What is a subscription model and how can you implement it in your business?

What is a subscription model and how can you implement it in your business?

Subscription model: It's no more about ownership, it is about access. A subscription model refers to a system wherein the customer enjoys access to a product or service by subscribing to it once and the seller receives recurring revenue until the customer decides to discontinue the usage of the product/service. In a subscription model the customer pays according to his needs (dynamic prices) and the convenience of auto-renewal since payments are directly deducted from customer's bank account or credit card. The model focusses more on customer retention than customer acquisition.

This business model has already shown its success in the SaaS(software as a service) industry. Some known examples are Netflix, Spotify, Adobe. In the SaaS industry, the clients instead of purchasing the whole software pay a licensing fee and get access to updated softwares through updates throughout the licensed period. A company which is always talked about when subscription model is discussed is the Dollar Shave Club which is a provider of razors and personal grooming products. Dollar Shave Club has a revenue of $263 million.

Freemium model: A freemium model refers to a system wherein free access is given to all users for the basic features of a software and a price is charged if the customer wants to access advanced features of the software. Many SaaS companies use the freemium model in order to acquire customers and then retain them by giving better features for a price. An example is the company FOTOR, which allows you to edit photos or even make logos.

Origin: The origin of the subscription model is dated back to the time when the news carriers started delivering newspapers and magazines to each and every household and the households paid on a monthly basis. The model is so relevant that even now the same model exists for newspapers and magazines and has been extended to other industries. The model is a bit difficult to implement but the advantages will make you work hard for that.

Advantage of a subscription model:

• Reliable cashflow: In this type of model the foremost advantage is the recurring revenue from the same customer. The customers are ready to pay a certain on a regular basis to avail access to a software or content or purchase a product on a regular basis.
• Customer loyalty: A subscription model provides customer loyalty to a brand and also the benefit of an exponential growth in revenue since old customers don't leave often. There is strong customer relationship between the brand and customer when both are in touch for a longer period of time.
• Active product improvement: Companies like netflix or spotify use the customer data to make a better personalised experience for the user. The companies have algorithms put in place which analyses customers streaming pattern and makes recommendations based on customers usage of the platform. The customers since associated for longer periods also give regular feedbacks and therefore, it makes space for active product improvement. This is the reason why you get so many updates on your mobile phone, streaming device or pc.
• Inbuilt marketing: When the customers like a service, they also advice others to subscribe. The customers do so because of the referral system which is embedded in the software, which gives the existing customer some benefit like free access for a month. The high customer engagement also sometimes enables communities to be formed where the people using same service talk about the product. 
• Better inventory planning and management: In a non-subscription it is difficult to predict how much you will sell, however in a subscription based model it is comparatively easier as the existing customers will pay regularly for your service/product and there will be a month over month growth rate which will help you take into consideration the added customers demand. This helps the companies for better inventory planning and management, which will eventually help keep your working capital cost in control.

Types of subscription business:

1. Replenishment: Replenishment subscription model involves automating the purchase of a product which is used on a regular basis. For eg. The Dollar Shave Club sends its subscribers razors and other beauty products on a monthly basis. Even amazon provides subscription service for paper towels and toilet papers.
2. Curation: Curation subscription model would involve offering new products or highly personalised experiences in categories such as food or apparel. Companies like Food Darzee provide meal plans to customers based on their health goals (gain weight, lose weight) and keep on surprising the customers with new meal plans every week. Similarly the Elyt Club provides subscription boxes for men's apparel. A box will contain a mix of t-shirt, shirt, jeans and other apparel.
3. Access: Access subscription model allows user to subscribe to a streaming service or use a licensed software. Companies like Microsoft and Adobe have used this model for their software license fees. Also, streaming services like Netflix and Prime video have implemented this access model well.

How to implement subscription model in your business?

• Check viability: Not all businesses can implement this model. Therefore, a viability check needs to be done. For eg. Electronic products like television are usually used for a long period of time (years) and therefore it is not possible to start a subscription service where customers can purchase a television every month or year. On the contrary a bedsheet is something which gets old and dull and people buy new ones every year. So a subscription model can be built around bedsheets.
• Easy sign up process: The more seemingly easy a sign up process is, the easier it is to acquire users because who likes to fill a form which takes 10 minutes. These days the companies use email verification(like Gmail) to get user data and then just payment is required to start the service. So try to use a mass verification method.
• Pricing and payment mechanism: Giving customers the power, makes it more attractive to the customers. The more the payment periods the better and therefore companies like Spotify offer daily, weekly, monthly and yearly payment periods. The more longer the period the cheaper it gets on day basis for the user. Also, payment options also makes it an advantage for a company. For eg. If there is only a credit card option, then you may lose the potential client because of the payment mechanism. Therefore, payment wallets, upi, debit card, net banking all make it attractive for the customer.
• Scale with mission critical infrastructure: One needs to know that the customer growth rate and existing  customer base helps to know the future infrastructure requirement for the company and therefore, they should invest actively in the servers, cloud storage and back-end support for better customer relationship.
• Billing process: The billing process is a bit complex in the subscription model and varies according to your product or service. Some offer pay as you go, some the freemium model, some has fixed fee, some have hybrid pricing based on what features you use. Therefore, a proper billing system needs to be made to support your entire business. Also, the accounting mechanism needs to be fast as customers don't follow a cycle A client can start his service at any point of time and therefore, his subscription revenue might have to be split to parts for accounting in different periods. For eg. If you receive 1200 from a customer on 1st may, then 200 will go towards June quarter, 300 towards September, 300 towards September, 300 towards march and then 100 towards the June quarter of next financial year (April - March).
• Customer experience: If a customer is loyal to you, he expects good customer experience as well, like a user friendly software and a good customer support service when there is any technical issue or payment issue. Also, since the companies have customer usage patterns, they can put more investments in algorithms which could render better recommendations to the customers
• Lock-in effect: Some companies are not transparent about the membership cancellation option and therefore customers are stuck with the product for unwanted time period. The lock-in period should be transparent to the customer.

Metrics to measure effectiveness:

• Subscriber acquisition cost (SAC): It is the marginal cost incurred in marketing dollars to acquire a new customer. The lower the SAC, the better it is.
• Monthly recurring revenue(MRR): It is the amount of money received every month in the form of sales from the existing customers. Higher MRR is preferred.
• Monthly recurring cost(MRC): It is the cost incurred every month towards serving the existing customers of the organisation. Lower MRC is better.
• Churn rate: It is the revenue lost due to existing customers being dissatisfied with the service and therefore discontinuing the subscription service. The lower the churn rate the better.
• Lifetime Value (LTV): It is the total amount of money received from a customer in the form of sales till the time he discontinues the subscription.
• Growth efficiency index: The growth efficiency index refers to the additional revenue that the company can start generating by investing certain money in the business.

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