More than twenty years into the ecommerce revolution, the idea of paying for products and services on a recurring basis has definitely carried over to the digital world. Businesses are abandoning the notion of one-time transactions for their products in favor of subscriptions as they realize that these sales are no longer enough to assure profitable, long-term revenue growth.
No longer does the customer relationship end with the swipe of a credit card.
But is it the best option for your company and customers? Let’s explore.
What Successful Subscription Businesses Have in Common
Companies like Netflix and Spotify are able to cultivate cohorts of customers who continue to submit additional payments over time for two interdependent reasons:
- Customers frequently use the service,
- The service is frequently updated.
If the service never improves, then usage declines, and the recurring revenue well dries up. This means that for subscription businesses, innovation is the key to ensuring customer loyalty, and thus, recurring revenue.
This differs from perpetual license businesses that depend on single transactions from their customers. In these perpetual license models, users pay a higher amount upfront to own the product regardless of how frequently they use it, and the product remains static until the next release a year or two down the line.
Following this line of thought, it’s also important to consider another benefit of subscriptions over perpetual licenses. With perpetual licenses, customer lifetime value is improved through maintenance/upgrade fees or selling additional units.
In the subscription world, lifetime value is improved with every successful renewal or billing event. Additionally, subscription businesses can increase lifetime values with a strategy for upselling customers to higher-tier plans and additional licenses for colleagues and family members.
Types of Subscription Pricing Models
So let’s assume you frequently push updates to your service, your customers frequently use the service and find those updates valuable, and you’re looking to subscriptions because they provide consistent and predictable revenue.
It’s important to understand that there are different types of subscription models. Choosing the best one for your business is not always obvious.
Subscriptions based on time intervals are common. Think about how many services you pay the same price for every month. The key to success with this type of model is whether the customer consistently submits payment. Usually, this means encouraging automatic renewals. Some companies decide to bill subscribers monthly, while others choose annual or even quarterly billing intervals.
Your other option for billing customers in regular intervals is to measure value based on user activities. A usage-based pricing model — employed by companies such as Amazon EC2, Mixpanel and nearly all cell phone carriers — is a common example of this model. Activity-based intervals might not be as predictable source of revenue like time-based subscriptions, but their advantage is bringing in greater revenue than billing based on a flat fee, especially from your base of power users.
All in all, with a subscription business model, provided you focus heavily on customer experience and relationships, your business stands to gain a stream of recurring revenue, improved business planning and loyal customers.