Six Reasons a Subscription Model Adds Value to Your BusinessOct 28, 2019
This week I share 6 reasons you need to consider implementing a subscription model in your business.
“Companies from start-up to Fortune 500, from flower sellers to car manufacturers are creating recurring revenue by jettisoning the old way of doing things.”
If you’re looking for ways to increase the value of your largest asset, then this episode is for YOU! Learn six reasons why a subscription model can add value to your business.
“The reasons a subscription billing model adds so much value to your business. And why companies like Amazon, Apple, and Smol… the people who deliver my dishwasher liquid are using subscription models..”
John Warrillow: The Automatic Customer
[The following is the transcript of this video. Please note that this episode, like all posts, features Jean speaking unscripted and unedited — filmed in one take. The actual video may differ in content from the script. But you’ll still get loads of value!]
Hey everyone! It’s Jean.
Have you ever found yourself approaching the end of the month, tossing and turning in your bed? You have that feeling of dread. You are desperately scrambling to collect outstanding invoices so you can meet payroll. I know, I’ve been there. Or, perhaps you’re one of those people who hates the first day of the new month because that’s when you reset the sales dials to zero and start scrambling to get enough business to cover the months overhead.
Today, I want to share some of the reasons a subscription billing model adds so much value to your business. And why companies like Amazon, Apple, and Smol… the people who deliver dishwasher pods to my front door are embracing subscription models.
Now I can imagine some of you shaking your heads saying: ‘Jean, that’s great, but it would never work in my industry or in my company.’.
Maybe, if you cling to your old business model. But companies from start-up to Fortune 500, from flower sellers to carmakers are creating some recurring revenue by jettisoning the old way of doing things.
And sure the transition from the old business model to a subscription model isn’t easy. In my Freedom Workshop, I go into detail on how to identify opportunities so a subscription model in your business. How to select a subscription model that suits your business. And how to build a subscription business.
For more information on the Freedom Workshop, subscribe to my newsletter.
So before we get into the reasons, let me share some examples of how businesses are embracing subscription models.
Your business probably relies on several subscription services. Software applications like QuickBooks for finance, HubSpot for marketing, Zoom for meetings, the list goes on. Software companies have all but made subscription billing the norm, but so too have other industries.
Well, I’m in the market for a car. For a while, I’ve enjoyed the freedom that comes with the car-sharing service Zipcar, but the costs can quickly add up. The Zip car is not always conveniently available on the weekends. So I started looking for a car and stumbled upon Volvo’s subscription model. You pay a fixed monthly fee for access to one of their cars, and it comes with insurance and maintenance all included.
And cars aren’t the only thing on subscription…
Tri-State Elevator company maintains elevators for billionaires in Manhattan — monthly subscription revenue of $70k helping them through the 2008 recession.
ContractorSelling.com charges $89 per month for tips on how to run a successful contracting company for plumbers and electricians.
So with companies selling everything from toothbrushes to motor cars on subscription models. And the emerging generation, something John Warrillow terms ‘The Access Generation’ in his book The Automatic Customer. My question to you is this:
Could you offer some sort of subscription plan to your customers?
So, let’s get into the reasons a subscription model adds value to your business.
Having subscribers means you can forecast. One of the biggest challenges we face in business is estimating demand. Guess too high, and you end up strapped for cash and with a warehouse full of inventory. Guess too low, and you risk running out of stock.
Take the flower business. A whopping thirty percent of a typical flower store’s revenue comes on Mother’s Day and Valentine’s Day – ultimately leaving them to scramble and make a sale in November. In the flower business, waste is a big problem. The average flower store throws out somewhere around half of its inventory each month.
In contrast, online florists like Bloom and Wild and H.Bloom, have no high-street presence. Instead, they have a single warehouse and no need to hold stock. Their businesses are data-driven; meaning they can predict seasonal trends, have monthly revenue off subscriptions, and throw out less than 2% of their flowers because they can accurately predict how many flowers are needed to fulfill their orders. Subscription services are making these businesses much cheaper to run than a traditional high-street florist.
Every business that employs people has to guess how much demand they will have and staff accordingly. I work with software companies and consultancies. When they lose a big account, people suffer. By contrast, the subscription business model smooths out demand so that you can plan your business effectively.
2. Get paid automatically
Assuming customers pay for your subscription via credit card, you get paid on the day you’re supposed to get paid. It’s the sale that keeps on giving!
Compare that to your typical payment cycle of 30, 60, or 90 days for payment.
You know, in my document storage business, we had great recurring revenue. However, one of the mistakes I made was not setting payments up on credit card or standing order. As we grew there were many small invoices of $20, $40, $100, you get the picture. Some customers would pay on time, but others required a phone call at 30 days, a nudge at 60 days, and a nasty letter at 90-days. Chasing deadbeats for $100 can become a full-time job, and expensive too.
3. Free market research:
When you get a customer to subscribe, you can start to see their spending and consumption habits. This data is the ultimate in market research. It’s how Netflix knows which new shows to produce and which to can.
If you want to find out more about what your customers want next. Or how much they would pay and what features they want, you could commission a six-figure phone survey or five-figure batch of focus groups. Or you could launch a subscription offering and get paid while you do market research.
4. Make your customers sticky:
Imagine you’ve just had a new baby. My neighbors have a new arrival. I remember running out in the middle of the night to find diapers. You stagger into the room somewhere around 1 am and realize there are no diapers in the cupboard. After tearing the house apart trying to find one you might have forgotten in the buggy or diaper bag, you give in and drive to the all-night convenience store. Amazon paid $540 million in cash for the parent company of diapers.com.
5. Subscribers buy more:
Once you subscribe to a service, you become much more likely to buy other things from the same company. That’s one reason Amazon is so keen to get you to buy subscriptions to things like Prime or Subscribe & Save. Amazon knows that once you become a subscriber, you are much more likely to buy additional products.
Those flower folks, H.Bloom, for every $10 subscriber they pick up $3 in one-shot special occasion orders.
6 . Improved Valuation:
If you’re like most business owners, your largest asset isn’t your house or portfolio of stocks. Your wealth is tied up in your business and how it is valued by potential buyers. Recurring revenue boosts the value of your business. When acquirers look at a healthy subscription business, they see an annuity stream of revenue throwing off years of profit into the future.
I’m not going to go into detail on the valuation model today. If you’d like to go deeper on creating a subscription business model, check out these articles from my blog:
- How to switch to a recurring revenue model (and why you need to)
- Four Subscription Business Models For Your Business
- 5 More Subscription Models for Your Business
- 5 reasons to run your business like you plan to sell it (even if you don’t)
- Are You Caught in The Owner’s Trap?
And don't miss The Freedom Experience podcast for my weekly insights into creating a valuable business that thrives without you.