The Colorado Society of Certified Public Accountants is a long way from a start-up. The organization was founded in 1904 and aims to bring together its 7,600 professional accounting members, organize networking opportunities and provide training courses.
But in 2018, the society underwent a small revolution. Instead of mailing out invoices and waiting for its members to mail back their dues in the form of paper checks, they switched to a subscription-based model. Members could choose from a monthly or annual subscription and would receive an email reminder two weeks before their credit card was charged.
Ten percent of members asked to continue receiving a paper invoice but within two months of the first set of automatic renewals, 72 percent had renewed their memberships even though the society had raised its dues.
“Very few of our members opted to pay by check when we first switched to the subscription model, and that is growing even smaller since the pandemic when more people were forced to pay more things online,” Rebecca Campbell, the society’s COO/CLO told the Membership Management Report.
The Colorado Society of Certified Public Accountants is coming late to the party. Other businesses have long recognized the advantages of charging customers a monthly fee for receiving an ongoing service instead of paying a single fee to own a product. Microsoft has offered its Office suite to families on an annual fee-paying basis since 2013, and to businesses for a lot longer. The Dollar Shave Club brought the subscription model to male grooming as long ago as 2013. Founders Mark Levine and Michael Dubin sold the company to Unilever for a billion dollars in 2016.
With companies from Netflix to Amazon Prime and from Apple Plus to Rent the Runway selling subscriptions that include streaming content and designer clothes, customers have never been more accustomed to paying monthly fees for services they use regularly.
The benefits to companies selling those subscriptions are clear. Businesses can enjoy predictable revenues. By tracking their retention and cancellation rates, they can project future revenues and know how much they can afford to invest.
Companies with high retention rates can also expect continued growth. As long they can maintain customer satisfaction, new customers add to existing ones instead of replacing old ones.
But most importantly, subscriptions also produce large amounts of customer data. Netflix’s recommendations depend on the data it generates from user profiles. By tracking not just which shows people watch but how much of a show they watch and how quickly they watch it, they can rate the popularity of a show. All of that data, particularly profile-based preferences will be crucial as Netflix adds advertising to its subscription model.
So what does a business need to consider as it starts to move towards a subscription model?
When Membership Might Not Work
One place to understand the potential success—and limits—of a subscription model is the music business, which has been upended by the growth of streaming services. When the iTunes Music store launched in 2003, it promoted itself “a revolutionary online music store that lets customers quickly find, purchase and download the music they want for just 99 cents per song, without subscription fees.”
What was revolutionary about the iTunes Music Store then wasn’t the ability to make regular payments in return for an ongoing service. It was the ability to buy single songs instead of albums, then burn them onto CDs and add them to movies and photos. That approach worked fine until Spotify offered people all the music they could want for a monthly fee.
The rise of Spotify, powered first through a generous free offer supported by ads, gave customers a new option and gave the traditional music model new competition. The company was founded in 2006 and launched in the United States in 2012. By the end of that year, it had a million paying customers in America and five million around the world. Apple didn’t take long to adjust. The company launched Apple Music at the end of June 2015, ditching its rejection of subscription fees in favor of “a revolutionary streaming service and app that puts the entire Apple Music catalog at your fingertips across your favorite devices.”
The success of Spotify and its imitators looks like a victory for the subscription model over the ownership model but the truth may be more complex. Subscription models are complicated by the possibility of including advertising. Spotify has a free, ad-supported service and Netflix is planning to launch an advertising tier in some markets in 2023 as a way of lowering subscription fees for some users and reducing lost subscriptions.
Ads reduce the quality of the experience. They can annoy subscribers who are paying for content not sales pitches, and they can be avoided by purchasing the product instead of buying the service.
So which model should a company use?
In a paper published in 2020, Shengli Li of Peking University and his colleagues compared three kinds of pricing models for digital music: subscription, ownership, and mixed revenue streams.
After crunching some complex equations, the researchers found that “the mixed model converts to the subscription model when the advertisement revenue rate is low; dominates the other two pricing models when the advertisement revenue rate is moderate; and converts to the ownership model when the advertisement revenue rate is relatively high.”
Providers, the researchers conclude, should choose a subscription model when they expect low advertising revenue, an ownership model when the advertisement rate is high, and a mixed model only when the advertisement revenue rate is moderate.
A Model for (Almost) Every Market
The complexity of juggling subscriber, advertising, and ownership models that has long roiled music is now challenging video content. Newer markets though face the additional challenge of trying to figure out whether customers even want to pay by subscription for a service they’re more used to buying as a product.
In 2019, Steven Day, a researcher at the University of Warwick, and his colleagues, surveyed more than 500 British women aged between 18 and 39 about their attitudes to buying clothes using a product-service systems (PSS) rather than as a one-off purchase.
The idea isn’t as strange as it sounds. Rent the Runway charges women between $94 and $235 a month to rent designer clothes from the company’s giant wardrobe. Subscribers can borrow up to sixteen items a month, returning them in a special bag for the company to dry clean, repair if necessary, and re-issue.
Investors were convinced the company was on to a good thing. At the company’s IPO in October 2021, shares opened at $23, almost 10 percent above the offer price and valuing the company at $1.7 billion. The company’s shares now sell for a little over $5.
Some of that decline is likely to be down to the effect of Covid, canceling events and keeping people at home. But it’s also possible that some products just don’t thrive with a subscription model. Steven Day and his colleagues found that renting clothes, instead of buying them, removes the experience of shopping, an event that’s social, a personal reward, and a symbol of renewal and change. The biggest motivation for using a subscription service, they note, is the financial savings. But that’s not an easy pitch to make without the offer looking cheap.
“Marketing PSS primarily as providing cost-saving opportunities would appear to be a strategic mistake, even if consumers are most attracted by obtaining more value for money,” warn the researchers, “as this could push the offer into a discount niche in which existing negative attitudes and stigmata to not new become increasingly powerful.”
The Structure of a Subscription Model
Businesses considering offering a subscription model then, first need to be sure that the model matches their market. Little is lost when someone swaps a download of a movie they’ll watch once for the opportunity to watch as many movies as they want each month. Exchanging a day of shopping with a friend for an evening picking dresses on the Internet is a bigger sacrifice.
They’ll then need to make sure that offer matches the market’s budget. Subscription models tend to offer different tiers of service. Microsoft targets its tiers by user group. Subscribers to Microsoft 365 can choose between plans that are personal and family; work; and aimed at education. Netflix subscribers can pay more for higher quality streaming and additional simultaneous screens. Rent the Runway keeps its most expensive frocks for its highest paying subscribers.
While the aim might be to keep subscribers moving up through the tiers until they’re paying the highest amounts, an alternative route is to offer accessories that a one-off payment model would once have offered as upsells. The Dollar Shave Club, for example, depends on its subscription service for its revenues but it also has a shop that offers shaving creams and face washes. The subscription model doesn’t have to be the only way to make money.
Once the model is up and working, the business should also make sure it collects data so that its offer remains attractive and valuable. And most importantly, it needs to hold onto its subscribers so that when times come to renew, people choose to keep paying and continue consuming.
And if you’re not sure whether your subscription model is working, ask your accountant.