Firms are increasingly incorporating subscriptions into their business models – or shifting to a subscription-based model entirely.
With restrictions, lockdowns and further uncertainty ahead, it looks as if this will continue to grow as entrepreneurs look at new ways to do business which will give them a steady income that can be sustained online.
We explore the surge of the subscription-based business model and what a business needs to do to get started.
Why should I introduce a subscription service?
Subscription economy is worth £323bn, according to research from Barclays Payments. 65 per cent of homes are signed up to a subscription service, with the average number of subscriptions totalling seven. UK spends £552m a year on subscription services. Increased 50.2 per cent year on year during April – the height of lockdown.
Zuora’s COVID-19 Subscription Impact Report reveals of those businesses that already offer subscriptions, four out of five companies are still growing despite the economic impact of the COVID-19 pandemic.
In fact, 50 per cent of all subscription companies are growing just as fast as they were before the pandemic while 18 per cent are seeing an acceleration in subscriber growth.
What’s more, subscription companies tend to be less resource-intensive than other businesses. A greater deal can be done through automated processes and chatbots.
Rather than a one-off transaction, you can observe customer behaviour over time and adapt to emerging trends. In turn, this can play a role in shaping future marketing campaigns and changes to products.
Are subscriptions right for my business?
We make it sound like a worthy shift for all businesses, but you’ve some crucial considerations to make first.
Assess whether your product or service lends itself to a subscription model
Certain types of business lend themselves well to subscription models as we’ve seen: music, film, service apps and all sorts of subscription boxes.
Food subscriptions are one of the most popular types of subscription service in the UK. A substantial 37 per cent are subscribed to some kind of food service, according to Finder UK. This is followed by razors and shaving (30 per cent), perfume and cosmetics (26 per cent), clothing (21 per cent) and contact lenses (ten per cent).
However, some businesses are unsuitable for subscriptions, namely products and services where there isn’t an incentive to buy regularly.
Just because your business may not seem like it would work well as a subscription, it may not be a cause to give up hope. Look at how consumer behaviour is changing. For example, car hire subscriptions have had surprising success. If you glance at changing patterns, fewer people own cars. Breaking it down, it’s more convenient for temporary residents based in cities or for those who find it impractical to own a car, such as in London.
Customers may be inclined to buy products that they don’t have access to normally. For example, in a Spectator interview with Sally Scott, the UK’s managing director at Birchbox, revealed that only seven per cent of the beauty subscription box’s customers are based in London, suggesting that others subscribe to it because they don’t have easy access to make-up and beauty products.
Consumers or business – or both?
If you do decide that you can do subscriptions, think about all of your options. Will you offer packages to individuals, family packages or something corporate?
What will your pricing tiers be like?
The first area to assess is the buying patterns of your products and services. Try two or three tiers to begin and build from there.
Tier your pricing based on functions available, length of subscription time (if a service), what time of day the service is used or whatever makes the most sense for your business.
One of your main objectives is to attract new customers. Will you be offering discounts or free trials? Many businesses offer 14-30 days free. Don’t get carried away, though – make sure that your business is still profitable.
It’s helpful to look to other businesses for ideas. Luke Haslett from search optimisation firm, Iakoe, launched the company’s subscription service at the start of lockdown. However, he wanted to do things differently.
“Our clients still sign 12-month contracts, but instead of paying a fixed fee they enjoy a ‘pay for performance’ agreement,” he tells SmallBusiness.co.uk.
“We believe that fixed retainer contracts are an old-fashioned setup that have long underserved clients. They favour the agency’s profitability rather than the client’s return on investment (ROI). Instead of our billings focusing on the time spent on a project, we focus on the value we create. Our monthly fee is directly correlated to the commercial value we create for our clients.”
He believes that this model will make the company more competitive as they burden the risk and clients pay purely on performance.
What payment systems will you use?
The systems you put in place will be integral to how your subscription runs, especially how you accept payments. Work with a programme that’s easy to implement. GoCardless data shows that subscription businesses lose four per cent of their customer base every month because of payment churn when payments fail to go through.
Payment systems will vary according to functionality, transaction fees, possibly even their own subscription pricing. Consider the implications of overseas sales too.
Bear in mind that your billing will be among the hardest elements of your business to scale – choose carefully.
Read Best payment processors for UK small businesses – 11 of the best to find out more.
Rethink your customer engagement strategy
Customer relationships will be more essential than ever. It’s wise to provide round-the-clock support service and, as mentioned before, keep an eye on product usage.
And as much as you want to attract new customers, it’s worth rewarding your existing customers – say, putting price rises on new customers only.
It’s easier to keep your customer base organised by using a customer relationship management system.
How will you manage licences and distribute your product?
Have a think about distribution if your offering is a physical product. It’ll likely be sent out by post but it may need a courier to deliver it or some sort of special packaging, such as cool packs if it’s something fresh that needs to be kept cold.
If it’s a service, the more likely case is that you’ll need to communicate with customers through email, sending verification codes or one-time passwords to activate. Again, consider who it will be available to. Will it be licensed to an individual, a business or can you offer different tiers to suit both needs?
Case study: Carlene Jackson, CEO of Cloud9 Insight
Carlene Jackson runs Cloud9 Insight, a cloud-based CRM firm. She shares her thoughts and experiences on subscription businesses.
Why set up a subscription service?
Businesses crave certainty but there’s been precious little of that this year. There might not be many more things to bank on next year, either; even in normal times the life of an entrepreneur tends to be unpredictable.
Sales should never be taken for granted. It takes effort to fork out money and people have to be motivated to do it. But when things change, so do habits, and it’s all too easy for someone to hold on to their cash rather than spend it with you. Subscription based businesses get around this by making it so convenient to spend it’s actually easier than not spending. You just set up your direct debit and get on with things.
How has having a subscription-based model benefited your business?
Like most, my business has had its ups and downs this year. There’s been a lot of upheaval and challenges. However, the one thing I’ve come to really value is the benefit of having some dependable, regular income coming in. About 60 per cent of our revenue comes from licensing, which means clients pay us a monthly fee. Having regular income has been a lifesaver this year and, as I look across my client list, it’s clear it has been for others too.
What types of business do subscriptions work for?
I do recommend that you review your current subscriptions for both your business and family life. As you do so, you might realise something that I’ve noticed. Virtually any kind of company can be a subscription business. Software as a Service (SaaS) has long used this model, as do many providers of non-tangible products and services like insurance. However, with home deliveries a mainstay of 21st century life, there are many product-based businesses selling very traditional products via direct debits.
The veg box is a well established service, much loved by foodies. The boom of craft beer, while massively impacted by lockdown, has still found a lifeline, with beer companies like Beer52 delivering crates to the door. What I like about some of these companies is that, while the payment is regular and the same each month, they’ve actually managed to persuade their customers to accept a degree of randomness with their actual offering. You aren’t 100 per cent sure what veg or beer will arrive, but you’ll probably like it, or find someone else who will.
Almost any kind of business can run a subscription and I recommend that all business owners explore the possibility. There are companies selling socks via direct debit and others selling software, so there’s a lot of range in between.
You don’t have to be a big company like Netflix to make money in this way, although I do think it’s a great way to grow a business. Having regular and fairly predictable income makes planning and scaling a lot easier and gives you more confidence going forward.
Why is now the right time to start a subscription service?
We really don’t know what the future will bring. No-one is sure where their customers will be tomorrow. However, getting someone to sign up to your business is the perfect chance to ensure you’ve got their contact details.
In this data rich age, we should all know what our customers are buying from us, how often and for how much. A subscription-based business, combined with a good data management system, will ensure you have that information in real time. The crisis of 2020 has accelerated our business transformation. It’s time you subscribed to a new way of thinking and ensure your customers do, too.
It’s there anything I should be aware of before I start doing subscriptions?
Naturally, no business model is perfect.
As firms start realising the benefits of subscriptions, it leads to high levels of competition. And, as a result of there being so much to choose from, customers feel overwhelmed by options and decide to opt out of subscriptions completely.
Lastly, though adopting a subscription service can reduce customer churn, it can encourage churn if not handled well. Remember – look after your customers and get the right systems in place before you dive into a subscription-based business model.
The essential guide to customer churn: what is it and how do I reduce it?