Since the pandemic started, the consumer demand for subscription offers has been growing at never-seen-before rates. It’s the best time ever to have a subscription model for your business.
Do you want to jump on the subscription model bandwagon?
Almost every business is suitable to adopt the subscription model.
But in order to be successful, a subscription model must have four growth drivers that work together.
Offer, pricing, retention, and LTV
The tricky part is that the four growth drivers operate differently for every type of subscription model.
There are about nine types of subscription models, and the growth drivers will differently for each one.
Here are a few examples to give you an idea of what you’ll find in this guide:
The best example here is Dollar Shave Club.
The key to this model is that it allows you to offer lower prices as future orders increase customer value.
This is how the 4 growth drivers work here:
- Offer: Convenience is the key driver.
- Price: Pre-approved, repeated purchases give you the advantage of offering a lower price than your competitors.
- Retention: The use of the product is essential. If customers don’t use it, they’ll cancel the subscription.
- LTV: Given the low prices, this model is heavily reliant on retention. Other ways to increase LTV are cross-sells, higher-priced tiers, and media revenue opportunities.
A key example here is The Hustle’s Trends or some form of content media subscription.
This model is about selecting, organizing, and summarizing important information and data for the subscriber.
- Offer: This is a high-end product. The conversion is based on the value the user expects to receive.
- Price: Focus on the opportunity generated by having access to exclusive information.
- Retention: Each fulfillment should feel like an invaluable gift surprise from a friend. Remind them of the volume of benefits they receive with each fulfillment.
- LTV: Solve more problems for your customers to increase the value they receive.
Gives access to members-only. Costco is the most common example.
Subscription entitles access to purchase additional products and services.
Subscribers often receive exclusive perks while access is primary value.
- Offer: Must establish value of offer to induce member to pay for access to the store.
- Price: Subscription price is usually perceived as small as there will be additional services to buy.
- Retention: Most businesses in this category expand offerings to include additional benefits in addition to access.
- LTV: Subscriber retention plus profit margin on subsequent purchases. Fastest LTV growth comes from increasing purchase frequency.
Amazon Prime is the “prime” example of the VIP model.
Members pay for privileged access including perks, exclusive offerings, and preferred service.
The VIP model puts a mote around your best customers.
Amazon adapted the Waldenbooks Preferred Reader program to online commerce through its Prime program by offering preferred pricing (free shipping in this case) and additional perks to members.
It creates a clear distinction between frequent customers and casual buyers for preferred treatment.
- Offer: Designed to be an obvious, “yes” decision for anyone who is a frequent customer. The discounts, special treatment, and other benefits accumulate to deliver value. Lack of free shipping is what frustrates most customers about e-commerce, for example.
- Price: Subscription price is usually perceived as small for the right customer. Some retailers, like Target, use a similar loyalty program because the purchase data is more valuable than the membership fee.
- Retention: Get customers back to the store with special VIP treatment. It’s worth investing the membership fee revenue into member communication.
- LTV: While the membership itself generates a nice profit margin, LTV is driven by members shopping more frequently and buying additional products. Members want to buy from the store to get more out of their membership.
Horizontal marginal cost subscription businesses benefit from minimal fulfillment expenses for each new subscriber.
There are often significant upfront costs to create and launch a product to serve the first subscriber.
Netflix is the most common example.
After disrupting the movie rental business with DVDs by mail, Netflix took advantage of increasing internet bandwidth to pivot to a video, movie, and digital content streaming service.
- Offer: Highest conversion comes from promoting a single benefit versus the entire offering.
- Price: This model is vulnerable to underpricing as customer acquisition costs increase as this business model scales.
- Retention: Customers want access to what their friends are watching and talking about at social gatherings. Consumption is not as important as long as you are delivering an experience worth talking about. Word-of-mouth can be big in the horizontal mode.
- LTV: With few other offered products and services, retention is the key driver of LTV. Like anything, the product has to be excellent. Other options include higher-priced subscription tiers to up-sell as well as accepting media/ sponsorship opportunities. Acquisitions of synergistic businesses may also be good for cross-selling opportunities or to eliminate redundant costs.
Positioning yourself or your team as the domain expert is the key way to attract new subscribers to your publishing business model.
For example, MarketWise went public in July 2021 via a SPAC with a $3 billion valuation.
Key elements are that 33% of its customers are categorized as high value, spending between $2K and $5K while 5% are considered ultra high value, spending greater than $5K.
Multiple levels of customers at different LTV ranges is a key growth driver for any subscription business, but publishers have a much longer history of doing this successfully.
- Offer: The key is that customers must feel the publisher knows important things about topics they don’t know.
- Price: Too many publishers become distracted by advertising and sponsorship revenue, though it’s easier than getting people to pay for something of higher value. For example, the mainstream media is often overly focused on sensationalistic, biased stories that get people to click but don’t offer much value outside a more superficial level of entertainment concept or simply winding people up. Ads and sponsors divert focus from the customers they serve. Creating one’s own products has more potential. Scaling revenue should include media opportunities, but tiered pricing with products priced at 3x to 15x the initial subscription price provides long-term sustainability.
- Retention: Subscribers come for information and stay for a personality. Your products must be engaging and entertaining to retain customers.
- LTV: Driven by two key factors, retention and upsells of back-end products. Those operating in the publishing model are often some of the best at it.
The SaaS model uses a technology-based tool to provide value to the user.
With acquisition valuations often topping 30x EBITA, SaaS-based companies are one of the most exciting business growth areas today.
For example, Adobe Creative Cloud includes the primary design tools for photos, video, and digital/print layout.
Adobe’s successful conversion from selling perpetual licenses to the subscription model marks a key milestone in the subscription model revolution.
- Offer: Problem/solution offers are most effective as potential subscribers rarely understand the benefits of using a new tool.
- Price: Customer value-based pricing tiers drive retention and margins more than feature-based pricing.
- Retention: Onboarding must create the customer habit that includes your new tool. One-time use, even if successful, doesn’t form a habit. Will users habitually use your product?
- LTV: Solve more problems for your customers to increase your value and move customers to higher-priced subscription tiers.
The Unlimited model gives customers all-they-want access to a product or service.
It can also be part of an up-sell to a more basic version of the product.
For example, many AI writing assistants only provide users with so many words per subscription period. For an extra fee, they can remove that and get all they want.
Unlimited subscriptions lock-in customers to return to a provider by transforming a one-time visit into a series of pre-approved subscription transactions.
Disney Annual Passholders plan multiple trips to visit Walt Disney World to make sure they get the value out of their pass investment.
For Disney, this increases customer value, creates buyers for their Disney Vacation Club, and fills the park with Disney fans who buy food and merchandise.
- Offer: Unlimited sales conversion is about the convenience of being able to consume all they want and the status of being an insider. Cost-savings may be the analytical reason for subscribing, but the special feeling of being an insider can also be a part of it for many. ESPN Insider is one service subscription that appeals to this ability to get inside/privileged information.
- Price: Price above your average LTV to result in an overall average increase. The multiple to charge depends on the cross-sell opportunities available within your business model.
- Retention: While front-end conversion is based on convenience, retention is based on status. The feeling you get as an unlimited car wash subscriber, driving past all the other cars waiting to pay for a car wash, to pull up to your own gate that opens as you approach.
- LTV: Most subscription programs discover that offering unlimited results in more subscribers moving up to a higher LTV to more than offset the costs associated and/or any cannibalization effects.
The billions of smart devices in the hands of consumers around the world create demand for app-first subscription-based tools.
App-first subscription programs are optimized for the smart device experience.
Tinder is the largest revenue subscription app across the Apple App Store and Google Play Store combined. Finding dates on Tinder is a uniquely app-related experience that’s completely different from using a computer.
- Offer: Most app subscriptions are sold on a free-trial basis. They motivate a new user to download the app, open it and go through the process to initiate a trial subscription.
- Price: Prices tend to be low because platforms take a large percentage of the transactions. Many app first subscription companies like Spotify collect subscription revenue outside of the app store because of this.
- Retention: The rate that apps are downloaded to a smart device and never opened by the user is surprisingly high. Plus, there’s high churn at each step of the new subscriber journey. Plus, users are quick to cancel subscriptions they aren’t using through the app store. As a result, this is the most challenging retention environment of all subscription types.
- LTV: For stand-alone apps, retention is the key to LTV growth. The most innovative use the app store as a new subscriber acquisition platform with systems to move customers to other platforms for additional purchases.
Subscription Business Models – Types You Should Know
In this article, we discussed the 9 major subscription models:
- Pre-approved model
- Curation model
- Access model
- VIP model
- Horizontal model
- Publishing model
- SaaS model
- Unlimited model
- App-first model
As subscription model trends heat up, think about your product or service and how you can successfully fit into one or more of these frameworks.