1. Trends & External Forces

The Subscription Economy is Taking Off. Here’s How to Get on Board.

The subscription economy has grown more than 435 percent over the last nine years. Internationally, nearly eight in 10 adults use subscription services. In the U.S. alone, 42 percent of men and 28 percent of women have three or more subscriptions. Between 2020 and 2025, the subscription market is set to more than double from its current $650 billion market to a $1.5 trillion market.

Subscriptions saw their genesis in gym memberships and magazine subscriptions. In the 2010s, the software industry caught on with software-as-a-service (SaaS). Today, almost any kind of business — B2C or B2B — has the opportunity to enjoy its slice of the subscription economy.

What makes the subscription model so attractive? More importantly, how can businesses ensure they succeed, rather than crash and churn?

A Winning Formula: Loyalty=Retention=Profits

The subscription model offers businesses several benefits, with loyalty and retention being the two most prominent. Subscription services can deepen customer loyalty — or create it, in the case of businesses where there is no loyalty. This is true for both B2C and B2B models.

For example, consider a service for an oil change. This is a service for which most people aren’t loyal: an oil change is an oil change, and it’s just something they have to do. Offer a subscription for an oil change, however, by including a discount or additional perks, and you increase the value for the customer and create loyalty.

When you consider the fact that it costs five times more to attain a new customer than to retain an existing one, the subscription model suddenly makes a lot of sense.

While many of us have conceived of subscriptions as a B2C offering, given our experiences with Netflix, Amazon.com and others, it works just as well in a B2B setting. Consider a home improvement retailer, for example. It purchases from multiple vendors, and it will always do so. Those vendors can never hope for an exclusivity agreement. However, they can guarantee the retailer’s loyalty with a subscription program. If every product they sell to the retailer is covered by warranty or damage coverage, that makes them stand out as a vendor. Subscription agreements strengthen the retailer’s connection with the vendor, while providing a steady source of revenue for the vendor.

The subscription model can work for any kind of product or service:

  • E-commerce products can be prescribed on a recurring frequency for a discounted price.
  • Rentals and leasing services can transition to a “membership” model which offers a more personalized experience.
  • Software companies can function as SaaS, using usage-based billing.
  • Expensive add-on services can become a minimal subscription fee, drastically reducing hesitation to purchase.

Given its proven success and wide applicability, many businesses are eager to enter the booming subscription market. They face two key challenges, however: finding the right pricing strategy and reducing churn. Fortunately, there are ways to resolve both issues and succeed in the subscription economy.

Picking the Right Pricing Strategy

There’s no perfect formula to pricing a subscription. It must be both valuable to customers and profitable to the business, which takes time and technology to figure out. The one exception is in e-commerce, where the model is straightforward. Customers sign up for a subscription and they receive the product at discount, usually 5 percent.

For other types of services, more strategy is required. For example, if you’re a car dealer that decides to spin up a maintenance subscription plan, you have to find a way to make the pricing make sense for both luxury and economy cars. What seems reasonable to a luxury car owner may cause sticker shock for an economy car owner. Also, cars have different maintenance needs over the course of their lifespan, so how do you ensure there’s value for newer car owners (who may need fewer services) while remaining profitable as you service older cars?

We’ve found creating a minimum viable product (MVP) and releasing it in a limited manner, such as to a small subset of your stores, can help businesses work out the kinks ahead of time and hone in on the right pricing strategy for launch. Having said that, you’ll ultimately want to rely on subscription software that allows for dynamic pricing moving forward.

Reducing Churn

Subscription churn describes the number of subscribers who stop paying for the subscription in a given period. It’s by far the biggest problem facing subscription businesses. In subscription apps, for example, the median churn rate is around 13 percent for monthly subscriptions and 50 percent for annual subscriptions.

To combat churn, subscription businesses must find ways to offer consistent value to the customer, and act proactively to save customers before they churn.

Typically, customers churn because they no longer see value in the subscription. Businesses can avoid this by allowing them to amend their subscription — e.g., upgrading or downgrading their plan. It’s essential that their subscription software enables customers to do this in a self-serve manner. Otherwise, they may end up losing the customer anyway out of frustration.

Subscription analytics can help with the second piece. Customers don’t cancel their subscription out of the blue. Often, there are warning signs. With a gym membership, they stop coming in. With a streaming service, they stop watching. If businesses have access to analytics, they can reach out to these customers before they churn, enticing them to re-engage by highlighting their newest fitness classes or TV shows.

Subscriptions Are the Future

The subscription economy isn’t going anywhere. Every business is thinking about how to introduce a subscription offering. The question isn’t which businesses will offer a subscription; it’s which will do so successfully.

Rich Minns is commerce and customer experience leader at Capgemini, a global leader in partnering with companies to transform and manage their business by harnessing the power of technology.

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