The Most Essential Elements of a Subscriber Business Model


In April this year, Netflix delivered a twist that almost no one expected to a story that seemed destined for a happy ending. The story was its own and the twist was that the company had lost subscribers over the previous quarter. Wall Street had expected the streaming company to announce the addition of about 2.5 million new customers. Instead, Netflix declared that global subscriptions had fallen by about 200,000 and the company expected to lose another two million viewers over the next three months.

The shock was expensive. Shares in the company fell more than 35 percent, wiping about $55 billion from the value of the company.

The reasons for the decline in Netflix’s subscription figures are varied. The growth of rival streaming services such AppleTV and Disney+ have forced viewers to choose the services they watch the most. Netflix has also increased its prices, nudging some viewers to reconsider the value of their monthly payments. And while Netflix continues to focus on original television shows like Stranger Things, its streaming rivals are broadening their interest to include sports broadcasts and news.

Netflix is fighting back. The company is clamping down on password-sharing and has pointed out that its withdrawal from Russia cut off 700,000 subscribers. Without that boycott, Netflix would have added half a million subscribers in the reported period.

But as Netflix also considers a version of its services funded by advertising, it’s worth asking whether subscription models are still working.

From SaaS to Shaving Clubs

Subscription models that deliver a regular service in return for regular payments have been around long before the Internet made digital delivery easy and charges easy to impose. Magazine subscriptions have been available since the nineteenth century, which is also when British homeowners could start paying a regular fee to receive morning deliveries of fresh milk to their doorsteps. The model has since grown to include travel clubs and wine clubs, book clubs and financial services. Recent innovations have seen businesses extend the model to disposable razers and, through Amazon, even to household goods such as cat food and kitchen towels. TikTok is currently testing a subscription model that would allow creators to charge audiences for watching their videos.

Microsoft’s switch from selling Windows on compact discs to offering annual subscriptions for usage licenses brought software as a service to household consumers while other start-ups have demonstrated the possibility of using subscription models even in complex, personal fields. Rent the Runway offers women plans costing up to $235 a month for regular deliveries of rented designer clothing. Customers can be sure that they’ll always have new outfits to wear, regardless of the number of parties and events they attend each month. They never have to worry about being Instagrammed in the same costume twice and someone else can take care of the dry cleaning.

Those benefits extend to other areas. Subscribers to Microsoft 365 don’t just have a new way to pay for their software. In return for making multiple payments they receive multiple updates so that they’re always using the latest version of Microsoft’s software. Subscriptions ensure that technology, which changes rapidly, is always up to date.

For companies, subscriptions provide regular, predictable cash flows. They generate streams of data that enable them to track usage, and they keep customers close, easing the ability to deliver upsells and win referrals. The growth of services has helped to keep Apple’s profits high at a time when sales of new devices have slowed and chip shortages are squeezing production. According to Apple’s second quarter financial report, the number of subscribers to the company’s services, from music to television and apps, rose by 25 percent year-on-year, reaching 825 million subscribers. Services were the company’s fastest-growing sector, rising 17 percent and generating almost $20 billion. “We’re obviously very happy given all the investment we made in recent years,” Luca Maestri, the company’s CFO told the Financial Times.

So can any business now offer a subscription model, and what can companies do to ensure that their model works?

A Model for Every Business?

“I’m not sure subscription works in every situation,” warns Nick Frederick, host of the Subscriptions: Scaled podcast, a show aimed at industry professionals working in subscription-based businesses and at entrepreneurs hoping to build their own subscription models. “Services with lengthy intervals between purchases aren’t always a good fit.”

That might suggest that fields as big as technology and travel should skip the subscription model and stick to traditional sales. But Frederick, who spent a decade as VP of Operations at Affinion, a customer loyalty company, notes that subscriptions don’t have to be “all-or-nothing.” The model can work alongside transactional sales to reach different customers in ways that suit them best.

Some quick service restaurants, for example, have created drink clubs and special passes to increase customer loyalty, improve store traffic, and drive incremental purchases. Taco Bell started testing a subscription service last year that allowed holders of its Taco Lover’s Pass to pay a flat monthly fee and eat a taco every day for 30 days. Pret offers two levels of monthly plan, allowing subscribers to pay up to $29.99 a month for up to five drinks a day.

Those kinds of subscriptions aren’t comprehensive. Pret’s subscribers can’t help themselves to anything they want in the store any more than Rent the Runway’s subscribers can wear a new outfit every day. But they can use those subscriptions to satisfy their biggest need and add extra items if they want. Rent the Runway lets subscribers pay for extra “spots.” Pret’s coffee subscribers can pay for pastries and sandwiches to add to their coffees.

In addition to those extra sales though, the company also gets stronger customer loyalty. Looking back at the more than 70 interviews he’s conducted with executives building and managing subscription models, Nick Frederick highlights the importance of community.

“Community is strongest with the most successful subscription brands,” he says. “Nearly anyone can put a product or service on a recurring model. But organizations that build community create a bond with their customers.”

Those “community” members aren’t just loyal customers who return often to make the most of their subscriptions and feel part of branded club. They also become brand evangelists, bringing the company free referrals at a time when digital customer acquisition costs are particularly high.

But building subscribers up can be difficult for businesses that are more used to selling and re-selling than to building communities and maintaining subscription renewals. Businesses with traditional transactional models often lack subject matter experts in acquisition, retention, or billing and payments, warns Frederick.

“Subscription is a different animal and organizations that focus on it are often structured differently… They must either find partners who can help them or hire those with the requisite experience.”

And as Netflix has shown, while subscription figures can go up, they can also come down, leaving companies with decreasing revenue to fulfill the obligations of the subscription. The good news though is that subscriptions also produce large amounts of data. When Netflix mailed DVDs to subscribers, its data could tell the company who was watching which shows and how often people changed their discs. But it couldn’t tell how much of a show someone actually watched. Netflix is now able to see whether people finish watching shows, the time they spend watching, and of course, they can match tastes to make recommendations easier and searches for something to watch shorter.

That data is the first place to look when subscriber numbers start to fall, says Frederick. In particular, cancellations come in two forms: voluntary, or customer-initiated; and involuntary, or billing-related.

“Voluntary cancellations may be a result of poor product experience, lack of usage, or low perceived value,” says Frederick. “Involuntary cancels are typically a result of errors in the billing processes.”

So if your subscriber numbers start to drop, start by checking your billing processes to make sure that the subscriber can be charged and the renewal can take place automatically. If those processes are working then you’ll need to look at the value of the service you’re offering, the functions that subscribers are using, and the offers that competitors are making.

The same calculation needs to take place before launching a subscription model and it needs to continue taking place as long as subscribers are paying.

“This is not a one-time exercise,” says Frederick. “Subscription success means ongoing analysis and optimization of the business.”

Despite the popularity of the model then, building and maintaining a subscription platform isn’t straightforward. You need to know which service or product customers will be willing to pay for on a continual basis. You need to be certain that you have the capacity to deliver those products or services consistently and without hiccups. You need to collect the data that will enable you to react and make changes if subscriber numbers start to fall.

And you should have methods and staff in place who can turn subscribers into a community and those community members into brand evangelists.

Put all those elements in place and you can build yourself a subscriber business as successful as Netflix—and even keep your customers.

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