Subscribed-everything: the subscription-based business model continues to grow
This morning you’ve probably had your coffee while reading the news from an online newspaper, been commuting while listening to Spotify, once in the office you’ve commented with your colleague the last episode of that series on Netflix. Without even noticing we are totally immersed in the subscription economy.
Subscriptions have been on the rise in the past few years, and today they occupy almost every aspect of our lives. It is a booming business in almost every sector, growing by on average 100% a year and increasing from 57$ million in 2011 to 2.6$ billion in 2016.
Consumers “are very comfortable with buying online, with buying unknown commodities, with buying products and then letting someone else select it for you,” says Marshall Cohen, chief industry analyst at the NPD Group, who predicts that subscriptions will become an additional retail channel, alongside e-commerce and bricks-and-mortar.
As noted by Tien Tzuo, founder of Zuora with a past of several years of working at Salesforce, it is actually difficult to imagine a business that can not be translated into a subscription model.
Zuora is a company founded in 2008 that offers a software aimed to help companies and organisations to shift to the subscription-based business model. Tien Tzuo stated in his best seller book “Subscribed: why the subscription model will be your company’s future — and what to do about it”:
“If you are not shifting to this business model now chances are that in a few years you might not have any business left to shift.”
But, how does a subscription-model exactly work?
Let’s start from its definition: it is considered a subscription-based business model a business model in which a customer must pay a recurring price at regular intervals of time to access to a product or service.
It operates a recurring revenue model, which requires consumers to pay a regular fee — once a customer commits, they are a guaranteed source of income for at least a month, and usually longer. Because of this, the company can predict its revenue stream, allowing management to plan and invest accordingly.
Main characteristics of this business model are:
- Offers conversion
- Customer retention depends on the quality of the offer
- Lifetime customer value
- Customer engagement
- Referral generation from existing customers
- Annual recurring revenue
In his book Tzuo explained it into details, and to try to assure retailers he quotes J.B. Wood and Thomas Lah, authors of another publication on the subject called “Technology-as-a-service Playbook: how to grow a profitable subscription business.”. In this book they explain the subscription model-revenue with a graphic called “The Fish Model”. As you can see from the image below, at the beginning costs grow and revenues drop, but, as soon as the transformation into a subscription model is completed, costs go down and the revenues come back up.
Other than the predictability of the revenue and costs, there are other reasons for retailers to consider passing to a subscription-based model: “it allows companies that are thriving provide convenience, personalisation and the ability to try new things without commitment or large risk”, says Brett Northatt, who founded subscription-based fashion rental service Le Tote in 2012. Several retailers are already sending subscription with personalised and branded packaging, free samples of products that may interest the customers. In this way the subscribers feel like a part of a team, of a community. And this is fundamental to retain customers, which is critical for the success of the business.
Ramanath Subramanyam, associate professor at the University of Illinois Gies College of Business, affirms that
“we know that consumers who consider subscription models will stay away from long term commitments before fully experiencing the periodic service […] It is only going to work if there are monthly or similar commitments with no penalty for cancellation.”
Brands need to find new ways to entice and keep customers, with continuous improvements to products, pricing, usage tracking and by testing different kinds of offers in different markets.
The markets and industries where to apply this model are endless: as commented by Tzuo it is almost impossible to find a sector that is not subscribable, even if we must admit there are businesses which are definitely less prone or easy to transform into this new model.
This is, for instance, the case of clothing and fashion. The new minimalism wave does not help (Marie Kondo we are talking about you), but in any case try to imagine receiving every month 4/5 new pieces of clothing: the closet gets full quite quickly. Other than that, we have to face the problem with sizing, textile that in the picture look different than in reality and a high percentage of returns. All of these elements not only represent a huge cost for the company, but are harmful for the environment as well. Nevertheless there are companies which seem to have faced and solved these issues. How not to spend a few words on Rent the Runway and Stitch Fix, two of the most innovative fashion businesses based on a subscription model.
Rent the Runway was launched in 2009 as a gown-rental service, for people looking for tuxedo or dresses for wedding or special occasions. In 2016 they improved their offer launching Rent the Runway Unlimited, a subscription service initially aimed to help professional women to dress for work. This has now been integrated with Rent the Runway Update, that allows you to rent four pieces for 30 days at $89 a month. A full 85% of customers who have a subscription use it weekly. And to make returns even more convenient, Rent the Runway recently partnered with WeWork to create drop boxes in 15 locations.
The platform, which counts 10 million members, is now working with 39 different brands — including Crew, Levi’s, and Club Monaco — to incorporate their inventory and help them become rental businesses of their own.
Until now, Rent the Runway owned the inventory on its website, like any other retailer might, buying directly from more than 500 different fashion labels. The difference now is that it will let partner brands use its platform to rent out as much of their inventory as they choose. Going forward, Sullivan says that between 15% and 25% of Rent the Runway’s inventory will come directly from outside brands.
And this is all working. Very well. The company has in fact, raised more than four hundred million dollars in founding; being valued at eight million dollars in December 2016, before taking into account the new subscriptions boom.
Another company definitely worth to mention is Stitch Fix.
Stitch Fix is an American company founded 2011 in San Francisco, California. As stated on their website they are “an online styling service that delivers a truly personalised shopping experience, for you and your family”. The system is really simple: you have to fill out your Style Profile and a Personal Stylist (human + data analysis and prediction) will handpick pieces to fit your tastes, needs and budget — and mail them right to your door. Each box contains a curated selection of clothing, shoes and accessories for you to try on at home. Simply keep the items you love and send back the rest in a prepaid USPS envelope. Shipping and returns are always free — even for exchanges.
The publishing sector is probably the most well-known for the struggle in finding the perfect subscription model. Newspapers and magazines following this classic type usually offer a monthly payment for a yearly subscription, this makes the revenue model of the company stronger because it guarantees itself sales over a 12-month period rather than a single purchase. In this way the revenue forecasting and business planning are easier, since a company can project its sales farther out with more accuracy. Lots of magazine and newspapers are today differentiating content between free and premium, keeping the most interesting and complete articles for those who pay the registration fee.
Over all anyway, the sector that more than any other else is exploiting the subscription model is the one of beauty. Beauty boxes have multiplied in the last years, with brands as BirchBox, GlossyBox and BeautyFIX leading the way.
But, as pointed out by Tzuo, you can create a subscription model out of any business, and start up and retailers seem to have gotten it clear: lifestyle subscription boxes, wine, food, wellness, name a product and you will probably find an already existing subscription option. There are websites, as mysubscriptionaddiction.com or cratejoy.com, that collect and review every existing subscription box available in the market.
If you are a retailer, we would say that whatever sector you are into, you should consider the possibility of developing a subscription–option. Not only it is a great possibility to create a fixed revenue, but it also gives you the chance to enter in the houses of your customers, to get to know your brand and cuddle them with special attention and personalised offers.