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SELLING A BUSINESS

The Automatic Company: 5 Ways To Create a Subscription Business

It's not just Birchbox. All kinds of businesses can benefit from the subscription model.
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Look at a recent credit card statement, and you’ll notice something relatively new. Instead of lumpy expenses for a few things you’ve purchased, you’ll likely see a number of small, monthly charges for services you subscribe to. You might see names like Netflix, Spotify, Google, Evernote or The New York Times. These are the pioneers in a radical shift from The Demand Economy to The Subscription Economy.

The Demand Economy

In The Demand Economy, businesses respond to customer demand. You open your store and hope customers will come to shop; you dutifully trudge to the office and hope clients will ask you to help with their next project; you go to the plant hoping you’ll be able to sell the stuff you make. Sure, you can stimulate demand through advertising, but you’re still in the position of hoping the money you’ve spent will get results.

The Subscription Economy 

In The Subscription Economy, the business model is turned upside down. You’re in control of your destiny. You proactively offer your service or product to customers on a monthly basis. The benefits of a subscription business are impressive:

  • Positive cash flow. Subscribers pay up front. The more you sell, the more money you have in the bank.
  • Higher profit margins. You can eliminate many costs associated with stimulating demand, such as an expensive retail store to capture foot traffic or advertising campaigns to stimulate “one-off” buyers.
  • Peace of mind. Typically, you know within three percent how much revenue you’re going to have next month.
  • Better planning. You’ll have a much better idea of how many employees you’ll need to serve your customers.

In addition to the day-to-day benefits of recurring revenue, an annuity revenue stream also gives you more strategic options. Over at SellabilityScore.com we help owners understand what their company is worth, and recurring revenue is one of the eight most important things you can focus on to increase the value of your business.

Magazine companies pioneered the subscription business model that so many software companies leverage today. But you don’t need to be a cloud-based application to enjoy the benefits of a subscription business. Are you wondering if you could transform your company into a recurring revenue engine? Consider the following models.

If you sell other people’s stuff:

Retailers can offer a monthly goodie box. For $25 per month, Standard Cocoa customers receive a curated box of chocolates from around the world. More than 20,000 women pay $10 per month to receive a “Birchbox” every 30 days that is full of make-up samples. Moms are avoiding baby stores and instead signing up for Bluum.com, a monthly box of mom and baby products delivered to their doorsteps. Even old-school retail giant Walmart is getting in on the subscription action: for $7 per month Walmart’s skunkworks company, called “Goodies Co.,” will send you a new box of snacks and treats every 30 days.

If you make stuff:

Manufacturers can isolate a “consumable,” that is, the part of their offering that wears out or runs out. Take, for example, Nestle, the manufacturer of the Nespresso coffee maker. They could offer a subscription of refill coffee capsules each month.

If you advise people:

Consultants can package their best thinking up into a monthly report and charge on an annual subscription model. Forrester Research, Marketing Sherpa and Bloomberg have all done this.

If you keep an eye on things:

Home alarm companies and IT consultants have mastered the ability to charge on a subscription for monitoring what’s important to you. Alarm companies charge you $19.95 a month to “monitor” your house and call the police if someone breaks in. IT consultants charge you a monthly fee to keep an eye on your network and eliminate computer viruses if you get infected. Even some contractors are getting into the subscription business: Hassle Free Homes will keep an eye on your home and proactively fix things that need replacing, like your furnace filter, fire alarm batteries and light bulbs.

If you have a library:

GameFly (video games), Amazon Instant Video, Netflix, Rdio and Spotify all have a library of content they offer on an “all-you-can-eat” subscription. This model can work well for smaller businesses that have built a library of content. Newport Beach-based New Masters Academy offers access to their library of art classes for $19 per month. New Masters Academy has created more than 100 hours of content, so the hard work of creating the library has been done. Now each new subscriber comes with virtually no additional cost.

So, what’s your subscription business going to be?

Last updated: Sep 12, 2013

JOHN WARRILLOW | Columnist | Sellability

John Warrillow’s new book, The Automatic Customer: Creating a Subscription Business In Any Industry will be released on February 5, 2015. John is also the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a company dedicated to helping business owners improve the value of their company.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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