Companies from “direct to consumer” startups to the largest tech firms are adopting subscription-based business models. They’re forgoing advertising or traditional sales and nurturing subscriber communities that keeping coming back. But what makes this business model so attractive? Is it applicable to your industry or product offering? Here’s what makes subscriber business models so effective.
1. More Consistent Revenue & Cash Flow
One of the greatest benefits of a subscription-based business model is consistency. Advertising, direct sales, and other revenue streams can fluctuate significantly throughout the year. Advertising revenue can rise or fall depending on trends beyond your control. Large advertisers can cancel or launch a major campaign on short notice. Direct sales will likely peak around the holiday season and then decline for the rest of the year. Large swings in revenue make it difficult to forecast revenue over an extended period of time. Subscription-based business models offer a more stable, consistent revenue stream throughout the year. If you’ve been in business for more than a few years you have enough data to accurately forecast subscriber growth and churn. Subscription-based business models take the guesswork out of financial forecasting. More predictable financial models make it easier to make investment decisions and grow your business.
2. Greater Operational Flexibility
Relying on a community of subscribers can provide greater operational flexibility. This is especially true when considering businesses that rely primarily on advertising. Advertising can provide significant revenue but those advertisers are fickle. They can easily switch their spending to competitors or entire industries. They require constant outreach and can interfere with the customer relationship. Companies in the entertainment industry face this issue on a regular basis. Advertisers may pull spending from specific programs or channels that they feel are inconsistent with their brand. They may also demand creative changes that upset fans or content creators. Contrast that legacy media business with firms like Netflix that use a subscriber model. Netflix doesn’t have to placate advertisers or alter content to manage those relationships. Netflix just has to focus on its core business: making great content that fans want to watch.
3. Higher Customer Engagement
One of the great benefits of a subscriber model is that your business focuses on the most important thing: customers. Customer satisfaction becomes paramount when you stop catering to advertisers or other third parties. There are a few metrics that are often used to measure customer engagement (these vary across industries):
· Daily Active Users (DAU) or Monthly Active Users (MAU): This measures how many customers are consistently using your service over an extended period of time.
· Net Promoter Score (NPS): This shows how likely customers are to recommend your company to their friends or peers.
· Time spent on platform: This measures how much time on average that customers spend on your platform.
· Customer Lifetime Value (CLV): CLV is a complex calculation that measures projected revenue over the life of the customer relationship, net of marketing costs. CLV scores help identify valuable customers versus those that may not be worth retaining.
Drilling into this data can help you tailor your product or service to meet your customers’ needs. Direct to consumer businesses like Warby Parker collect subscriber data to improve products and the customer experience. Warby Parker uses data to constantly adjust glasses styles and identify consumers likely in the market for new glasses. Effectively harnessing subscriber data ensures that you deliver the right product to the right consumer, every time.
A subscription-based business model isn’t right for every company. You need to be able to develop a dedicated community of subscribers and keep them engaged. Your business may have to embrace new performance metrics to evaluate success. If you’re willing to do that, you can realize more consistent cash flows and greater operational flexibility. Being a subscription-based business narrows your strategic focus to one goal: keeping the customer happy.