront, and businesses get a recurring source of revenue and potential to serve long-term customers.

Co-founder of the technology forum in Melbourne, Ben Richardson explains why subscription business models are becoming increasing popular across industries and shares the benefits and pitfalls of running a subscription business.

Subscription models are not new, but are gaining ground across industries

The subscription business model itself has been around for decades – paying weekly rent is a good example – but many traditional product-centric industries are moving to subscription models whereby customers pay a recurring fee to get new items sent to them. Today, subscription business models are used to purchase everything from music to pet food.

Subscription businesses have been going on for decades in one form or another, but it depends on whether the payment process is seamless and on the definition of ‘subscription’ itself.

“Many industries are not doing it, but probably should as the definition of subscription is ease for the customer – you have one problem and that is sorted by a subscription,” he says. “One day you will be able to subscribe to ‘short grass’ and lawnmower businesses will be able to track weather and growth rates to keep the grass short.”

Richardson, who co-founded a condom subscription service and later a company called Subservice, which helped other product-centric businesses move to subscription models, believes people will also pay more to have things taken off them through a subscription. “Look at the Dollar Shave Club. It has taken over the supply chain and owns the entire operation. They can completely change an industry and open up new subscription opportunities.”

Richardson says subscriptions could apply to any industry, but the viability depends on the industry demographic as much as the product itself.

Steer the subscription benefits

What’s making subscription business models all the rage right now? The lure of a steady stream of recurring revenue is proving to be very attractive to business owners.

“Subscriptions are great as it is all net positive cash flow as you always have cash to buy things and do things,” Richardson says, adding it is the “easiest model to get a business off the ground”.

Retaining customers can be up to nine times cheaper than acquiring new ones and at that nine times metric you don’t need to scale a sales force to keep up with revenue growth, according to Richardson.

Another significant advantage of subscription business models is the high level of customer intelligence vendors can obtain.

Bellabox, a subscription business that sends out product samples from make-up companies has become so focused on follow-up questions it has created marketing reports “worth millions” to get feedback on products. “It is creating marketing analysis for each product and sending that back to the company,” Richardson says.

Avoid pitfalls by putting customers first

A subscription business has many benefits; however, it changes the way business owners need to think about selling as retaining the customer is much more important for success.

“You need to make sure everyone is happy and make sure every interaction – from social media to the delivery package – makes everyone happy. Traditional business models are more about sales than about how to keep customers happy,” Richardson says. “Err on the side of caution. Giving away a free subscription due to a problem is worth it to keep your customers happy. The first rule is be fair – if you were on the other side what would you expect?”

Some customers won’t know they have subscripted to a recurring billing service so vendors should give these people a refund and let them keep the product they have been sent. Keeping multiple communication channels open is also a must.

“A terrible example is an experience I had with car insurance,” Richardson says. “When I changed addresses some letters got lost so I lost my insurance for three months. The company put the entire retention strategy in the letter medium. You have to be as communicative as possible and err on the side of more communication and automate as much as you can.”

Subscription customer are “paying for automation” and to not have to worry about reminders and, in some instances, they would rather not be presented with options as it’s just another decision point they have to deal with so the amount you can minimise manual interactions the better.

“Keep your customers happy. You’ve got to be gathering customer feedback and know if they are happy. If a customer doesn’t have a good experience and keeps getting sent products then it can get messy and you can lose cash flow,” Richardson says.

Another tip is to make sure your finances are okay as subscription companies can grow very, very quickly. “Be careful you don’t grow too quickly and overdo your systems,” Richardson says. “Managing logistics in a sustainable way can be really tough so look at a dedicated fulfilment service.”

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