12 Vital elements of the Subscription Business Model

The Subscription Business Model has entered all parts of daily life.
Today we are going to have a look at the 12 vital elements of the
Subscription Business Model.

From Simon+Kucher Consumer Insights magazine, spring 2016

(pdf)

InnovationTactics.com
There are various ways to categorise subscription models.
One useful way to categorise is by the offered service/product
type:

1 Access to intangible assets: media, TV shows, news, music,

movies, ebooks, magazines, video, TV shows, games,
application software and Software as a Service (SaaS).

2 Access to durable goods: cars, bicycle, smartphones (with

contracts).

3 Regular delivery of goods: newspapers, clothing, toiletry,

consumer packaged goods and any other consumer goods.

4 Utilities: internet, phone contract, electricity, computing

power, Infrastructure as a Service (IaaS). Note, that many of
these are a combination of subscription business model and
pay-per-use.

5 I am excluding peer-to-peer offerings, such as Uber or

AirBnB. These fall under pay-per-use and sharing economy
business models.

InnovationTactics.com
InnovationTactics.com
Don’t learn from early subscription models

Let’s start with one of the early subscription models. Cable TV

started in the late 1940s. And the competition was mainly within
the system, i.e. other Cable TV providers. It had started
declining in subscribers as the internet and other media
expanded (early 2000s). In recent years streaming providers, such
as Netflix started putting further pressure on Cable TV. Even
though they too are a subscription business, they do things
differently. And these differences are a great illustration for
what make this business model work.

Review.com starts their review on Cable TV with clear

words “Cable is the worst. And it’s not just in our imaginations —
it’s a fact. According to the American Customer Satisfaction Index,
a research group at the University of Michigan, customer
satisfaction of cable companies is the lowest of any industry, and
it’s not done tanking.”

InnovationTactics.com
12 Vital elements of the Subscription Business Model

(1) Value & quality

(2) Clear offers & fair pricing
(3) Convenient transactions
(4) Improve offer continuously
(5) Localise offering
(6) Personalise
(7) Build a culture of membership
(8) Make deeper connections
(9) Freemium to get started
(10) The right metrics
(11) Funding sources
(12) Cost structure

InnovationTactics.com
(1) Provide value and quality
The review points out clearly that there are now alternate offerings
which provide more value (in this case better TV shows):
“There used to be no other option: Without cable, there was no
way to watch your favourite shows. But with streaming devices
and subscription services on the rise, that’s no longer the case.
Some of the best shows on TV aren’t even on cable TV anymore —
Amazon Instant Video has Transparent; House of Cards is
exclusively on Netflix; Broad City broadcasts via Hulu — and
streaming is becoming less an alternative to cable and more the
go-to way to get our shows.”

Pink Floyd was lamenting about it in 1979 “Got thirteen channels

of sh!t on the T.V. to choose from.” The only thing that had
changed was that you had more of it to choose from (AT&T U-
verse® offers 590 channels).

Providing value & quality is an essential ingredient to the

subscription business model. Regurgitating the same offering
year-in-year-out is not quality.

InnovationTactics.com
 


InnovationTactics.com
(2) Clear offering & fair pricing

A common approach among cable TV providers is artificial

bundling. Check out Foxtel’s 26 “offers” – this is the number of
choices at the time of writing in their Australian offer. It artificially
disaggregates genres (comedy, drama, etc) into different
packages as if there was anyone who would watch one genre
only.

It is a see-through manoeuvre to make the complete combo

look reasonable in price and get more people to sign up to it. 
Foxtel package ranges from $26-$137 (a huge gap).

Netflix on the other side has exactly 3 packages to choose from.

All packages offer access to their entire offering (and that on-
demand.) The only difference is the number of devices you can
watch it from and the maximum resolution. The price ranges $9-
$15 which is an acceptable premium to get to the best offer.

Another sticky point with cable TV are lock-in contracts (generally

24 months.) Even though this is partly caused by the necessity of
the cable TV providers to set up some infrastructure and provide a
physical box, it comes with a bad taste. Further on cable
providers’ in part rely on people forgetting to cancel in time
which leads to an auto-renews for another year. It is likely that this
drives a company internal mentality of complacency.

InnovationTactics.com
 


InnovationTactics.com
(3) Offer convenient transactions

Most new subscription models across many industries allow you

to cancel anytime. Not just streaming providers but most of the
examples that I have listed in last week’s article. This in return this
puts the provider under constant obligation to deliver value.

You can’t rely on lethargy of the customer as a strategy to retain

them. If they don’t feel the value they will eventually quit. And
once they quit, they don’t come back easily – a well-known effect
in the newspaper industry.

Insincere offers, such artificial bundling, lock-in contracts and

hoping for the customer’s lethargy are no longer a useful
“strategy.” It is better you put yourself under pressure by reversing
the risk back to yourself.

Demonstrating the importance of easy payment are Netflix’s

struggles in South East Asia. With only 2.3% of people owning a
credit card, there are barriers to subscribing to Netflix. Their
growth in this huge potential market of 600m people has been
below expectations owing to the relatively high price (normalised
to the region’s average income). iFlix, a local competitor, offers
much lower payment models that can be directly paid together
with their phone bill.

If you are interested you can find more on the transaction

management here.

Further on you will find that most subscription models make sure
they offer you very easy ways to up but also down grade your
subscription, to skip a week (or month of delivery), return stuff,
etc.
InnovationTactics.com
InnovationTactics.com
(4) Improve your offering continuously

These previous points bring us to what is being pointed out by

many experts of the subscription business model. You have to
continuously improve your offering.

This can include a lot of things depending on your industry:

1 Exclusively created shows on streaming TV and new
seasons thereof
2 Added features on Software (e.g. MS Office or Adobe)
3 New flavours with coffee subscription (Starbucks)
4 Varying & exotic recipes on food subscriptions (Blue Apron)
5 Different styles on clothing subscriptions matching to season
and user (Trunk Club)
6 Various discounts on grocery subscriptions
(Amazon Subscribe&Save)
7 Varying gifts on toiletry subscriptions (Dollar Shave Club)
8 And more

Netflix had massive success wit “House of Cards” exclusively

streamed on Netflix. Now everybody has started producing their
own TV shows, including Cable TV, Amazon and many other
streaming companies.

In ownership models the sale is the end point, in the subscription

model, it is the starting point. This has definitely an impact on the
R&D model of your company. It is better to have faster roll-out of
smaller feature additions than one big bang roll out every few
years.

InnovationTactics.com
InnovationTactics.com
(5) Localise

Another important element is to consider location/culture specific

aspects. In the case of streaming providers this of course means
localised shows.

As Bloomberg reports: “Amazon already has its own shows and

development teams in Japan and India, and is commissioning
shows in Germany and Korea, said Price, the company’s studio
chief. “In every country, there’s a different competitive
environment,” Price said. “The key is the user experience and
selection.””

It demonstrates the point that it is no longer enough to

serve everybody the same stuff all the time. I believe it is
important to realise this point before you embark on a
subscription model and factor the costs of this into your proposal.

InnovationTactics.com
(6) Personalise

The Financial Times is one great example how it allows

customers to subscribe to their own curated content.

Personalisation is the opposite of artificial bundling: “My FT’ will

let readers subscribe to topics and effectively curate their own
content and will go mobile first, to help close the gap between
mobile readers and revenue. Today’s newspapers need to acquire
a holistic understanding of their customers and the ability to
manage those relationships from not just an editorial and
technological perspective, but also a commerce, billing and
finance point of view. They need to use data and insights to give
readers what they want (the right editorial mix), where they want
(on any device), and at the price they want it at, which is known as
flexible subscription options.”

Personalisation is a powerful way to provide customer experience

and to build soft switching barriers.



InnovationTactics.com
(7) Build a culture of membership

Spotify gives members additional benefits. It increases direct

network effect (word of mouth recommendations) as well
as loyalty (I hang out where my friends hang out.) This is
significant because customer lifetime value is the most important
metric of the subscription business model.

InnovationTactics.com
(8) Make deeper connections through values alignment

Blue Apron delivers recipes & its ingredient. But their mission is
bigger, among other elements they emphasise their
goal of developing a sustainable food system. Check out their
beautifully crafted mission page. This will allow them not to
be purely compared to price!

InnovationTactics.com
(9) Measure the right metrics

Two of the most important metrics are customer lifetime value

and churn. Customer lifetime value within the subscription
business model requires loyal customers that use your offering.
Churn is the opposite.

A great proxy for loyalty is engagement. And an amplifier of

loyalty is advocacy (i.e. recommending your services to others).

With lifetime value being so important and cost of customer

acquisition being very high (esp. for start-ups) how long people
stay with your company is more important than how many people
come in.

Metrics most relevant to the Software-as-a-Service business model

(which in most cases is a subscription model sometimes combined
with an on-demand component).

InnovationTactics.com
(10) Have a long breath (i.e. funding sources)

In 2015 Netflix entered Australia. In anticipation, Foxtel had halved

their subscription prices. Foxtel did well even in the 18 months
post Netflix entry into the market. They have not lost subscribers
as predicted by some analysts. In fact, they have had good
growth. And it is likely people who had previously considered
Foxtel took up the special reduced rates.

It is also not a surprise that the existing subscribers stayed with

cable as this is the most convenient approach (and many may still
be locked into their existing contracts.) In Australia, Netflix has
captured their subscriber from non-cable TV viewers. This fight for
market share may be another one where a lot of the benefits go to
the customer.

From the perspective of the disruptor (being Netflix,) there are

more important lessons: the incumbents have reacted exactly the
way that management literature recommends. As per professor
Clayton Christensen’s recommendations the incumbents
have started a new brand completing with the start-up on the
same business model.

Foxtel has not only reduced their pricing but they have also
launched their own streaming service called Presto. And not only
that. Other powerful local media companies have started a joint
venture streaming offering (Stan). Both are in direct competition
with Netflix. Netflix also faces challenges in emerging countries
from local start-ups (such as offerings at even lower price points).

It is important to anticipate the moves of the incumbent and

competing start-ups and to think about your funding sources. If
you are an established company, starting a new spin-off or a JV
InnovationTactics.com
may be a great idea to defend from a start-up trying to disrupt
your ownership business model with a subscription business
model (“disrupt yourself.”) This is even more true once you read
the first few tips. I am convinced for established companies the
transition  to a subscription business model requires a lot of
changes in culture, in processes, accounting, etc. This can often
not be done quickly. You might end up looking like a Cable TV
company compared to a streaming providers regardless of your
industry.

InnovationTactics.com
(11) Freemium: to get started!

When done right offering a freemium can be the best way to get
started. Robbie Kellman Baxter recommends in the Harvard
Business Review following tips for a successful Freemium:

” Freemium works best in three scenarios:

• As a means of trial. Many people who have a free
subscription to Dropbox get all of the online storage they
need. But for others, as they make Dropbox part of their daily
routine, they find they need more storage and greater
functionality. As a result, they upgrade to the premium
service.
• To create a networked effect. Each new member that joins
LinkedIn for free creates additional value for the recruiters,
salespeople and jobseekers paying for LinkedIn
subscriptions. And if no one used the free version of
LinkedIn, there’d be little reason for those people to pay at
all.
• To serve as a marketing channel. Some people never pay for
a SurveyMonkey subscription, because they only need small
surveys sent to a few people, with limited analytics. But when
those people send out their surveys, they are advertising for
SurveyMonkey to everyone who receives the survey. If one of
those survey recipients subscribes to the premium offering,
the sender (who’s a free member) becomes a marketing
channel for attracting and converting new members.”

InnovationTactics.com
InnovationTactics.com
(12) Cost structures are different

Whenever physical assets (or infrastructure) are involved there are

additional considerations. Take subscription of durable goods,
e.g. bicycles, cars. In this form the company retains ownership of
the asset but grants access to it in form of subscription model or
subscription plus pay-per-use.

With Cable TV, the provider often owns some of the infrastructure

being the distribution cabling from a hub to the end-user. Take
the following into account:
(1) find efficient ways for the recurring/ongoing distribution of
your goods,
(2) minimise transaction costs and
(3) work out the ongoing management of the asset (with
accountability transfer to the users to treat the asset as it was
theirs).
And then some more. I have covered this in detail our article
about the Pay per Use Business Model.

With durable goods, you have to also distinguish between peer-

to-peer and business-to-consumer. AirBnB and Uber fall into the
first category (though enabled by those companies who profiting
handsomely). Zipcar, BMW’s DriveNow and many others fall into
the latter category.

There are some similarities though with digital goods that book or

media subscribers grant you access to. You get given access to it
for a period of time after which the media “disappears.” The
above three points hold valid also for digital assets (e.g. one of
the most important items in the asset management is to prevent/
reduce privacy).
InnovationTactics.com
InnovationTactics.com
The subscription business model is one of the most
promising business models regardless if you work for an
established company or a young one.

We have more resources on the Subscription Business

Model. If you haven’t dowloaded them all yet, click here to
do so:

www.InnovationTactics.com/subscription-business-model-pdf

Author: Murat Uenlue, PhD, PgMP, PMP

Feel free to email, tweet, blog, and pass this ebook around the web. But
please don’t alter any of its contents when you do. Thank you.

InnovationTactics.com