Why You Should Use a Subscription Business Model
Since consumer buying habits are trending toward more simple and hassle-free shopping experiences, more and more companies are jumping into the subscription space and seeing incredible growth. Last year, Dollar Shave Club was expected to generate $60 million in revenue, nearly tripling its 2013 revenue. Even more impressive, Honest Company was expected to bring in $150 million in revenue in 2014, landing the business a $1 billion valuation.
But along with the increasing success of subscription-based businesses comes the cautionary tale of the failure to adapt. Take, for instance, the decline of movie rental giant Blockbuster. Faced with Netflix’s budding success, Blockbuster failed to recognize the changing needs of the modern consumer. By the time it rolled out its “no late fees” campaign, the last nail had already been hammered in place. In 2010, just 10 years after the arrival of Netflix, Blockbuster was worth just $24 million with $1.1 billion in losses.
When we look at the success of software-as-a-service (SaaS) companies, many of which are offering monthly or annual service subscriptions and pulling in multi-billion valuations -- hi, DropBox and Salesforce.com -- it's more evident than ever that customers prefer subscriptions. Yet professional service industries are falling behind. The only hope? We must adapt.
Valuable for the company -- and the customer
The subscription model owes its success to the optimal balance of value it provides to both the company and the customer.
For customers, the value lies in the convenience. First, there’s the autopilot simplicity of subscriptions that removes the thinking out of a purchase decision. Subscribers never have to remember to reorder every month, which gives them the reassurance that they will have whatever they need before they actually need it. Everything arrives to your door like magic -- removing the hassle of making a trip to the store or website to place an order. Second, subscriptions offer a flat rate which helps customers stay within their budget -- always. Lastly, subscriptions usually bring added value to the customer through bundling or getting it all for the price of one.
For businesses, the value of a subscription is the ability to predict revenue through recurring sales. In fact, according to John Warrillow, creator of The Value Builder System, recurring revenue is perhaps one of the most compelling factors in a company valuation. “The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be," Warrillow says. "Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.”
This consistency in revenue also allows subscription-based companies to easily calculate the lifetime value of a customer, manage inventory, offer simple pricing and many other business benefits.
Time for services to launch subscriptions
As I mentioned earlier, while products and SaaS have caught onto the subscription model, it seems that professional services have not. Sure, we have the monthly retainer, but these agreements are usually locked in based on pre-purchased services rendered and tasks completed. It doesn’t allow for flexibility like subscriptions do.
What if services were offered on a subscription based model instead?
Fed up with the risk and constant guessing game of scoped projects, I took the plunge and converted the business model of my UX firm Digital Telepathy to subscription only. Instead of signing project agreements or monthly retainers with a detailed scope, we simply offered all of our services under a flat-fee subscription. Clients were initially confused, but once they experienced how our new approach improved our alignment on strategy, design output and working speed, our retention rates catapulted. Since switching to the subscription model, our revenue has increased by 300 percent.
In addition, the subscription model positively impacts our clients by providing results that are aligned with their business objectives, not just a project plan. In other words, we went from creating project deliverables to being an extension of their team and impacting their bottom line.
Positive impact of a service-based business
Subscriptions allow you as a company to plan resources and predict revenue. Your client wants to change the focus of the project? No problem -- nothing is “out of scope” because there isn’t a scope. Service subscriptions allow you to be flexible in your tactics without having inconsistent service due to recalculating costs. It gives your company the ability to provide different types of services, not just deliverables. This is also a benefit to the client, as they always know that resources (whatever they may need) will be available to them as their needs change. It gives the option to change their objectives on the spot and adjust the game plan month over month.
2. Ability to scale
If client needs change dramatically, a subscription will give them the ability to scale work up or down, without worrying about contracts. For instance, if a client is in the middle of a website redesign, and they suddenly need to invest funds into a special product initiative they are rolling out, they have the ability to decrease their subscription for a few months. Work will still continue but at a slower pace.
On the other hand, if the client just closed a round of funding and needs to accelerate the launch of their SaaS site to satisfy investors, they can increase their subscription to increase the pace. Or let’s say a client is opening another location and is in need of more design work, the graphic artist could increase their service subscription to meet the needs for that month. Subscriptions allow clients the security of knowing that everything is month-to-month, and nothing is set in stone -- especially scope.
As a company, subscriptions also allow you to scale if you continue to add value to the client and impact their bottom line.
3. Stronger relationships
The subscription model is also not about getting a project done and then moving on to the next client. It allows us as a service provider to grow a relationship with the client and cater to their business or design needs as they change. It builds a substantial level of trust since the client knows that you have their best interests in mind and understand their business.
Moreover, it also forces service providers to be accountable in their client relationships. In a project, the goal is to finish, whereas with a subscription, the goal is to accomplish the objective -- and continue to provide value over time. We must always be pushing for innovation and exploring ways to make a greater impact, to be proactive instead of reactive. For instance, lawyers would look to drafting stronger contracts and proactively looking out for trademark infringements, using new tools to do so.
Subscriptions can work
Services must adapt to avoid falling behind like Blockbuster. There are already a number of successful service providers using the subscription model. Global web and software developer Pivotal Labs offers their services through coaching subscriptions -- clients retain their team’s expertise and learn their processes by working side-by-side with them on location. Their success didn’t go unnoticed. EMC acquired them in 2012. Innovative medical startup One Medical Group has remade the office visit into a convenient and efficient process. Members of One Medical pay an annual fee of $149 to $199 (depending on the city) and enjoy benefits such as same-day appointments made online, more personal treatment plans and direct access to doctors outside the office. The group raised their second round of funding in 2014, bringing in $40 million in additional investment.
Product and SaaS service subscriptions offer value to both the company and to the customer. Following their lead, professional service providers such as web designers, marketers, financial advisors and more can reap the benefits of subscriptions and grow their companies. Sure, it’s a bit different than the way things are usually done -- but if we can do it, you can, too.