3 Surprising
Reasons To Offer A Subscription
You
can now buy a subscription for everything from dog treats to razor blades.
Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks
now even offers coffee on subscription.
Why
are so many companies leveraging the subscription business model? The obvious
reason is that recurring revenue boosts your company’s value, but there are
some hidden benefits to augmenting your business with a subscription offering.
Free
Market Research
Finding
out what your customers want is expensive. By the time you pay attendees, rent
a room with a one-way mirror and buy the little sandwiches with the crusts cut
off, a focus group can cost you upwards of $6,000. A statistically significant
piece of quantitative research, done by a reputable polling company, might
approach six figures.
With
a subscription company, you get instant market research for free. Netflix knows
which shows to produce based on the viewing behaviour of its subscribers. No
need to ask viewers what they like, Netflix can see what they watch and rate.
For
you, a subscription offering can allow you to test new ideas and gives you a
direct relationship with your customers so you can see what they like first
hand.
Cash
Flow
Subscription
companies are often criticized for being hungry for cash. Many charge by the
month and then have to wait months—sometimes years—to recover the costs of
winning a subscriber.
That
assumes, however, that you’re charging for your subscription by the month. If
you’re selling your subscription to businesses, you may get away with charging
for a year’s worth of your subscription up front. That’s what the analyst firm
Gartner does, and it means they get an entire year’s worth of cash from their
subscriber on day one. Costco charges its annual membership up front, which
means it has billions of dollars of subscription revenue to float its retail
operations.
Loyalty
Customers
can be promiscuous. You may have a perfectly satisfied customer but if they see
an offer from one of your competitors, they might jump ship to save a few
bucks. However, if you lock your customers into a subscription, they may be
less tempted to try a competitor since they have already made an investment
with you.
One
of the reasons Amazon Prime is so profitable is that Prime subscribers buy more
and are stickier than non-Prime subscribers. Prime subscribers want to get
their money’s worth, so they buy a wider swath of products from Amazon and are
less tempted by competitive offers.
The
obvious reason to launch a subscription offering of your own is that the
predictable recurring revenue will boost the value of your company. And while
that’s certainly true, the hidden benefits may even be more important.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
