Subscriptions are suitable for selling a wide variety of goods and services, from monthly beauty boxes to movie streaming. The subscription format is not limited to a few niches and almost any business can use it.
The concept of ownership is taking a backseat and more and more country b2b b2c email list people are willing to pay for the right to use it.
A study by Zuora showed that users have more subscriptions today than ever before, and they are not ruling out subscribing to other services in the future. About a third of respondents believe they will have even more subscriptions in two years than they do now.
Distinctive features of the subscription business model.
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According to McKinsey, the subscription-based e-commerce market is projected to reach $473 billion by 2025. The subscription business model helps companies capitalize on an ongoing relationship with customers.
There are 5 distinctive features of the subscription business model in e-commerce.
Lower price – more customers
It is usually easier for a person to pay $60 per month for something than to pay $6000 for it right away. This factor greatly reduces the barrier to entry for new customers.
For relatively little money, a person gets immediate access to the service, and this plays a key role for him.
Projected income
You need to constantly attract new customers to a company with one-time sales. And even in a failed month, you can run into a deficit.
That means you'll have to spend even more money to attract them. The subscription business model helps avoid these risks: users who have subscribed to the service are already loyal customers.
So, monthly recurring revenue helps you forecast sales, plan inventory, and understand how much to reinvest for business growth. Receiving monthly advances means more cash flow for your startup.
Promotion is more profitable.
Single-payment business models have a customer acquisition cost (CAC) rate.
In the case of a subscription, the CAC remains the same (depending on the marketing and conversion path). The profit from a customer over the entire period of working with him (LTV) increases gradually, until he unsubscribes.
With a subscription business model, you have more opportunities to cross-sell. The more customers that use your products, the more credibility you have. This makes it easier to sell them additional products because they already know you represent value.
Good read: How to leverage AI to increase sales and cross-sell
It is easier to build loyalty
The subscription business model allows a company to be in constant contact with the customer. This opens up great opportunities to promote your products, additional options, and more as they become loyal to your brand.
With an existing subscription, it is easier for a customer to make new purchases or, for example, switch to another subscription model in the same service.
In addition, regular customers who have been subscribed to the service for a long time are often loyal to it and promote it to their friends.
At the same time, regular purchases give you more insight into customer behavior . You can continually improve products and keep customers coming back for more.
Good reading: 4 benefits of having a solid customer loyalty program
It is easy to check the service or product.
Many subscription services offer a free trial period.
In the case of one-time purchases, the user does not always have the opportunity to try out the product. This greatly increases the entry threshold for new customers.
Of course, there is no guarantee that after the free period the person will agree to a paid subscription, but even in this case, the company still has the contacts of a potential client.
This means there is an opportunity to get feedback, improve the product, and try to keep the user coming back.
Key metrics of an e-commerce subscription business
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Already at the beginning of the fiscal year, a company based on the subscription business model can predict annual recurring revenue (ARR).
It is important to note that in this case we are talking about a constant volume of periodic payments, without taking into account one-off payments.
However, attrition must be taken into account, as well as the lost income of those who leave. The annual contract value (ACV) allows for increased income.
As a result, the formula is as follows (n – year).
ARRn – Churn + ACV = ARRn + 1
Traditionally, the calculation is based on the results of the period. The subscription business model is characterized by an understanding (even if approximate) of the situation at the beginning of the year.
Predictability of revenue allows you to plan expenses (how much to invest in product development, whether to hire a new employee).
And now we move directly to the key metrics on the basis of which the effectiveness of the subscription business model is estimated.
Customer churn rate
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Customers lost by a company are lost revenue and must be deducted from the ARR. But how is customer churn determined? Different methods are used.
For example, Andreessen Horowitz divides the number of remaining customers by the number of customers at the beginning of the counting period (new deals made during that time are not counted).
A different monthly churn rate will be normal for each area. For example, for some services a churn rate of 20% is normal, while cloud-based subscription services cannot exceed 5-7%. The lower the churn, the more interest investors have in the business.
Let’s say the projected revenue for the end of the year is $100, from which we subtract 10% of churn (a very realistic figure for B2B), we get $90 in annual revenue. Even a very modest percentage of lost customers is not good for the overall result.
The churn rate metric will help you understand how many new subscribers you need to attract to meet your revenue plan.
Good reading: How to reduce customer churn with content marketing
Repeatable income
This metric represents the difference between recurring revenue and recurring expenses. Therefore, the higher the metric, the more free money the company has.
Let's say that out of our planned revenue of $90, a portion needs to be invested in maintaining the quality features of the subscription service (for example, data center costs for a SaaS company). This is the cost of goods sold (COGS), for which we will spend, say, about $20.
Another $10 will be spent on business administration. This involves a wide range of tasks related to accounting, legal support and the cost of renting office space.
Don't forget about research and development (R&D) - these recurring costs are largely made up of the cost of engineers' salaries. In our example, we'll budget $20 of annual revenue for this.
We will lose $10 due to subscribers leaving, $20 will be spent on maintaining the quality of service, another $10 will be spent on administration, and $20 will be spent on innovations, which must first be developed and then competently implemented.
So, out of the $100 originally planned, the income was only $40. That is, 40% of the income. It can be spent on business development.
The amount of revenue is directly related to recurring costs: the higher the latter, the lower the former. By calculating the amount of expected revenue, the company will be able to understand how much money is left for development.
The subscription business model allows for forecasting. A company that does not use subscriptions will have a much less accurate forecast because it does not know the annual number of customers and the amount that customers will spend on transactions.
