The subscription economy paradigm
READ TIME: 11 MINUTES
Ty Collins, February 14, 2021
No matter what industry you’re in or what you sell, the subscription economy is changing the game. Businesses of all kinds are moving from the conventional pay-per-product or fee-for-service model to a subscription-based model.
Since 2019, the U.S. subscription market has grown more than 66% to a whopping $28.4 billion. Online subscriptions predict a year-over-year increase of 11.7% in 2021, and 15.2% in 2022.
As subscription-based companies continue to outperform their peers — expanding at a rate of 12% overall while traditional businesses shrink by 10% — companies everywhere look for ways to understand and speak to subscription consumers.
Why consumers and businesses opt to subscribe
To understand why the subscription economy has taken off so quickly, you need to fully understand the value that it provides to customers. Some of the most influential benefits include:
In both business-to-consumer (B2C) and business-to-business (B2B) models, subscription-based companies typically offer free trials so that potential buyers can experience the product or service firsthand.
This eliminates the “leap of faith” involved with traditional one-off purchasing. When the time comes to subscribe, the customer doesn’t have to take the company’s word as to whether it’s worth the expense.
Easy direct purchasing
Subscription services tend to be direct-to-consumer. No more needing to connect with a mass retailer or distributor. Instead, the customer purchases directly from the product or service provider. It’s simpler and it provides more opportunities to ask questions.
Most subscription services today offer month-to-month services with no ongoing commitment. Some, especially in the software-as-a-service (SaaS) world, offer discounted rates for annual versus monthly billing. There’s no requirement to bill annually; buyers can choose what makes the most sense for them.
Either way, if a customer decides that the product or service isn’t valuable, they can usually cancel without penalty.
Upgrades, additions, and improvements
Subscription services want their customers to stick around long-term, so they’ll work hard to consistently deliver values. These entail software upgrades, new content, and features that keep up with the times.
With Microsoft's software, for example, a customer can choose to pay a one-time fee for the latest version, and perhaps pay less in the end than they would with a subscription.
One-time licenses don’t include updates, though. This means that someone might need to pay for a new license when their software becomes obsolete. Microsoft 365 subscribers have updates included in their subscriptions, whereby every renewal has the potential to pay for itself.
Pay for what you use
B2B and B2C subscription services offer high levels of customization, whether that entails choosing channels on Apple TV or buying a bespoke SaaS solution for a company’s specific needs. This equates to better customer value and a more satisfying experience because the customer only pays for what they use.
Selling to the subscription customer
The subscription economy fundamentally transforms how a customer chooses to interact with businesses. Today’s subscription customers expect seamless experiences and ongoing value delivery.
In the subscription economy, you need to create value at every phase of interaction, starting with sales and marketing. It’s no longer about convincing someone to make a one-time purchase. You need to sell yourself as a long-term solution.
True, your customers can probably cancel without much trouble and they likely appreciate that flexibility. However, part of the appeal of a subscription is the promise of ongoing value. Most of your buyers won’t sign on with the intent of canceling.
Potential subscribers want you to serve their needs in the short-term and long-term. To encourage them to commit, you need to target both needs.
Acquisition is the first step in a long-term customer relationship for subscription-based companies, no different from the pay-for-product world. What separates the two is that when people become subscription customers, they have less incentive to go back to the old model of one-off buying.
To acquire those subscribers, you need to elaborate the type of value that you offer. That means demonstrating that you understand what customers need and showcasing how you meet those needs through your subscription service.
In other words, potential subscribers want to know that you’ll not only meet their current needs, but also any related needs that they might have in the future. People will choose you over a competitor because they believe that you’ll keep being the best choice.
To inspire that kind of confidence, you need to do three things:
Show your market knowledge
Prove to potential customers that you have your finger on the pulse of your industry.
Communicate your value
Connect your understanding of the market with your ability to develop industry-leading products and services.
Set yourself apart
Know which aspects of your product or service to emphasize at each stage of the customer journey. Also, more importantly, ensure that you deliver on that value proposition.
To touch on all three points, you need to provide a seamless marketing and sales experience. Every communication should highlight one of the three points in the same way.
This requires a significant amount of coordination between departments, and good communication tools can help. Consider investing in a customer relationship management (CRM) system and integrated it with a scheduling tool like Calendly to facilitate your team's interactions.
Focusing on the customer
In the subscription economy, you need to keep providing value even after someone has signed up. That entails adopting a customer-centric mindset.
The service mindset in a subscription economy exceeds what you’d typically see in pay-for-product. When you have subscribers, you nurture an ongoing relationship with the subscriber at the center.
Digital services pioneer Richard Reisman calls this a “customer journey cycle of interactions.” It’s an ongoing dialogue that includes product delivery and billing as well as product updates, service communications, and more.
Here’s how Reisman presents the difference in the service model:
In this model, it’s not about meeting a single need. Rather, it’s about listening to what customers ask for and going a step further with the value that you deliver.
Giving them what they want
Take meal kit subscription service EveryPlate, for example. They’ve harnessed the choose-your-meal model and gone a step further with complete personalization.
As EveryPlate General Manager Yury Trofimov said to BusinessWire:
“We listened to our customers and learned that they crave customization while still enjoying the ease and convenience of having all the fresh ingredients safely delivered to their doorsteps. We’re excited to put the control in customers' hands, giving them the opportunity to personalize their orders by adding, swapping, or upgrading their protein or sides selection with our CustomPlate feature.”
Subscription companies need to provide this kind of service upgrade on a regular basis. It works best when it originates with customer requests. The more you can meet and exceed those requests, the more you’ll be able to drive loyalty and increase your CLV.
Focusing on the service-level agreement
In his book Subscribe, as quoted by Reisman, author Tien Tzuo suggests that companies identify the core value proposition. Tien advises companies to “tease out the service-level agreement that sits behind the product. So instead of a refrigerator, it's the guarantee of fresh, cold food."
If the value proposition concept works for refrigerators, it will work for meal kits, streaming content, SaaS, and more. Determine what it is that you’re really selling—labor cost savings? More effective marketing? The latest in streaming content?—and concentrate all of your service messages on how you deliver it.
In the subscription economy, customer retention links directly to higher customer lifetime value (CLV) much more than it would in the pay-for-purchase economy. A loyal pay-for-purchase customer might buy from a particular company every day, a few times a month, or once a year. It all depends on how often they want or need what the company sells.
By contrast, a subscriber generates revenue for the company consistently. Every subscription payment increases your average CLV, which correlates directly with profitability. The more subscribers you can retain, the less you’ll have to spend on new customer acquisition.
Fortunately, companies that offer subscriptions have additional opportunities to interact with and offer value to their subscribers. SaaS providers can provide value across workstations, functionalities, and customer success interactions. “Box of the month” clubs can integrate product variety, customization opportunities, and post-delivery service.
Whatever the type of subscription you offer, it’s about building the customer relationship in three ways:
Developing new uses and use cases for your product or service
Increasing customers’ reliance on your product or service
Boosting loyalty to your brand
Availability is particularly important here. You need to be there for customers in two ways:
Exceed the request when customers reach out for support
Be proactive in communicating product innovations and new services
Again, you need to ensure that your team is connected and has all of the information that they need to provide seamless service. A CRM will be helpful, as will a Calendly link that makes it easy for customers to connect. When subscribers can more easily contact your team, you have additional chances to build value and encourage retention.
Doing business in the subscription economy
Whether you’re new to the subscription economy or you’re looking to capitalize on its increasing popularity, you need to have the right systems in place.
For subscription-based companies, price translates directly to monthly recurring revenue (MRR). You want to set your pricing at a level that allows you to budget for growth and help customers to see your value.
Return to your identified key outcome: what are you guaranteeing your customer through your subscription model? Is it time or money savings? Enhanced customer relationships? Personal enjoyment?
Look at what similar subscription companies offer within certain pricing tiers and start in a similar place. Consider your cost of customer acquisition (CAC) and your average CLV, and decide how long you want it to be before a new customer’s revenue covers their CAC.
Keep in mind that you can always ask customers what they think about pricing. With a paid Calendly account, it’s easy to host webinars and focus groups that are convenient for everyone.
Many companies find that outsourcing customer service helps them to meet and exceed subscriber expectations. Outsourcers have the resources and time to invest in the latest communications tools and stay current with service trends in general.
The key to a successful outsourcing relationship is, again, communications. Be certain that your outsourcing partner understands the customer experience that you want to create, and make it as easy as possible for them to get in touch with you. At a minimum, they should have your team’s Calendly link.
Subscription service tools
Establishing and scaling a subscription-based business requires a lot of work. It’s tough to do alone, especially if you rely on systems designed for traditional pay-for-product commerce.
There’s going to be a learning curve. The Technology and Services Industry Association calls this “swallowing the fish,” referring to a temporary dip in revenue and increase in costs as you adjust to the new model. This is the time period in which you figure out your pricing and subscription offerings, take your subscriptions to market, and assist your customers with the transition.
During this stage, it’s particularly helpful to have a tech partner that knows the landscape. You might consider Zuora, the SaaS company that usually receives credit for inventing the term “subscription economy.”
Zuora offers a variety of SaaS applications geared specifically for subscription management, including billing and revenue management. These applications interact via a central platform that connects everything from CRM to subscription activity monitoring.
Zuora also has a robust application programming interface, which allows it to connect to tools you already have. You can connect even more applications with tools like Tray.io, which lets you integrate your Zuora platform with the scheduling tool Calendly.
Thriving in the subscription economy
You don’t need to have in-depth expertise in the subscription economy to succeed.
What you need is a commitment to customer success and the tools that let you provide value to your customers, both now and into the future. In time, the subscription model will become second nature, and you’ll be on board with a trend that shows no signs of slowing down.
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