The idea of subscription came from the books and newspapers trade of the 17th and 18th century. Subscription is a term coined for the recurring exchange of services and products for money and value.
The subscription model can help you build customer relationships and capitalization. This recurring payment system ensures that as long as you provide value, customers continue using your products or services.
This model falls under one of the two broad categories of a revenue model. The other is one-time payment. It is necessary to find the correct revenue model for a company to make a profitable business.
Over the past five years, there has been significant growth in subscription revenue models. Back in 2005, Bill Gates said in The New York Times:
People hate, hate, hate to subscribe to things on the internet.
Through the 2000s and 2010s, there was remarkably less hype about subscription models. Now, with Industry 4.0, subscription has set the trend through increasing internet connectivity and the availability of data.
Two terms to know first
Customer Lifetime Value (CLV) is the amount a person is expected to spend on your product from the start of the first sale.
Cost Per Acquisition (CPA) is used to determine how much a marketer should spend to turn a new prospect into a converted customer.
The ultimate aim of a subscription revenue model is to enhance CLV while reducing CPA.
The rest of this piece covers:
Why a tech giant like Apple is shifting toward subscription
Interesting facts from McKinsey
Challenges companies face during the shift and after
Who actually benefits from the model
Apple's transition from one-time payment to Apple One
Apple's revenue split is 70/30. That means Apple keeps 30% of the revenue an app makes on a one-time payment, and the software company gets 70%.
Apple noticed a fall in revenue as software companies put their apps on the App Store for free and then redirected customers to their main site after download. The continuous decrease in margins might be a potential reason behind Apple introducing Apple One, which bundles services like Apple Music, News, and Arcade under a single individual or family subscription.
Statistics and facts
From a McKinsey study on subscription e-commerce:
"Churn rates are high, and consumers quickly cancel services that don't deliver superior end-to-end experiences."
"The subscription e-commerce market has grown by more than 100 percent a year over the past five years."
Of 5,000 US consumers, "the median number of subscriptions an active subscriber holds is two, but nearly 35 percent have three or more."
Challenges in the subscription model
The main challenge is customer retention. According to McKinsey, 53% of consumers have heard about subscription revenue models, but only 8% are currently subscribed. There is room for a lot of improvement, which can come from acquiring the remaining 47%.
Another challenge is a sudden shift from one-time payment to subscription. For companies with a large one-time customer base, strategies like A/B testing and market research should run before drastically shifting the model.
Who actually benefits
For tangible delivery goods like groceries and food, the subscription model can hurt operational performance (increased costs) even while helping marketing numbers. With a fixed monthly subscription fee, monthly spend and purchase frequency go up. The increased operational load can outweigh the marketing lift.
The subscription model is often ideal for SaaS companies, who don't carry the same operational cost. For e-commerce and food delivery, a minimum order amount on top of a subscription fee (as Amazon does) keeps things profitable.
In short
The subscription model is designed to put customers at the center and build services and products around their interests. We see a significant shift in many companies' product-centric approach to a customer-centric one. The possibility of subscription sustaining in the market very clearly exists.
Originally published on Medium's Intelligent Elixir, November 2020.
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