Customers are great, but subscribers are even better. Here are seven reasons why you should consider the subscription model for your business:
- Subscribers drive up the value of your company
Acquirers regularly pay two or three times more for a business with a recurring revenue model when compared to a similar business in the same industry using a traditional business model. For example, these days private equity acquirers are paying about seventy five cents for every dollar of installation revenue a security company generates, while they pay two dollars – almost three times more – for every dollar of recurring “monitoring” revenue.
- Subscriptions increase the lifetime value of your customers
In the old days, you bought Microsoft Office software from Staples for $200 and installed the program off a set of CDs. These days, you subscribe to office 365 for $100 per year. If they keep you as a subscriber for a decade, Microsoft has turned a $200 sale into a $1,000 sale.
- Subscriptions smooth out demand
Many businesses are feast or famine. Florists make a truckload leading up to February 14th and not much any other time of the year. Subscription-based H. Bloom, by contrast, sells a subscription for fresh cut flowers to spas and hotels who buy flowers in an even pattern throughout the year.
- Subscriptions cut the cost of customer market research
Subscription company operators don’t need to undertake six figure research studies to see what their customers like. As a subscription company, you have a direct relationship with your customers and can simply ask them what’s on their mind. When Walmart wanted to understand how our snacking habits had evolved, they created a $7 per month subscription business called Goodies.co and sent their subscribers a box full of snacks each month. The deal was, if you rated the products, you earned points toward a free box the next month. Why give away free stuff? Because Walmart didn’t care much about the $7; they wanted the market research to help inform their buying decisions at the store.
- Subscriptions automate the collection of receivables
Most subscription companies divide up one big bill into smaller, monthly charges that can be processed on a credit card so you reduce the need for an Accounts Payable clerk to chase deadbeat customers.
- Subscriptions lock in your most promiscuous customers
You know those customers who are always looking for a deal and who will switch for a small price advantage? Lock them into a subscription and they’ll stop shopping around. If you have a 100-pound dog that eats two hearty bowls of kibble per day, you are always on the hunt for a deal on dog food. That is, until you subscribe to PetShopBowl.com where they send you a bag of dog food every month, thus turning off the part of your brain that is always on the hunt for a deal on dog food.
- Subscriptions trigger customers to buy a broader selection of your products and services
Amazon loves the subscription business model in part because of the change it triggers in their customers’ behavior. Once someone subscribes to a service like Amazon Prime (or Amazon Mom or Amazon Fresh), they start to buy more to “get their money’s worth.” So much so that Morningstar has estimated that the average Prime customer spends more than double the average of Amazon’s non-Prime customer.
In summary, customers are great, but subscribers are sublime.
This article is adapted from the new book The Automatic Customer: Creating a Subscription Business In Any Industry by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House,Copyright © John Warrillow, 2015.