Sign Me Up! 10 Tips for Success with Subscription Business Models

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Some of us are old enough to remember when subscriptions were limited to just sports clubs, newspapers and magazines. In fact, the subscription-based business model has been around since the 1770s. It was originally established in London as a way to expand newspaper sales. In 2009 only 18% of the value of the top 100 brands was in subscriptions. This grew to 29% by 2018.

According to its Always On report, FIS, a global leader in financial services technology, nearly 42% of customers state that they remain subscribed after the first month because they welcome the ‘personalised or tailored’ nature of subscription services. An additional 19% do so because of the ‘convenience’ that a subscription service delivers.

As reported by Gartner, an astounding 7 out of 10 organisations have shifted to building ongoing customer relationship through a subscription service, from a transactional, one off sales or repeat purchases model.

UBS is predicting that subscription businesses will grow from a current estimated value of $650 billion to be worth $1.5 trillion by 2025, globally.

The UK Became a Country of Subscribers during the heights of Covid

The UK subscription market grew by an unprecedented 135% and during the height of lockdown in 2020, the market was worth an estimated £1.4bn.

The growth in the ‘Subscription Society’ was further fuelled by our 2020 and 2021 enforced lockdowns where we were grounded at home and consumers found safe and convenient ways to engage with brands, products and services, and to be entertained.

A spokesperson for Mary Portas affirmed, “Subscriptions were already a vital tool for UK retailers prior to the pandemic, helping businesses to remain nimble and transport their product or experience direct to their customers’ homes. Due to the prolonged period of lockdown, the public has grown accustomed to the range of products on offer, as well as the ease at which they can be regularly surprised and delighted by the brands they care about.”

In fact, Barclaycard consumer spending data research exposed the top reasons for signing up to subscriptions as, exclusive content (53%), convenience (53%), a personalised offering (48%), and the discovery of new brands or products (5%).

The British consumer spends £552 a year on sign-up services, with 65% of UK homes signed up to regular subscription services and they have an average of seven subscription services. Men spend an average of £684 a year compared to £420 a year for women.

During the less certain times of 2020 and 2021, subscription services offered a more reliable and predictable source of income. This market was valued at £323 million in July 2021 having increased by 39.4% year-on-year. 10% of retailers launched their first sign-up service during lockdown. At the height of the lockdown restrictions, Disney+ experienced a 72% increase in subscriptions.

Top 10 UK Subscription Service Categories

Source: Barclaycard

What Is the Subscription-Based Business Model?

A subscription business model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for products or services, unlike a traditional model where customers buy a product or service as and when they need it.

Customers can then renew their subscription. This model allows businesses to build ongoing customer relationships to create a steadier and more predictable revenue stream. But customers can cancel their subscription at any time, after giving a period of notice. The same report by FIS affirms that 68% of customers who cancel their subscriptions do so because of poor customer service. Organisations, therefore, need to prioritise the end-to-end customer experience and shift their focus beyond the product. The experiences that customers want to receive are hassle-free, personalised, curated, and immersive. With the growth of subscriptions and rising competitiveness, organisations need to deliver a streamlined, effortless experience for customers at every touch point.

There are four subscription models:

  • Streaming/content services
  • Technology as a service
  • Subscription boxes
  • Products with added subscription services

For the purpose of this article, I’m discussing subscriptions generally but with more of a focus on Streaming services and Subscription boxes.

Key metrics for a subscription-based business model are:

  • Monthly recurring revenue (MRR)
  • Annual recurring revenue (ARR)
  • Churn rate (% of customers terminating a subscription in a given period
  • Revenue churn (% of lost revenue from existing subscribers in a given period)
  • Renewal rate (total number of subscriptions renewed in a given period)
  • Customer lifetime value (CLV — total revenue potential from a customer)

Normally, a renewal rate of 80% is deemed to be good and what is required for longevity (therefore a churn rate of 20%)

The Opportunities & Challenges of a Subscription-Based Model

Daniella Peri from Yoppie (pioneers of personalised period care) observes: “Subscription boxes have provided a vital service for many during the pandemic, helping us to get what we need, when we need it, all without having to leave the house… It also offers a far more personal experience with many providers providing a great deal of personalisation, and this is something that resonates with the modern consumer.”

There are several opportunities and benefits presented to organisations looking to introduce a subscription-based model.

  • It’s much easier to forecast demand with the recurring revenues of subscriptions
  • Increases relationship longevity — subscriptions can greatly reduce a customer’s likelihood of churn and switching brands.
  • A personalised, needs-based direct relationship — I’ve already mentioned personalisation but businesses with subscriptions can get feedback from customers to both improve and personalise the experience given they have a direct customer relationship.
  • Frequency of interaction — subscription-based businesses have much more frequent contact with customers and the ability to engage and interact. This helps not only gather data, build relationships, and communicate but the feedback loop is faster and more frequent to react to suggestions or complaints and continually improve the customer journey
  • Cross-Sell and Up-Sell – Using the data that is collected from subscribers, organisations can cross-sell or up-sell based on customer preferences and real customer behaviour insights. This can improve relationships with customers by refining their subscription to meet their needs as an individual.
  • Builds a community of like-minded customers

On the flip side, there are challenges to the subscription-based model.

  • Customer acquisition – for subscription-based services can be a tougher challenge, as they require a greater commitment from the customer.
  • Fulfilment & Customer Service — Customers come to expect and rely upon their regular subscription service and a customer service or delivery failure can have a greater impact on customers than a one-off purchase. Service recovery needs to be excellent in these situations.
  • Control – Customers like to feel in control. Subscriptions need to empower customers, for example allowing customers to choose the length of subscriptions, making it easy to leave if they want to or take a break, and having a degree of choice over what they are receiving.
  • Apathy – Subscription services can be a fad for some customers. Content, products, and services need to be relevant and keep customers interested.

From Cars to Food to Fashion

ln 2017, Volvo launched their two-year subscription service ‘Care’ which costs from £699-£799/month. It went UK-wide in 2020. The subscription is all-inclusive, meaning it not only includes the car of choice, but it covers servicing, maintenance, wear and tear, vehicle tax, dedicated customer care, and roadside assistance — you can also choose to add insurance. Those choosing a flexible plan can then change their car or cancel whenever they want to, although this freedom to choose comes at a higher monthly cost.

Source: Volvo

Since then, others have followed suit. Jaguar and Land Rover launched Pivotal in 2020. It has a minimum 90-day term but includes vehicle swaps, recognising that there are moments in life where we need greater flexibility or the ability to change vehicles rather than being tied to the same car for a number of years. There are several membership levels, and the membership can be put on hold which speaks to the need for control and choice, mentioned earlier. It is also very easy to speak to a Pivotal expert, directly from the website.

Elmo is a multi-car subscription service specialising in a range of Electronic Vehicle (EV) brands. Customers can compile a bespoke bundle and Elmo provides access to a home charge point, renewable home energy, and a public charging membership.

HelloFresh is the leading food subscription service that delivers the ingredients to cook a complete meal. The HelloFresh box includes individually wrapped packages of food, measured out to the exact portion needed in the recipe. HelloFresh not only saves customers time as there is no preparation work to be done, but also money as there is no food wastage.

Source: Shutterstock

Stitch Fix is an example I personally love because it cleverly uses AI to create an intelligent subscription offering. Customers complete a questionnaire detailing sizes, style preferences, and lifestyle. The system uses AI to select clothes that will fit and suit each customer. A human personal stylist then finalises the selection which are sent to the customer. The system then learns more and more about style and preferences to make future suggestions even more tailored.

Strategies that Support Subscription Success

Research by The Royal Mail identifies the top reasons for businesses starting to offer subscription services to their customers, to be:

  • Drive greater brand loyalty 44.8%
  • Desire for greater control (distribution) 34.5%
  • Control of marketing and promotion 24.1%
  • Lower start-up costs 24.1%

Kirsty Morris from Barclaycard Payments believes that “Subscription services provide an exciting opportunity to engage consumers with products and services at home, whether that’s digital content or streaming services, meal kits, or more personalised offerings such as bespoke alcohol kits or on-demand exercise classes. For many retailers this has meant adapting quickly to offer new products and services to respond to the growing demand.”

Most businesses can pivot and migrate to a subscription model. Here are 10 tips for subscription success:

  1. Nurture customer relationships for life — consistent and relevant engagement supported by prompt, proactive and transparent customer service will help build a closer customer relationship
  2. Make every interaction valuable (and easy) — make every interaction valuable and of value to customers e.g. use digital technology such as integrated playbooks, suggested knowledge articles, and AI-powered assistants that empower customers
  3. Harness customer data – gathering of customer data is much easier now via AI technology. Customers will leave a digital trail so there is an opportunity to connect these data or profile dots to surface valuable customer insights. Use data to analyse behaviour, personalise the next-best actions and predict likely future commitment. Ensure an integrated 360 view that empowers employees to best serve the customer
  4. Get aligned — ensure collaboration rather than siloed working practices so that the experience and contact are integrated and seamless for customers where everyone in the organisation is clear on ownership, roles, and responsibilities
  5. Articulate the value proposition – communicate subscription benefits. Customers might not automatically understand the benefits of a subscription offering. Even after signing up, customers will be considering the value exchange and if the subscription is worth the recurring cost
  6. Evolve the subscription experience – subscription players like Dollar Shave Club and Graze have been successful by providing a regular and personalised experience with an evolving customer experience.
  7. Establish pricing strategy — there are many pricing models that a company can employ. Amazon’s Prime subscription service commands a relatively low price but it is a loss leader as Prime Customers spend substantially more with Amazon. The pricing structure needs to be linked to business outcome e.g. retention, acquisition, revenue etc…
  8. Geographic or segment tailoring — to nuances of locale or customer segment by learning about customer preferences, habits, previously liked products, and so on.
  9. Be truly omnichannel – unifying customer channels to be consistent through the customer journey, with all customer and brand information readily available irrespective of the touchpoint
  10. Be metric driven — metrics are specific to subscriptions. Use metrics to align the organisation around performance, performance gaps, and improvement opportunities

Are Subscriptions Here to Stay?

Coming out of lockdown, figures suggested that the subscription market was projected to grow by a further 29% by 2025. However, we now find ourselves in a time when living standards are forecast to suffer their biggest decline since the 1950s.

It’s hard to have missed the headlines about Netflix claiming that the streaming ‘pandemic boom’ is over as according to a Kantar report, whilst there were 1.29 million new subscriptions to subscription video-on-demand (SVoD) services in the UK in the first three months, this was overshadowed by 1.51 million cancellations including Netflix and Disney+. Many of these were due to financial concerns and money-saving activities. In January 2022, Netflix confirmed that in 2021, it added the fewest subscribers since 2015. Indeed, last year, Netflix attracted the lowest number of new UK subscribers since launching in 2012.

Dominic Sunnebo, the global insight director at Kantar Worldpanel stated, “With many streaming services having witnessed significant revenue growth during the height of Covid, this moment will be sobering. The evidence from these findings suggests that British households are now proactively looking for ways to save, and the subscription video-on-demand (SVoD) market is already seeing the effects of this. In times of financial uncertainty, services need to be indispensable in subscribers’ minds. As a result, it’s now more critical than ever that SVoD providers demonstrate to consumers how their services are indispensable in the home in what has become a heavily competitive market.”

Subscriptions with the highest cancellation rates include Audible, Time, Amazon Kindle, The New York Times, and BeenVerified respectively. Those subscriptions have cancellation rates above 15%. The least-canceled subscriptions include productivity services like Wix, Squarespace, Dropbox and Zoom; streaming and entertainment services like Twitch, Xbox Game Pass, and Blizzard Entertainment; and financial subscriptions like Stash and Wealthfront, with cancellation rates of just 1% to 2%.

Subscription customers appear to be questioning value for money and are canceling their payments because they can no longer afford them, even if they love the products and services that they have been signing up to. Subscriptions could be one of the first things to go when customers in the UK are trying to manage rising fuel, energy, and food bills. A further study asserts that 38% of UK consumers are planning to cancel a streaming subscription and stated that their primary reason was ‘wanting to save money’.

A subscription model is clearly an opportunity to capture nuanced data on customer wants and to more frequently interact with customers, over a longer period of time. Whilst the impact of an economic downturn will inevitably hit ‘perceived’ luxury items, however delivered — staying close to customers, as subscription allows, if utilised effectively will allow organisations to actively engage with customers and through careful marketing messages, reduce the impact that might be faced by more transactional models.

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