How can startups ensure success in the subscription economy?
Subscriptions seem to be everywhere around us these days; they are here, and they’re growing more than ever. The benefits of shifting to a subscription model is motivating many of today’s disruptive tech companies. Take a look at Apple, for instance; this is a company that used to be known for their premium consumer devices, and now they have expanded their business to offer additional services and subscriptions.
The company recently broke through the $2 trillion valuation barrier, which many have directly linked to Tim Cook’s services plan and Apple’s shift from one-time purchases to a more customer-focussed array of services like Apple TV and Apple Music.
This type of model is driving growth in these challenging times, particularly for big players like Netflix which experienced 16 million new sign-ups during lockdown. It seems that now is a better time than ever to take the leap to this model, but how can businesses make the transition to this so they can reap the benefits?
Many of the most valuable tech, media and telecom companies have now moved to a subscription-based model, and the effect on the share price since this switch is staggering. Adobe has jumped to 843.7%, Microsoft has risen by 522.2%, while Autodesk has seen a 321% jump since using this model. On the other side of the coin, more startups are starting to consider making the jump, with increasing encouragement from VC investors upon seeing success case studies in their industries. For investors, reasons for the pressure is obvious; pushing for subscription-based products on the market means more generous valuations and higher market caps.
The subscription model is appealing for several reasons. It offers a robust and elegant solution for attracting and maintaining a loyal customer base and it has the potential to do various upsells due to the rich data that it aggregates in the process. It’s also much easier to grow and scale subscription-based products; as demonstrated in the last pre-COVID report, which showed that subscription businesses have grown revenue about five times faster than S&P 500 companies’ revenues throughout January 2012 to June 2019.
But does it perform well in a post-COVID world? Absolutely - the latest edition of the report finds that subscription companies continue to outperform their product-based peers even more substantially, with six-times faster-growing revenues and 12% expanding sales.
Understanding and appealing to Gen Z demographics
Consumer behaviour is also playing a big role in this growth. Appealing to Gen Z and millennials, and building lasting relationships with them, is the key to success in today’s market. It’s projected that Gen Z represents 40% of all consumers, so businesses must understand them and their needs.
Businesses should recognise that these younger demographic groups simply don’t have the purchasing power to own a lot of assets and/or consumer discretionary like previous generations. This means that a small, recurring monthly payment works equally well regardless if the product is a cloud-based entertainment content provider such as Netflix or Spotify, or an insurance company like AXA.
The shift from a transactional to a subscription-based model was eased also by the concentration of spending power in millennials and Generation Z. Their buyer persona has simple characteristics - they don’t fancy owning things anymore, and prefer to have the freedom to explore and switch between new services effortlessly, with no strings attached.
How to succeed with a subscription model today
The subscription model, therefore, wields many business benefits, from sustainability to growth, but the question remaining is how to design, develop and successfully monetise a subscription service. The formula can be distilled to several factors, including:
No barrier for entry or for leaving the service: keep the T&Cs light
Recurring payments aren’t new, but leaving out the contractual obligation which used to be an integral part of all recurring expenses such as utilities was a major game-changer for the market. The learning here is; don’t lock your user in (arguably what Monzo has just decided to do with its new premium account), keep the T&Cs light and motivate the customer by giving them a good value instead of exercising legal power over them and forcing penalties if they decide to leave at any point in time.
Low entry price, keeping options open for upselling and cross-sell later
Keep the initial price low to help consumers casually try the service/product. If they like it and decide to stay, you have a higher chance to upsell new services to them later instead of trying to force it all at once. This way you also build better consumer loyalty.
Keep free trials free and transparent, make unsubscribing as easy as subscribing
Subscriptions are a marathon, not a sprint - your main aim is to keep customers happy and loyal for the long run, and by that avoid churn. Transparency and making it as easy as possible to both subscribe and unsubscribe will create the best possible customer experience, so try and minimise any hidden auto-renewals the user may not be aware of. The payout will be a happy and loyal customer, accompanied by stable revenue.
Businesses considering making the move to a subscription-based model need to understand that the younger generation is dictating how this should appeal to them. The key to creating a successful subscription model is ensuring your customer is at the heart of your strategy and that you are adding value. Providing complete transparency and developing a product that is simple to use as well as easy to unsubscribe from is crucial.
This will help to build stronger customer relationships, along with the ability to experiment with agile pricing and the scalability to handle high-volume and dynamically changing service delivery. Once you have all this in place, you will be able to create a strong revenue source for your company and provide a product that appeals to your customers.