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why every business should consider a subscription model

March 20th, 2017 Posted by alastair, blog 0 comments on “why every business should consider a subscription model”

written by alastair barlow [blog]

with the right insight and metrics, subscriptions offer a great way to build a reliable business or a reasonably predictable revenue stream.

subscription based models are something every business should consider as part of their revenue model. why? they are a great way to maximise the value you get from each hard earned customer – and the length of time you hold on to that customer. it’s hard and expensive to win new business, so this provides a great source of recurring revenue of maximising the return from the effort. the trick is being able to make sure your chosen subscription based model fits your targeted customer segments and getting the most from your model once you’ve chosen it requires the right combination of metrics.

subscription based models aren’t just for technology businesses

tech-based firms, particularly those offering software as a solution (SaaS) or cloud-enabled applications, are probably already very familiar with a subscription based revenue model. but those more traditional businesses may wonder how to introduce this to their offering. the good news is, it may be easier than you think.

I recently took my daughter to the cinema where they tried to sell me a membership card, allowing me to watch an unlimited number of films for a monthly fee. it struck me how many other businesses that have been around for years are reinventing their revenue models and venturing into subscription revenue models.

magazines pioneered this type of revenue model but more and more businesses are adopting them these days.

in the specific cinema example, in exchange for a minimum subscription period of a year and paying £17.99 per month (£19.99 in london) you can watch as many movies during the month as you want. once a customer has signed up, it’s a predictable source of revenue for the cinema company. all businesses are being disrupted and I challenge you to think about how you could disrupt your own business or revenue model to make sure you don’t just grow your business, but stay in business. some simple but powerful examples of subscription based businesses you wouldn’t readily think about include:

  • flinder – amazing accounting & management information services provided monthly
  • graze – pay monthly to receive a fresh box containing a selection of themed snacks to your door every week
  • hp ink cartridges – your printer sends a wifi signal and they deliver printer ink in time for when you need it
  • odeon – pay monthly and see as many movies as you want on their limitless card
  • briefd – pay monthly to receive new luxury underwear each month
  • london sock company – pay monthly and receive a new pair of socks as part of their sock club
  • ocha matcha – premium japanese tea delivered to you monthly (a business I set up)
  • dollar shave club – pay monthly and get razor blades delivered to your door (watch their ‘f**king great’ video)

the continuing growth of online shopping, combined with the convenience factor for the time poor consumer, has created a real opportunity to expand into subscription. many of these are successful through their ability to also add an element of curation to the process – so in addition to the convenience of delivery to your door, time-consuming browsing is also eliminated. the best newcomers combine this with data capture around subscribers’ preferences – making recommendations of new products and items to try based on previously caught data. but before businesses invest considerable time and effort into clever algorithms, there’s understanding how well the subscription model is performing to consider. there are some specific metrics that will help you.

which metrics should subscription based businesses (including SaaS) be monitoring?

it’s clear that whether your business is set up to provide access to a service, or physical products, there’s a lot of scope to build in a subscription element to your revenue model (just look at ours – it doesn’t come more traditional than accounting!). and when these models work to their full effect, it’s a great way to grow your business – helping you to remove a lot of the time and cost from continually having to work your way through a sales cycle or customer acquisition process. however, long term success with this model relies on providing your customers with a more convenient or customisable experience than they would experience elsewhere.

this is where having the right metrics to hand can make a real difference and business owners should challenge themselves to delve deeper than the superficial headline stats. scratch the surface to reveal the full story behind your numbers and those high level metrics can not only masquerade the truth, they can also obscure a host of opportunities. 

I recently wrote an article on 9 metrics to excite potential investors (CAC, LTV, cash burn and more) you should be all over if you’re looking for investment. these metrics will also be important for acquiring your customer base. but when it comes to assessing how effective your subscription model is at maximising the time they remain active customers – and the value you receive during that time, you’re going to need a few more.

the metrics I see as the most important when running a subscription or SaaS based business are:

  • ARPU (average revenue per user)
  • AMPU (average margin per user)
  • MRR (monthly recurring revenue)
  • CCR or RCR (customer churn rate, revenue churn rate) sometimes specified as a period and referred to as monthly churn rate

now your turn – I challenge you to think how you could create a subscription revenue model. there is a follow on article which goes into a lot more detail on how to calculate these metrics and brings out the benefit of using segmented data to get an even deeper understanding of your business which you can read here.

thanks for reading – if you have any comments or questions on the above, or are interested in talking to us, please get in touch.