You can now buy a subscription for most consumer products from dog food to flowers. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.
Why are so many companies switching to a subscription business model? The main reason is that recurring revenue increases the value of your business, but there are some other, less obvious, benefits to add a subscription offering to your business.
Free Market Research
Finding out what your customers want is expensive. Focus groups can cost thousands of dollars and a statistically significant piece of quantitative research, done by a reputable polling company, can approach six figures.
With a subscription company, you get instant market research for free. Netflix knows which shows to produce on the basis of the viewing habits of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.
For you, a subscription offering can allow you to test new ideas and gives you a direct relationship with your customers so you can see what they like first hand.
Subscription businesses are sometimes criticized for being cash hungry. Many charge by the month and then wait months—sometimes years—to recover the costs of winning a subscriber.
However, if you can get away with charging for a year’s worth of your subscription up front, cash flow will improve. That’s what the analyst firm Gartner does. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.
Customers are not always loyal. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few dollars. However, if you lock your customers into a subscription, they may be less tempted to try a competitor since they have already made an investment with you.
One of the reasons Amazon Prime is so profitable is that their subscribers buy more and are less likely shop around than non-Prime subscribers. Prime subscribers want to realize the full value of their subscription, so they buy a wider spectrum of products from Amazon and are less tempted by competitors’ offers.
The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will increase the value of your business. But the other benefits are just as important.