What is a subscription business model
The automated customer: subscriptions as a business model
Subscription business models are becoming interesting for more and more industries. This involves all forms of automated recurring income. Sometimes it goes by the name of "membership", sometimes "flat rate". In this article, Jan Tißler presents nine different models and also explains what makes a successful subscription and how you can measure success.
Why do customers get involved?
The “subscription” business model is well known in journalism, and we rely on it here at UPLOAD Magazin. A subscription within the meaning of this article includes all forms of recurring payments. Why do customers get involved? There can be various reasons for this - here are three options:
- You get access to exclusive content. This can work in the sense of a "club" in which all content and functions are only available to members. Netflix is an example of this. Or there is a mixed model with free and exclusive offers. Many news websites are experimenting with it, but online tools sometimes have a free basic version as well.
- You have access to a service that is available at all times. Many cloud offerings work in this way, but tradespeople can also use it, as will be shown below.
- You get a product delivered automatically and at a lower price. This is the case with physical products for pretty much everything we buy on a regular basis. Amazon is now also involved here.
The advantages of a subscription business model
The attraction of recurring payments for the provider lies in a reliable, predictable income to have. At the same time one becomes more independent of external platforms: After all, a significant part of the income comes from the existing customer base, only for further growth and to compensate for layoffs you have to rely on social media marketing, advertisements, press work and other tools.
Another argument for some: A subscription model makes a (web) company more attractive for sale or takeover. After all, business will continue without the original founder, unless you are too stupid. There is also a fixed customer base and fixed income. Depending on the offer, sales may even be based on a clearly defined service or on a portfolio of long-term useful and valid information.
In the following I would like to show how versatile the topic can be. The examples are based on the book "The Automatic Customer: Creating a Subscription Business in Any Industry" by John Warrillow *.
Model 1: The membership website
This model is about giving like-minded people a point of contact to learn new things and to exchange ideas.
According to John Warrillow, the most successful examples of this type are those helping (budding) entrepreneurs. He mentions RestaurantOwner.com as an example. Basically, this page is the digital version of the specialist books and seminars that you would otherwise have done. The page offers a clearly defined benefit (value proposition) and since you will hopefully be more successful with the knowledge conveyed here, the output literally pays off.
Also worth considering: Such a membership website can be the first step towards offering additional products and services. After all, the members have already shown interest in the topic and are even willing to pull out their wallets for it. The conversion rate for a suitable event, for example, should be significantly higher here.
The online subscription areas of a newspaper such as the New York Times or the Wall Street Journal are in principle a membership website: Certain content and offers are only available here for paying subscribers.
It is clear that the content and offers behind a paywall must be correspondingly exclusive. Of course, you don't win paying customers with quick snippets of news. And anyone who otherwise relies on trash journalism shouldn't be surprised when a few good pieces of content sink into the click-strong morass of the rest of the website.
In general, this model can work if you have very specialized information that a target group willing to pay wants - or has to - stay up to date. It usually works best as a B2B offer with a clearly defined benefit.
Model 2: the library
In the digital world, it is technically easier than ever to give customers access to an almost unmanageable library of content - at a comparatively low monthly fixed price. Well-known examples are Netflix or Spotify.
As with a classic library, you will never be able to consume everything that you regularly pay for. But the customer is promised to always find something suitable and you can watch as many films and series or listen to music as you want. For a comparatively manageable price of around 10 euros, this seems an almost unbeatable price / performance ratio.
The biggest challenge of this model is of course the library of content itself. But you don't have to be a publishing giant or start-up with millions of venture capital. If you have little or no budget, you have to be a little more inventive instead. For example Joshua Jacobo when he started the New Masters Academy. He had noticed how expensive artist seminars can be. In addition, they were only available in some regions. He wanted to make it accessible to everyone and offer courses where artists were the teachers. Only it had no content. Although he had $ 70,000 in start-up capital, that wasn't enough to buy a suitably large library. Instead, he made common cause with the artists: they should give a seminar, Joshua and his people would record it. This was paid for in retrospect: the artists received a share of the site's sales. The more they contribute, the bigger the piece of cake they get. With at least 100 hours of material, the site was finally launched.
He won the first participants through a Facebook page on which he posted his own works and those of the participating artists. After eight months he had 30,000 fans here. When the Academy launched, 1,000 of them became paid subscribers - a good start.
The intermediate step via a newsletter or, as here, a Facebook page is as well known as it is tried and tested. In this way you gather an interested community and can then make yourself and your offer better known over time and build trust.
Tip: In order to keep the subscribers of such a library in line, the offer must be continuously expanded. Otherwise, at some point you will get the feeling that you have already consumed everything essential. Another tried and tested option is to offer a community in addition to the content in which members can exchange ideas.
Model 3: The exclusive club
It's not always about getting as many people as possible into subscribers or members. On the contrary, it can be interesting to deliberately limit access. This can be done through specific and strict entry requirements or through a correspondingly high price.
In addition, it is often not so much about content or services, but about the network. And for some people, the more difficult it is to achieve something, the more they want it. This is why club membership can sometimes be a status symbol.
One example is the Genius Network, which brings ambitious entrepreneurs together with the “smartest minds in the world”. You have to apply for access on the website and still pay $ 25,000 per year. You can take part in three events for this. There's an even more exclusive version that costs $ 100,000. Sounds like a scam? That's what Anna David thought when she was invited as a guest. She wrote about her experience here. She stated: Without such a network, she would never be able to get to know all of these high-ranking, successful people. In this respect, the Genius Network is a perfect offer for a very special target group.
Of course, none of these are inventions of the Internet. Exclusive clubs and associations have been around for a long time in one form or another. But the digital world makes it possible to network worldwide and to find like-minded people.
The secret of the success of such an offer is not to make any compromises. Free lock offers à la freemium or different membership levels are out of place here. “All or nothing” must be the message.
Model 4: The premium service
Good customer service is rightly considered a guarantee of success. If you have a complex product or offer and you are targeting customers for whom quick help is worth cash, you can turn it into a subscription offer.
Take Salesforce, for example: The company popularized the idea of cloud software and is therefore already relying on a subscription model. And not just in terms of the actual offer, but also in terms of service: every customer receives the basic version of customer service, but those who pay more receive preferential treatment. Depending on the price level, you are guaranteed to receive an answer within an hour or even within 15 minutes.
You will also find such a model with web hosts, often combined with the technical offer. In other words: If you pay a higher price, you not only get more performance for the website, but also faster service or higher availability.
Not only the response time can be a way to differentiate the different service levels from one another: The basic offer often only contains inquiries via e-mail. If you pay a little more, you can call a call center. If you pay a little more, you have a personal contact. This, too, is something that professional customers are happy to spend more on if they can get quick and competent help in the worst-case scenario.
With this model, of course, make sure that you can also provide the promised services. So you have to increase both technically and personally.
Model 5: Automatic consumer products
There are a number of things that we keep buying at predictable intervals. That is why there are now quite a number of providers who regularly send you such consumable products - and ideally save money in the process.
The Dollar Shave Club is a famous example of this, which got off to a flying start with an often copied viral video. Subscription services for socks, coffee, diapers, soap, and more are other examples.
The main problem with these providers is that an online giant like Amazon could become aware of them and then force them out of the market. No startup can keep up financially. Because Amazon & Co. definitely have the staying power and also have established customer relationships.
That's why it's important to build a brand in this area. For this reason, the viral video of the Dollar Shave Club was twice as successful: It not only makes the offer known in no time, but also gave it a personable face. Customers soon became fans.
It is also important that the products also bear their own name - even if you buy them elsewhere. It is crucial for this model that customers have the feeling that they are only getting this offer in this form here.
Model 6: the surprise box
While model 4 is about delivering specific products repeatedly, this variant is about having fun with the surprise. It's like a monthly gift.
This is useful, for example, to inspire pop culture fans with things related to their favorite topic. Or it helps customers to try new things: they take the burden of the decision off your shoulders. The latter is available for all sorts of topics - from dog toys to tea.
With this model, you are the curator. They are the quality filter and should take this task seriously. After all, you want to inspire your customers over and over again and keep them for as long as possible.
A great challenge is not only to keep finding new, beautiful things for the surprise box, but also to procure, assemble and send them in sufficient numbers. Perhaps you design this model with products that you already offer in the shop. Then it is a little easier for you.
Model 7: The great-someone-else-does-it-offer
We all know that "team" is the abbreviation for "Great, someone else does it". But what if you don't have a team? Then you can book one and in many cases you will gladly (and regularly) pay for it.
This model is about selling services that make life easier for customers. Then they no longer have to worry about something that is important but that they themselves do not enjoy.
Think, for example, of people who live in a house but are not particularly skilled at handicrafts. Perhaps you already have a craft business, but have so far been dependent on being called. Why not offer such services as a package that arise regularly anyway? Then you will have a steady income and customers will have one less thing to keep in mind. Because you as a service provider determine what is to be done when and how and take care of everything. Communicate this to customers so they know they are in good hands.
Another advantage of this model: You build up a portfolio of existing customers who are already familiar with you and who are very likely to come to you when something bigger comes up. The subscription model not only ensures more predictability and financial security, but is also marketing in its own right. "Cross-selling" and "up-selling" are the keywords here: You can offer similar or higher-quality services as a supplement.
Basically, this model is ultimately similar to the “automatic consumer products” above, only that you provide a service. There are many ways to do this: window cleaning, gardening, accounting and a lot more.
Model 8: the network effect
In this case, the value arises not only from the offer itself, but above all from the members. One example is car sharing: the more people participate, the better the offer, the more likely it is to be recommended, the more likely it is to grow and keep getting better.
Accordingly, we are dealing here with the famous chicken and egg problem: the beginning is especially difficult. In this respect, it is important that you pay particular attention to what your customers want and what could prevent them from becoming part of the network with this offer. Start with a small, clearly defined group and offer them a perfect experience. Only when that works will you expand your offer.
It is also a crucial element to be significantly better than comparable offers. WhatsApp was originally an example of this: It competed with often expensive SMS. It seemed comparatively cheap to pay 1 euro a year. Because of this overwhelmingly better offer, WhatsApp was recommended from user to user and grew rapidly: shortly before it was taken over by Facebook, it gained 1 million new users per month. The comparatively tiny annual fee quickly brought significant profits, because WhatsApp was working behind the scenes with an astonishingly small team: At the beginning of 2013, WhatsApp already had 200 million users and only 50 employees.
Nevertheless, they too had costs and the beginning was not easy. They started their idea in 2009 with $ 250,000 in seed capital. They raised another $ 8 million in 2011 and then another $ 50 million in the summer of 2013.
Therefore, this model is more suitable for companies that can inspire investors. And it should also be considered: Since the actual value comes from the network, it can vanish again if you piss off your users.
Model 9: The Peace of Mind Service
Sometimes we pay for things that we will hopefully never need - so that we have something if we do need it. Think of the backup service in the cloud for your computer, the security service for your house or, of course, insurance.
This variant is suitable for both B2C and B2B, because companies in particular need the certainty in many places that they are protected in the event of an emergency. What pushes a consumer into a financial hole or causes a headache can mean the end of a business.
The greatest difficulty with this model is your own calculation: How much do you have to charge in order to make a profit even if the customers use the service? At the same time, of course, it has to match what your customers are actually willing to pay.
At the same time, keep in mind that your profit does not only consist of the difference between income and expenditure: after all, you are paid money that you can then invest elsewhere in the meantime.
Especially at the beginning, you should develop this model slowly and, for example, only offer it to a limited number of existing customers. You can also set conditions that limit, for example, how much you can do if the worst comes to the worst.
Win subscription customers ...
All models presented here can be combined with one another. It all depends on the industry, target group and offer. It is important that the benefits of membership become clear: What do you get here that you wouldn't get elsewhere? What value (whether directly monetary or otherwise) is offered?
In addition, you first have to win the trust of potential customers. Here the hurdle is even higher than with a one-time online purchase. And anyone who is in the e-commerce sector knows: the smallest disruption, the smallest doubt, the slightest lack of clarity can ensure that the interested party jumps off. This is even more true if you want to commit yourself as a customer for a longer period of time. There are various means of overcoming this hurdle.
An example: You are using a “freemium” model, in which there is free and paid content. The idea here is to create trust and give a foretaste. It is also good to have come into direct contact with a prospect: It is then much easier to sell something. You will know this trick from your supermarket if you are offered a free sample - it is based on the same principle.
There are a number of variants online. You may be able to make full use of the product / service for a limited time. You may be offering a limited free version that is not the size of the paid product but already gives a good impression. But be careful: It is not easy to find the right balance here. If you restrict the free product too much, it is rather frustrating for the interested parties and they do not get any feeling for what they are missing in the "Pro" version. If you are too generous, you will have far too many users who pay nothing, but may still do work, e.g. for support. Even experienced companies sometimes find it difficult to walk this tightrope.
It can also be a good idea not to have a free offer at all, but a paid “basic” offer. Advantage: You can be a little more generous here because you are still making some money. Disadvantage: Here too, as with the free offer, you have to find the right balance. Paying customers are automatically more demanding than testers of a free offer - even if the contribution is only small.
Small, regular contributions also have other disadvantages that you should keep in mind: Every payment is a booking process that makes work. Not only are taxes deducted from every payment, but also the fees of the payment providers. It is not uncommon for PayPal, Stripe & Co. to have a minimum fee per payment process, which means that small amounts have a poorer balance sheet. So it may well be that your basic customers pay something, but in the end nothing is left with you. You should therefore work from the outset to ensure that these customers take advantage of one of the larger offers as soon as possible. The good news: those who have paid you once are more willing to spend money with you again.
There are many more ways to build trust. You should design your landing page accordingly and attach great importance to "social proof", for example. We have a detailed post on what makes a successful landing page. Or you offer, for example, a newsletter to keep in touch with interested parties. A free series of advisors via e-mail is also a tried and tested tool that is often used. Explanatory videos, free courses or online seminars are further ideas.
Basically, we could repeat here all the tips that are given about selling on the Internet. You should just be aware that the hurdle is a little higher in your case.
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... and keep it
In online marketing, the focus is often more on gaining new customers than on customer loyalty. What is a failure there is a serious mistake with a subscription model: If you have laboriously won a customer, you want to keep that person. If you manage to do that, they will remain loyal to you and you will continue to get paid for your offer weekly, monthly or yearly.
Depending on the subscription model, you can achieve customer loyalty in different ways. If you set the "library", you must add further content as regularly as possible. If you are betting on membership or an exclusive club, the value should always be evident.
Reading tip: Find out more about customer loyalty alias "Retention Marketing" in a separate article ...
Key figures for measuring success
Also evaluate your results regularly. Important key figures here include:
- The monthly recurring revenue ("Monthly Recurring Revenue").
- The average value of a subscription customer from conclusion to termination (“Lifetime Value”).
- The cost of gaining a new customer (“Customer Acquisition Cost”).
- The churn rate.
The general rule is: With a subscription model, you first optimize the churn rate before you take care of acquiring new customers. After all, you don't want to laboriously win new customers at one end who then regularly run away from you at the other end because the offer is incorrect or the target group orientation needs to be improved.
The good thing in the long run is: If your churn rate is low and your existing customers are satisfied, they can even deliver new customers to you free of charge. Keyword: recommendation marketing. You can support this with an affiliate program: Existing customers receive a reward when they acquire new customers.
As you may have seen, there are numerous ways to implement a subscription model. And there are a number of adjusting wheels and success factors - significantly more than can be presented in the context of such a contribution.
At the same time, there are hardly any general statements that apply to every model, every industry, every offer and every target group. Example churn rate: Which value is good and acceptable here depends on a number of factors.
In the end, however, the following applies: Such subscription offers are possible in many industries and you don't have to be a hip start-up with pockets full of risk capital. Small businesses or even sole proprietorships can implement it successfully. Their strength is that they are so close to their customers that they can assess much better which subscription model could be used here.
* This is an affiliate link. Means: If you order something with it, we get a commission. Nothing will change for you.
This article belongs to: UPLOAD Magazin 74
Who wouldn't want to achieve more with less effort? There are plenty of opportunities to do this, especially in digital business. And sometimes it comes down to changing your own way of thinking and approaching ... In this issue, we present subscription business models. We explain how to go from self-employed to entrepreneur (and free yourself from the self-made hamster wheel). We show customer loyalty strategies that work. We look at the role good content plays in marketing automation. Finally, we take a look at self-optimizing, data-driven advertising campaigns.
Jan "jati" Tißler has over 20 years of professional experience as an online journalist and digital publicist. In 2006 he launched the UPLOAD magazine. Since 2015 he has been helping companies to inspire the right customers with content. Together with Falk Hedemann, he offers UPLOAD Publishing services along the entire content marketing process chain. Born in Hamburg, he lives in Santa Fe, New Mexico.
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