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Subscription models: How can businesses capitalize on the latest corporate trend?
When you think about subscription models, Amazon Prime, Netflix and Spotify may be the first that jump to mind, however, this model is by no means unique or individual anymore. Whether it is ink from HP, razors from Harrys, coffee at Pret A Manger or flowers from Bloom & Wild, it seems every business is jumping on the subscription bandwagon. Even Volvo recently introduced its new Care By Volvo service, allowing customers to subscribe to a car.
The UK subscription market is already worth £323 million annually, and growing exponentially, it is no surprise that the model is being adopted by household names and helping smaller brands become recognized faster than before.
We now live in a world where convenience is king and the subscription model can be a win-win for both consumers and businesses – if executed effectively.
While for consumers, the subscription model offers a lower price point and is, therefore, more attractive, the benefits to business owners are even greater. Subscriptions not only guarantee predictable revenue and access to huge amounts of marketing data, but they can also convert one-time shoppers into lifelong customers.
So, how can SMBs capitalize on this latest corporate trend?
Many of the early subscription services were built around experience rather than convenience and, at the time, this model was nothing short of genius. Up and coming companies, such as chocolate or spirit manufacturers, would provide free sample products as loss leaders for subscription companies to send out to their customers in the hope that they would be wowed by the product and go on to place an order.
While these “experience” models still exist, today the real success sits around single branded products or services that fulfill a need or desire.
The key for any business, regardless of sector, is to identify whether their product or service is something that a customer wants or needs on a regular basis. Very few individuals will be persuaded to sign up to a subscription model if they only want the product once, or are after one time access to a service.
Start by getting to know your marketplace inside out and understand the demand for your product and the lifetime value of your customer. Dig deep into your core demographic. What encourages them to buy, what encourages them to stay, what encourages them to come back but most importantly, what encourages them to leave? You cannot identify the subscription opportunity and drive forward an effective customer retention strategy without understanding their motivations.
Once you have identified the opportunity, there are a number of subscription models to base your service on. For example:
Curated – sending out a ‘luxury’ item, or a selection of curated items, to customers on a regular basis with the idea of encouraging them to try something new.
Replenishment – automatically sending out essential items to a customer, often at a discount.
Access – allowing subscribers access to a membership or service which provides curated perks.
The most suitable subscription model will depend entirely on the product or service you are offering. However, regardless of the route you take, there are some key considerations that apply across the board when launching a subscription model.
Starting a subscription model can be tough on cash flow. Your customer acquisition costs will be high for what is typically a relatively low-cost product, so breaking even will take time. With costs “front-loaded”, lots of businesses launch their new subscription service with an introductory offer to encourage people to sign up. However, it is essential that you design a pricing strategy that your business can afford and that isn’t going to put a strain on your cash flow.
For example, if you offer customers a free one-month trial, you run the risk that they will cancel as soon as it expires. Instead, consider offering a discount for the first three months if they sign up for a six-month subscription from the start. Or consider offering a range of pricing options to appeal to a broader demographic.
As with all businesses, marketing the launch of your new offering is essential. While cohesive branding, customer promotions and developing a social media presence is key, it doesn’t stop there. Your new customer has gone to the effort of buying your product and expects to be wowed, so when your product lands on their doormat, simply placing it in a jiffy bag with a compliments slip is no longer enough. Your packaging forms part of the customer experience and therefore it needs to reflect the quality of your company and the product inside. It must highlight your gratitude for your customers’ business and reflect everything your company wants to portray.
Finally, it is crucial to understand your customer attrition rate. Whilst it is important to grow your customer base, you also need to ensure that your customer retention remains strong. This may be a time-consuming process but minimizing your churn rate is the ultimate key to the success of a subscription model.
Rewarding loyalty will be key. For example, offer a discount code every six months so that recurring customers continue to feel valued. Tailoring these promotions will help to extend typical customer loyalty and keep your subscription base engaged for longer. Brands can also encourage BGB (buyer get buyer) schemes by incentivizing existing subscribers to recommend products or services to new customers in exchange for a promotional reward.
Remember, customers have extremely high expectations when it comes to a subscription service and will quickly cancel or switch to a market competitor if they feel a service or product is coming up short.
If executed well, the subscription model can provide unrivaled brand loyalty and open up new and exciting revenue streams for a company but don’t be fooled that this is the answer for every struggling business. If you can’t provide a unique product or tailored experience, then you risk becoming repetitive or irrelevant which could hinder the potential of your existing business model.
Neil Debenham is a business troubleshooter, consultant and private equity specialist.
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