Subscription business model

The subscription business model is a business model that has traditionally been used by magazines and record clubs, but is increasingly being used by other businesses. Rather than selling products individually, a subscription sells periodic (monthly or yearly) use or access of a product or service. Thus a one-time sale of a product becomes a recurring sale.

In addition to magazines, book clubs, and record clubs, many other industries are using the subscription model. They include telephone companies, newspapers, cable television providers, cell phone companies, internet providers, pay-TV channels, software providers, business solutions providers, and financial services firms.

Renewal of a subscription may be automatic periodic where the cost of a new period is automatically paid for by a pre-authorized charge to a credit card or a checking account.

The razor and blades business model (also called the bait and hook model) is an attempt to approximate the subscription model.

Membership fees to some types of organisations, such as trade unions, are also known as subscriptions.

Kinds of subscriptions

One can distinguish different kinds of subscriptions:

A subscription for a fixed set of goods or services, such as one copy of each issue of a newspaper.
A subscription for unlimited use of a service or collection of services; Use may be personal and non-transferable, for a family or under certain circumstances for a group using a service at one time. For example, a subscription to a railpass by a company may not be individualized, but might permit all employees of that firm to use the service. Renting can fall in this category (e.g. renting for a week means unlimited use during that time). For goods (unlimited supply) and for many luxury services subscriptions in this category are rare.
A subscription for basic access or minimal service plus some additional charge depending on usage. A basic telephone service pays a pre determined fee for monthly use but may have extra charges for additional services such as long-distance calls, directory services, pay-per-call services, etc.; a discount pass also falls in this category, as does the rental of a car for a fixed daily or other rate for another time period plus another charge for the distance driven.

Effect on the vendor

Businesses benefit because they are assured a constant revenue stream. This greatly reduces uncertainty and the riskiness of the enterprise. Also, in many cases (such as integrated software solutions), the subscription pricing structure is designed so that the revenue stream from the recurring subscriptions is considerably greater than the revenue from simple one-time purchases. In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any specific issue. This reduces customer acquisition costs, and allows personalized marketing or database marketing. An important disadvangage of the system is that the business must have an accurate and timely way to manage and track subscriptions.

Effect on the customer

Consumers may find subscription convenient if they think they buy something regularly anyway. It takes just one transaction to arrange for repeated delivery of the product or service. It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. Subscriptions that present themselves as clubs answer the need for belonging. The subscribers are called "members" and people of similar interest belong to a group (example: Computer Science Book Club). Subscription pricing can blunt the sting of paying for expensive items. By spreading the cost over a period of time, the purchase seems more affordable.

A subscription for unlimited use of a service or collection of services for a fixed price is an advantage for consumers using the services frequently. On the other hand it could be a disadvantage if a customer subscribes planning to use the service frequently but later, for any number of reasons, does not. The commitment to paying for a package may be more expensive than a one at a time purchase. The purchase of timeshare vacation resort packages may be an example of this.

Advantages and disadvantages for software customers

However there are also drawbacks to subscription models. Often, as in the case of software, the customer may wish to pay a one time fee for the security of knowing that no further payment is necessary. Also subscription models increase the possibility of vendor lock-in, and consumers may find repeated payments to be onerous. Finally, subscription models often require or allow the business to gather substantial amounts of information from the customer (such as magazine mailing lists) and this raises issues of privacy.

Christopher Lochhead, Chief Marketing Officer of Mercury Interactive (as cited in the CNET News.com article listed in the "References" section) dissents. A subscription model may be beneficial for the software buyer if it forces the supplier to improve its product. According to this idea, a psychological phenomenon may occur when a customer renews a subscription, that may not occur during a one-time transaction: if the buyer is not satisfied with the service, he/she can simply leave the subscription to expire and find another seller. This is in contrast to many one-time transactions, when customers are forced to make significant commitments through high software prices. Some feel that historically, the "one-time-purchase" model does not give sellers incentive to maintain relationships with their customers (after all, why should they care once they've received their money?). Some who favour a subscription model for software do so because it may change this situation.

The subscription model should align customer and vendor toward common goals, as both stand to benefit if the customer receives value from the subscription. The customer that receives value is more likely to renew the subscription and possibly at an increased rate. The customer that does not receive value will, in theory, return to the marketplace.

Effect on the environment

Because customers may not need all the items received, this can lead to wastage and an adverse effect on the environment, depending on the products. Greater volumes of production, greater energy and natural resource consumption, and subsequently greater disposal costs are incurred.

Subscription technology vendors

Finding related topics

References

CNET News.com article, A

Business models | Newspapering

Gourt Home::Gourt :: Subscription business model