Last week I have talked about the subscription business model with many examples. Today we are going to look on tips how to make it work.
There are various ways to categorise subscription models. One useful way to categorise is by the offered service/product type:
- Access to intangible assets: media, TV shows, news, music, movies, ebooks, magazines, video, TV shows, games, application software and Software as a Service (SaaS).
- Access to durable goods: cars, bicycle, smartphones (with contracts).
- Regular delivery of goods: newspapers, clothing, toiletry, consumer packaged goods and any other consumer goods.
- Utilities: internet, phone contract, electricity, computing power, Infrastructure as a Service (IaaS). Note, that many of these are a combination of subscription business model and pay-per-use.
- I am excluding peer-to-peer offerings, such as Uber or AirBnB. These fall under pay-per-use but are intermediated by a corporate (also called online-to-offline) or attributed to the sharing economy (yes, there are many overarching categorisations).
Don’t learn from early subscription models
Let’s start with one of the early subscription models. Cable TV started in the late 1940s. And the competition was mainly within the system, i.e. other Cable TV providers. It had started declining in subscribers as the internet and other media expanded (early 2000s). In recent years streaming providers, such as Netflix started putting further pressure on Cable TV. Even though they too are a subscription business, they do things differently. And these differences are a great illustration for what make this business model work.
Review.com starts their review on Cable TV with clear words “Cable is the worst. And it’s not just in our imaginations — it’s a fact. According to the American Customer Satisfaction Index, a research group at the University of Michigan, customer satisfaction of cable companies is the lowest of any industry, and it’s not done tanking.”
(1) Provide value and quality
The review points out clearly that there are now alternate offerings which provide more value (in this case better TV shows):
“There used to be no other option: Without cable, there was no way to watch your favorite shows. But with streaming devices and subscription services on the rise, that’s no longer the case. Some of the best shows on TV aren’t even on cable TV anymore — Amazon Instant Video has Transparent; House of Cards is exclusively on Netflix; Broad City broadcasts via Hulu — and streaming is becoming less an alternative to cable and more the go-to way to get our shows.”
Pink Floyd was lamenting about it in 1979 “Got thirteen channels of sh!t on the T.V. to choose from.” The only thing that had changed was that you had more of it to choose from (AT&T U-verse® offers 590 channels).
Providing value & quality is an essential ingredient to the subscription business model. Regurgitating the same offering year-in-year-out is not quality.
(2) Clear offering & fair pricing
A common approach among cable TV providers is artificial bundling. Check out Foxtel’s 26 “offers” – this is the number of choices at the time of writing in their Australian offer. It artificially disaggregates genres (comedy, drama, etc) into different packages as if there was anyone who would watch one genre only.
It is a see-through maneuver to make the complete combo look reasonable in price and get more people to sign up to it. Foxtel package ranges from $26-$137 (a huge gap.)
Netflix on the other side has exactly 3 packages to choose from. All packages offer access to their entire offering (and that on-demand.) The only difference is the number of devices you can watch it from and the maximum resolution. The price ranges $9-$15 which is an acceptable premium to get to the best offer.
Another sticky point with cable TV are lock-in contracts (generally 24 months.) Even though this is partly caused by the necessity of the cable TV providers to set up some infrastructure and provide a physical box, it comes with a bad taste. Further on cable providers’ in part rely on people forgetting to cancel in time which leads to an auto-renews for another year. It is likely that this drives a company internal mentality of complacency.
(3) Offer convenient transactions
Most new subscription models across many industries allow you to cancel anytime. Not just streaming providers but most of the examples that I have listed in last week’s article. This in return this puts the provider under constant obligation to deliver value.
You can’t rely on lethargy of the customer as a strategy to retain them. If they don’t feel the value they will eventually quit. And once they quit, they don’t come back easily – a well-known effect in the newspaper industry.
Demonstrating the importance of easy payment are Netflix’s struggles in South East Asia. With only 2.3% of people owning a credit card, there are barriers to subscribing to Netflix. Their growth in this huge potential market of 600m people has been below expectations owing to the relatively high price (normalised to the region’s average income). iFlix, a local competitor, offers much lower payment models that can be directly paid together with their phone bill.
If you are interested you can find more on the transaction management here.
Further on you will find that most subscription models make sure they offer you very easy ways to up but also down grade your subscription, to skip a week (or month of delivery), return stuff, etc.
(4) Improve your offering continuously
These previous points bring us to what is being pointed out by many experts of the subscription business model. You have to continuously improve your offering.
This can include a lot of things depending on your industry:
- Exclusively created shows on streaming TV and new seasons thereof
- Added features on Software (e.g. MS Office or Adobe)
- New flavours with coffee subscription (Starbucks)
- Varying & exotic recipes on food subscriptions (Blue Apron)
- Different styles on clothing subscriptions matching to season and user (Trunk Club)
- Various discounts on grocery subscriptions (Amazon Subscribe&Save)
- Varying gifts on toiletry subscriptions (Dollar Shave Club)
- And more
Netflix had massive success wit “House of Cards” exclusively streamed on Netflix. Now everybody has started producing their own TV shows, including Cable TV, Amazon and many other streaming companies.
Another important element is to consider location/culture specific aspects. In the case of streaming providers this of course means localised shows.
As Bloomberg reports: “Amazon already has its own shows and development teams in Japan and India, and is commissioning shows in Germany and Korea, said Price, the company’s studio chief. “In every country, there’s a different competitive environment,” Price said. “The key is the user experience and selection.””
The Financial Times is one great example how it allows customers to subscribe to their own curated content. Personalisation is the opposite of artificial bundling:
“My FT’ will let readers subscribe to topics and effectively curate their own content and will go mobile first, to help close the gap between mobile readers and revenue. Today’s newspapers need to acquire a holistic understanding of their customers and the ability to manage those relationships from not just an editorial and technological perspective, but also a commerce, billing and finance point of view. They need to use data and insights to give readers what they want (the right editorial mix), where they want (on any device), and at the price they want it at, which is known as flexible subscription options.”
(7) Build a culture of membership
(8) Make deeper connections through values alignment
(9) Measure the right metrics
Two of the most important metrics are customer lifetime value and churn. Customer lifetime value within the subscription business model requires loyal customers that use your offering. Churn is the opposite.
With lifetime value being so important and cost of customer acquisition being very high (esp. for start-ups) how long people stay with your company is more important than how many people come in.
(10) Have a long breath
In 2015 Netflix entered Australia. In anticipation, Foxtel had halved their subscription prices. Foxtel did well even in the 18 months post Netflix entry into the market. They have not lost subscribers as predicted by some analysts. In fact, they have had good growth. And it is likely people who had previously considered Foxtel took up the special reduced rates.
It is also not a surprise that the existing subscribers stayed with cable as this is the most convenient approach (and many may still be locked into their existing contracts.) In Australia, Netflix has captured their subscriber from non-cable TV viewers. This fight for market share may be another one where a lot of the benefits go to the customer.
From the perspective of the disruptor (being Netflix,) there are more important lessons: the incumbents have reacted exactly the way that management literature recommends. As per professor Clayton Christensen’s recommendations the incumbents have started a new brand completing with the start-up on the same business model.
Foxtel has not only reduced their pricing but they have also launched their own streaming service called Presto. And not only that. Other powerful local media companies have started a joint venture streaming offering (Stan). Both are in direct competition with Netflix. Netflix also faces challenges in emerging countries from local start-ups (such as offerings at even lower price points.)
(11) Freemium: get started!
When done right offering a freemium can be the best way to get started. Robbie Kellman Baxter recommends in the Harvard Business Review following tips for a successful Freemium:
” Freemium works best in three scenarios:
- As a means of trial. Many people who have a free subscription to Dropbox get all of the online storage they need. But for others, as they make Dropbox part of their daily routine, they find they need more storage and greater functionality. As a result, they upgrade to the premium service.
- To create a networked effect. Each new member that joins LinkedIn for free creates additional value for the recruiters, salespeople and jobseekers paying for LinkedIn subscriptions. And if no one used the free version of LinkedIn, there’d be little reason for those people to pay at all.
- To serve as a marketing channel. Some people never pay for a SurveyMonkey subscription, because they only need small surveys sent to a few people, with limited analytics. But when those people send out their surveys, they are advertising for SurveyMonkey to everyone who receives the survey. If one of those survey recipients subscribes to the premium offering, the sender (who’s a free member) becomes a marketing channel for attracting and converting new members.”
(12) Cost structures are different
Whenever physical assets (or infrastructure) are involved there are additional considerations. Take subscription of durable goods, e.g. bicycles, cars. In this form the company retains ownership of the asset but grants access to it in form of subscription model or subscription plus pay-per-use.
With Cable TV the provider often owns some of the infrastructure being the distribution cabling from a hub to the end-user. Take the following into account:
(1) find efficient ways for the recurring/ongoing distribution of your goods,
(2) minimise transaction costs and
(3) work out the ongoing management of the asset (with accountability transfer to the users to treat the asset as it was theirs.)
And then some more. I have covered this in detail our article about the Pay per Use Business Model.
With durable goods, you have to also distinguish between peer-to-peer and business-to-consumer. AirBnB and Uber fall into the first category (though enabled by those companies who profiting handsomely.) Zipcar, BMW’s DriveNow and many others fall into the latter category.
There are some similarities though with digital goods that book or media subscribers grant you access to. You get given access to it for a period of time after which the media “disappears.” The above three points hold valid also for digital assets (e.g. one of the most important items in the asset management is to prevent/reduce privacy).
Take action now & boost your innovation skills
- If you already have a subscription business model consider what you can do better on the following dimensions. If you do not have one, brainstorm what can you do on the following dimensions:
- Value and quality
- Clarity of pricing
- Convenience of transactions
- Continuous improvement of your offering (few ideas)
- Membership culture
- Values alignment
- The right metrics
- Funding sources
- Starting offer
- Cost structure
If you are just starting from scratch, this is tough! But that is ok, this is a starting point. And thinking about it is better than giving up on it from the get-go!
If you are already on a subscription business model, the above dimensions and the examples in our article should give you great ideas to improve!
On a parting thought
The subscription business model is here to stay. In fact, it will expand. With the cost of near-range transport reducing & accelerating (see Amazon first drone delivery), the subscription business model will receive a further boost.
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