Subscription Business Models: Not Just for Services
By: Marco Vergani
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This was originally published on LinkedIn.
The shift toward subscription-based commerce models not only offers companies new incremental revenue opportunities, it also drives behavioural change among consumers. Companies that can adapt quickly to this trend stand to capitalise on new revenue streams in the short-term, and position themselves for lasting and profitable customer relationships long into the future.
Subscription-based services from Netflix and Spotify typify the post-ownership economy, threatening even Amazon’s core business as consumers buy fewer products in physical formats and instead opt to pay for ongoing access. Adobe is leading the way in the software market, moving its core creative software business to the cloud and transitioning customers to a monthly subscription fee model. Its business is growing rapidly following the move:
“We have tens of millions of people who have bought Acrobat over the lifetime of the Acrobat product,” says Adobe CEO Shantanu Narayan. “And for the first time the number of subscription units of Acrobat actually exceeded the perpetual units … It’s about enhancing new services that we can add to the business.”
But subscriptions aren’t just for services. Savvy branded manufacturers that understand these changing consumer behaviours can leverage that knowledge to secure long-term relationships with customers.
Everybody wins
The subscription model provides a level of dependability and reliability that benefits both sides of the consumer-brand relationship. For consumers, once they’ve activated their subscription, they feel their needs will be taken care of. They take comfort in the automated process and know they will be notified of any necessary actions in the future. As long as they remain satisfied, consumers are more likely to remain loyal and allow the passive transactions to continue.
For brands, the strategy of shifting from one-off transactions to recurring payments brings significant advantages. Forecastable income streams allow for significant and strategic marketing gains. As Adobe is proving, shifting customers to a subscription model also creates a ready and instant market for the rapid roll-out of new products and services. Applied strategically, brands can capitalise on a fan base that’s invariably receptive to new ideas launched under the brand’s umbrella.
The subscription model offers tremendous opportunities for brands to tie themselves closely to consumer lifestyles by becoming intrinsic factors in their daily lives. To fully realise the potential of subscription-based service models, brands need to consider three key trends:
1. Subscriptions include physical products
Media giant Condé Nast is diversifying its revenue and strengthening customer relationships by adding product subscription services to their current content subscription model. The company is launching “subscription boxes” based on the idea that if readers buy into the lifestyles their magazines promote, they’ll also buy into regular deliveries of the products essential to those lifestyles.
The subscription model for physical products is viable across industries. Healthy snack start-ups Graze and Naturebox, video game distributers Loot Crate, and even Starbucks have seen sizeable profits through subscriptions. Loot Crate has sent more than 14 million crates to fans in 35 global territories, and Graze enjoys annual sales exceeding £70 million.
2. Commerce of Things
Commerce of Things (CoT) is the marriage of digital commerce and the Internet of Things. With CoT, subscriptions take centre stage in consumers’ lives, bringing together the behavioural, technological and cultural factors giving momentum to subscription models in a post-ownership economy. Whether it’s coffee or toothpaste, automated reordering enabled by the IoT (and framed within an ongoing subscription model) brings greater ease, flexibility and convenience into consumers’ lives than ever before.
Consumers may not yet fully realise the possibilities of CoT. But brand owners should be rapidly preparing for advanced integration into consumers’ lives and the increased revenue opportunities such integration represents.
3. Wraparound services
Brands will only capture the full revenue and customer loyalty potential of Thing Commerce if they change their perceptions about what they can offer to consumers. Brands that used to sell a one-time item must evolve to offering a range of services that make that item more satisfying and enjoyable. The initial transaction with each consumer will no longer be an isolated incident as it is with traditional purchase models. It will be the beginning of an ongoing relationship within the context of a subscription payment model.
The subscription model commitment
Brands will be able to secure these new repeatable revenue streams by ensuring that they maintain regular dialogues with their customers. This involves adding more services and fresh ideas along the way to stimulate interaction and satisfaction from customers.
A company’s competitive advantage will be defined not by its products, but by its service. That’s a challenging proposition, but one that rewards companies in the long run with loyal customers whose lives are intertwined with their products.
It’s an exciting time for brands. As digital commerce and subscriptions move to deeper levels of adoption and maturity, we face significant changes in how brand-consumer relationships are played out. Is this how you see the next stage of ecommerce developing? Let me know.