The latest disruption to the traditional transaction-based business is the subscription model. Subscriptions have been working successfully in the software industry for years. But more businesses are now adopting this model to create predictable and profitable revenue streams.
One of the hottest subscription models is in shaving supplies with a half dozen or more options available. Even razor giant Gillette has entered the subscription market with plans for both men and women. Why are subscription plans exploding for a product easily purchased at the local drug store or supermarket? One of the reasons is perceived quality. Even at the drug store you can pay a wide variety of prices for razors, presumably reflecting the quality of the shave received. Of course, quality is in the eyes of the consumer. Cheapskate guru Clark Howard swears that a $0.79 disposable blade can deliver nearly a year of close shaves if the blade is meticulously dried after each use. Beyond perceived quality, subscribers enjoy the convenience of having the supplies arrive at their door each month without prompting. There is also an air of luxury in having shiny things delivered in high quality packaging each month.
What about your business? Are there products or services you now only offer on a transactional basis that are well suited for a subscription model? The question is worth considering. Subscription revenues provide a predictable stream of revenues and typically produce higher margins. Contracted sales of your products increase the opportunity to plan purchases of raw materials and finished goods, which should drive prices lower. Likewise, having a more concrete view of required production and services to be delivered should allow for lower costs throughout your operations.
Here are five questions to ask in determining whether a subscription model might be a good fit for some or all of your products and services.
5 Questions to Help Evaluate if a Subscription Model is a Good Fit for Your Business
- Could we create a luxury experience around our product or service? In most businesses, providing top quality products and services is required to compete effectively in today’s marketplace. However, many consumers are willing to go beyond that and pay a significant premium for a luxury experience. In many cases, creating such an experience can be achieved through relatively small touches. These might include high quality and professional invitations to events, premium packaging of products, using high quality finishes in waiting rooms, or providing exclusive access to either the highest service levels or to product experts.
- Would it be mutually beneficial to my customer and to me to regularly refresh or upgrade our product? Many mechanical products, as well as software driven systems, provide significantly better service and uptime if they are maintained and upgraded regularly. When customers wait until there is a problem with these systems, both their business and yours are disrupted dealing with the emergency repair or upgrade. Providing a regularly scheduled preventative maintenance plan can create a win for everyone.
- Would more customers use our services if they could predictably budget the expense each month? Nearly every organization would like to be able to accurately predict their expenses so they can properly plan their budgets and cash expenditures. Most would pay a small premium in exchange for that predictability. Providing your products and/or services for a fixed monthly fee could give you a significant competitive advantage.
- Could we reduce our sales cycle by converting our product and warranty into an operating expense versus a capital expense? Most customers have a different and more rigorous process for capital purchases than for operating expenses. Capital purchases are usually scrutinized at higher levels and require more competitive bidding. Conversely, operating agreements can often be executed by plant managers or other operating management. Consider converting your sales agreement into a one to five year service agreement which includes the use of the equipment and locks in service revenues for the duration of the agreement. Because of the negative impact on initial cash flows, this approach works best on high margin products. Also, much like a lease, this type of agreement should be non-cancelable.
- Would it create a win with my customers if they could access our products and/or services whenever they wanted without worrying about the cost? Capelli’s is a Seattle-based chain of “Gentlemen’s Barbershops”. In addition to creating a luxury barbershop experience for businessmen (think leather chairs, dark wood paneling, and large screen TV’s), Capelli’s also offers a variety of memberships that allow their customers to get up to 20 haircuts a year on their own schedule. As a result, a member who just had his hair cut a week ago could pop in for a trim in advance of an important meeting, knowing that it was already included in his membership. Clearly, there have to be defined limitations, but by bundling your services into a monthly fee, you can give customers more control to access your services when they need them.
Creating a strong base of recurring revenues through a subscription-based business model can have a powerful impact on your business. Lenders and investors will typically have more confidence in forecasted revenue streams based on contracted recurring fees, often resulting in a lower cost of capital. The same is true for potential buyers of your business. All other things being equal, having a growing base of predictable, contracted revenues will make a positive difference in the valuation of your business.
In the next thirty days, take some time to think about how your business could be transformed into a subscription based business model to create value for both you and your customers.