So far, in this eight part series titled "8 Reasons Subscribers Are Better Than Customers", we've seen how subscribers boost the value of your company and increase the lifetime value of a customer. Today, we look at how subscribers smooth out demand in your business.
In a traditional business, the customer buys your product or service once and it is up to you to try and convince them to buy again in the future. Some months you have more demand than you can handle and you need to hire more staff to serve your customers. But if demand wanes, you have more people than you need. In a subscription business, you have what I call "Automatic Customers" who agree to purchase from you into the future as long as you keep providing your service or product. When you know how many subscribers you have, you can accurately predict the resources (people, raw material, etc.) you'll need to fulfill demand. Through the research for my new book, I've discovered there are nine different subscription models, which can be leveraged by anyone from a pest exterminator to a home contractor.
One of the biggest challenges in a traditional business is estimating the amount of inventory you'll need. Guess high and you end up strapped for cash and with a warehouse full of stuff. Guess low and you risk running out of stock, losing out on sales and disappointing customers.
Your typical bricks-and-mortar flower store, for example, has to throw out between 30% and 50% of its flowers each week because they rot. At H.Bloom, the subscription based flower company I described in part 2 of this series, the spoilage rate is just 2% per month because they know how many subscribers they have. Each subscriber is invited to customize their bouquet before H.Bloom places a bulk order for the flowers they need to fulfill their customer's subscriptions. The result: customers get what they want and H.Bloom avoids throwing out a bunch of rotting flowers.
Service Companies Have Inventory Too
Even companies without perishable inventory are affected by lumpy demand. Every company that employs people has to guess how much demand they will have and staff accordingly. In a people business, when you underestimate demand, your employees burn out, morale sinks, the quality of your service suffers, and your brand is damaged. If you have too many employees, they spend time gossiping about when the layoffs will come, while your profit margin shrinks because you're paying for people to sit on the bench.
I learned this one the hard way. Before I morphed my market research business into a subscription company, we followed a traditional professional services approach where we bid on projects. It was a classic "sell/do" business model and it meant we were always guessing wrongly when it came to our head count needs. I remember at one particular bullish phase, I committed to a five-year lease on A class office space--a $250,000 per year commitment--and set about hiring staff to fill our new digs. Within months, the attacks of 9/11 caused most of our clients to cancel their projects. We were left with way too many staff in office space that was way too big and fancy. Our team could see the writing on the wall; some left and others lived in fear of being laid off. Our culture became toxic as employees fought to survive the cuts.
We survived that period but I vowed to find a better way to run a business, which ultimately led me to the subscription model. The subscription business model smoothes out demand so you can plan your business effectively. Knowing within a few percentage points how many customers you will have next month helps ensure you have the right number of staff and adequate supplies. Optimizing your labor and raw materials means lowering your costs--and your blood pressure.
This article is adapted from the new book The Automatic Customer by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House, and is available wherever books are sold. Copyright John Warrillow, 2015.