As the term “Subscription Economy”, coined by Zuora founder Tien Tzuo, continues its journey from the lexicon of CFO’s in global SaaS businesses to that of mainstream business commentators, it’s worth taking time to understand what has given rise to it. What is the Subscription Economy? How can it benefit your business?
You may have seen, or heard, the Subscription Economy referenced in stories covering a huge array of products and services including coffee, cars, grooming products, food, films and gaming. Put simply, the Subscription Economy refers to the growing number of businesses who are moving their commercial models from a one-off customer purchase to a recurring subscription model whereby customers continue to make regular instalment payments for as long as they opt to receive the services being provided. Sounds pretty revolutionary right? Well, not really!
This model has been commonplace for many years in health and fitness centres and martial arts studios, as examples. These businesses recognised long ago that moving from a one-off purchase for membership to recurring instalment payments provided them, and their customers, with a number of significant benefits:
Increased sales: taking a large lump sum price and spreading it over easy to manage instalments significantly improves the affordability of your offering and so massively increases the addressable market, simple stuff!
Greater lifetime value of the customer: A small instalment provides an affordable entry point and customers stick around for longer!
Increased retention: anyone paying for a service on an annual basis by a lump sum knows the feeling well – at the end of each year you receive a renewal notice which inevitably prompts the question as to whether you will indeed renew. Renewal time is painful for the business too, with countless hours spent chasing payments. Conversely, customers paying in instalments simply have their payments continue until such time as they choose to opt-out. A movement to recurring instalment payments greatly assists with customer retention.
Improved cash flow: all business owners know how important cash flow is, it is not just a cliché to say that it truly is the lifeblood of any economy (including the Subscription Economy!). The difficulty in managing cash-flow is contributed to by the peaks and troughs in revenue throughout the year. Having a proportion of customers paying for services on an instalment/subscription basis can go along way towards smoothing these peaks and troughs, providing businesses with some surety of income throughout the year.
Given these benefits, the continued rise of the Subscription Economy seems inevitable. We are now seeing subscription models implemented by some household names, including Nespresso (free machine when you commit to a recurring monthly pod purchase), Adobe (moved from a one-off perpetual license on software to a recurring monthly fee) and Volvo (who are offering two models of car on an all-inclusive subscription model, as opposed to an outright purchase).
The benefits of the Subscription Economy are clear and will become even clearer as consumers move to “rent” rather than “own” services. So how does your business take advantage of this shift? You should start by talking to the experts. Contact Payleadr today for a no-obligation discussion about how we can assist you in taking the plunge, or a few tentative baby steps, into the Subscription Economy.