Netflix. Adobe. Microsoft. These are some of the biggest companies in the world who have all either turned their full or part of their traditional business model into a subscription as a service model.
However, you don’t have to be one of the giant SAAS companies (software as a service) or have an online streaming service to find success in a subscription business model.
In fact, Gartner has predicted 75% of businesses will offer a subscription service to consumers by 2023 — that’s only a year away.
But is a subscription business model right for the small Australian business?
We say yes, and here’s why.
What is subscription as a service?
A subscription or membership as a service or subscription business model is one where a customer is charged on a regular recurring schedule for a product or service. They typically come in the form of a membership, replenishment cycle or a subscription box.
Gyms are the most commonly thought of subscription business model, and one of the earliest success stories. You sign a contract to pay a weekly, fortnightly or monthly price in return for access to the gym facilities. Whether you go or not, the gym still receives your money.
Similar to a subscription service is providing an option to split up payments. The 3.6 million active Afterpay customers in 2021 highlights how ready Australians are for more affordable ways to pay for larger purchases, either through a subscription model or through micropayments.
Top Benefits of Subscription Models for Businesses
1. Measure future revenue more accurately.
Most subscription pricing models will require a minimum term or cancellation period. For example, you may require subscribers or members to cancel before a certain date or hold their subscription for 3 months (or more), or incur a fee to break their agreement.
One of the many things this does is allow you to measure future revenue, even if it’s just the next month, quite accurately. Unless there is a major life-altering event (like the pandemic), you should also be able to measure an average monthly cancellation rate.
When you have your expected revenue and average cancellation rate, you can then work on revenue increase targets and retention targets to grow your business. With a traditional business model, nothing is guaranteed month-on-month, so you may feel the effects of public holidays and minor events much more.
2. Create greater customer lifetime value.
Customer lifetime value is the physical value placed on a customer for the amount of time they use your business. For example, if you are a dentist and you have a client who has a teeth clean every 6 months for $100 a clean over 3 years, their lifetime value would be $600.
However, subscriptions can increase your overall lifetime value, particularly if you have a large up-front cost or have a poor retention rate. Subscriptions do two things:
- Break upfront costs up over long-term payments.
- Retain customers for longer.
For example, say you are a florist with the average cost of flowers sitting at $60 per order. Your customers tend to only order flowers when they need them for a special occasion, so their lifetime value may only be $60 to a couple of hundred dollars a year.
Now, imagine if you created a flower subscription model at $30 a month where they can have fresh flowers delivered once a month or opt to have it sent to a person of their choice. In just a year of them being a member to your flower subscription service, you’ll receive $360. That’s going from an unpredictable $60 to $100+ a year to a guaranteed $360 if they stay subscribed.
3. Manage stock levels easier.
Have you ever been left with too much stock or sold out in times of demand? While selling out is good for your business, it isn’t good for your customers and their trust in your business’s reliability.
A subscription based business model allows you to have the right amount of stock (and staff) on-hand, reducing wastage and ensuring you have enough to go round.
As for service-related membership plans, you can pre-book appointments to help you schedule staff long in advance and always have enough staff on to service your customers.
4. Generate more up-sell opportunities.
Subscription services generally work in tiers with the more benefits available the more is paid. If structured correctly, you can easily create up-sell or cross-sell opportunities.
Going back to our florist example, you may have tiers for the number of deliveries or arrangements per month, creating an easy opportunity for people to upgrade their package. However, you could also offer discounted upsells for gift add-ons. For example, adding on a gift basket with 25% off.
By providing more up-sell opportunities, you can increase your customer’s lifetime value very easily, something that may not be as easy if you were providing a one-off transaction.
5. Receive feedback sooner.
How often do you send out customer services? You likely either said never or only after a transaction. This means you have to wait until your customer actually purchases something to receive feedback.
With a subscription service equalling a regular transaction, you can ask for a rating after every use of your product or service. For example, you could send out an email asking them to rate this month’s product, their bi-annual service, etc.
Feedback is critical for businesses to ensure you’re meeting the needs of your audience as accurately as possible. The more often you can receive feedback, the quicker you can adapt and provide an even better service, improving retention rates.
Examples of Subscriptions-Based Business Models
Car maintenance memberships.
When a car needs repairs or maintenance, the cost can be sudden and in the hundreds, even thousands of dollars. Car maintenance memberships allow members to pay a fixed weekly, fortnightly or monthly amount to add up for when they need car servicing and minor repairs.
Some body repair shops have also started memberships to keep up maintenance on car interiors, paintwork, scuffs, dints, etc.
A car maintenance membership is an easy way to offer tiered packages, starting with a simple twice-yearly service plan, with upgrades available for car detailing, common repairs and more. You could even add on roadside support.
Take a look at Membership Auto for some ideas of package groupings.
Blow dry and hair maintenance clubs.
We don’t need to tell the hairdressers reading this that what you do to your hair at home can help your cut and colour last, or make you wash money down the drain. This is where the concept of blow dry clubs and hair maintenance memberships came from to help cut down the cost and work required to maintain hair.
Blow dry clubs will generally be around the $15 to $20 a week mark and will include 1 wash and blow dry a week, plus a discount on other products and services. Typically, hair salons will offer treatment, trim and toner add-ons for another $5 or so a week.
The blow dry services are great as you can schedule them in at the same time and day every week per member and fit them in-between larger jobs. They’re also great for apprentices to learn too.
Gold Coast salon Mylk is currently utilising a blow dry club from $18 a week to generate monthly recurring revenue.
Product refill subscriptions.
Razors. Beauty products. Underwear. Wine. Beer. Feminine hygiene products. Pet food and care. Even vitamins. You can find nearly any product you want as a subscription product these days.
If you have a product where repeat purchases are required, provide your customers with the option to subscribe to repeats for a discounted price. The easiest way to do this is to add an option on your product page on your website, showcasing the discount price if someone were to sign-up for a repeat purchase then and there. It’s also good to offer free shipping to really sweeten the deal.
Now, you may be tempted to set a minimum term, like a 6-months, but having a cancel-any-time policy may be your trick to signing up more people. While you’ll get the people signing up for a one-off discount and free shipping who plan to cancel after one order, you’ll also get those who do so, and then forget to cancel and experience how much easier your service is. It’s a win-win.
You may already recognise names like Dollar Shave Club. The Dollar Shave Club empire has tapped into influencer marketing to get their product known and the convenience of having razors sent to your home each month from $15 for a starter kit.
Flower and plant subscriptions.
We’ve already used a florist as an example above, but there are a few different ways a florist could make a subscription service.
You can use the idea above of monthly fresh arrangements being delivered to their home, with the add-on to include extra arrangements or gifts for friends. Or, you could also have an office plant subscription. Many workplaces have plant or floral displays in reception or in office spaces, so a subscription service would make it easier for them to not have to maintain these displays.
To sweeten the pot, add in full maintenance, so changing over vases, water, maintenance of existing plants, etc. and you’re onto a winner.
Home and car cleaning memberships.
Anything where there is a regular repeated product or service can easily be made into a membership model, including cleaning and car detailing.
However, before you throw out a tiered service for home cleaning with how many times a month as your determiner of price, think outside the box. You could offer a cleaning membership exclusive to a monthly oven clean, quarterly carpet cleaning or grout cleaning every 6 months. These could be affordable standalone services or add-ons to a full house or office clean.
For car detailing, you could offer levels for a mobile service or where they come to you, the level of clean to be expected, interior versus exterior and more. The more options you give people, the more people who will be willing to subscribe.
Clothing rental service memberships.
Get the formal dress and wedding suit hire out of your head. Clothing rental services are thriving thanks to the reducing waste movement.
Clothing subscription businesses allow fashion and environment conscious consumers to have the latest in bags, shoes, accessories and clothing, but not contribute to fast fashion and waste, and on a budget.
Rent the Runway is one example of a thriving fashion subscription model, allowing one-off hires of clothing and accessories, or to subscribe to a membership for discounts and lower fees.
Examples of Micropayments
Buy Now Pay Later
Buy Now, Pay Later (BNPL) services, like Afterpay, Klarna and Zip, allow users to divide larger transactions into smaller amounts to easier-to-manage payments for eligible retailers. For example, with Afterpay, consumers can divide payments into 4 fortnightly sums, or customise their payment schedule.
According to the latest research, 42% of online purchases and 16% of in-store purchases are made using a BNPL service. Of these, 56% of purchases are for necessary items, like fridges, appliances and household items, while 28% of payments are for essential items like food, and 57% of purchases are for luxury items, like designer clothing.
The BNPL option allows people to visualise larger purchases as smaller amounts, making them feel more manageable. For example, would you rather pay $1,000 or 4 easy payments of $250 over 8 weeks?
The more payment options you can provide to your customers, the more sales you’re likely to make.
Read more: Are buy now pay later services too risky for businesses?
Many businesses are still on the fence about buy now pay later options. It’s worth noting, only 13% of respondents in a recent survey weren’t aware BNPL can impact your credit rating if you miss payments, with 53% saying they would use a debit account if they couldn’t divide the payment.
However, if you are wary, consider allowing your customers to be able to put larger purchases on payment plans.
At Localsearch, we have a 10-month payment plan option for our flat-fee websites, helping any business be able to get the website they need now, rather than later. Around 90% of people who build a website with our team choose this 10-month payment option.
Membership or subscription models are becoming more and more popular, and can be rolled out to almost any product or service.
The success of memberships come down to helping people save time and/or money. For the consumer, they can break down lump sums into more manageable payments and use a set-and-forget model for whatever it is they need.
Gyms have been utilising membership models for decades. Instead of paying an annual fee, they break down the cost over weekly/fortnightly payments, with tiers for different access levels.
The entertainment industry is also the perfect example of how advantageous subscription services are for businesses. Studies show 80% of Australian households have at least 1 streaming service, with the average household paying an average of $55 a month on digital entertainment. These numbers are on the rise.
However, if you asked these households if they would pay $55 upfront for entertainment every month, you’d likely be told to get lost. When you see 2 or 3 $10 to $15 payments every month, it’s not as intimidating as one upfront cost.
How to Make a Subscription Business Model
1. Create your tiered subscription model.
The first step to creating a subscription business model is creating a table with all your different offerings they could work on a subscription model and how they differ from each other.
If you only have one product, consider bundling products together or allowing for bigger or smaller orders. For those who can provide a product or service people are already buying together or frequently with a competitive pricing model, you’re onto a winner.
These different tiers will allow you to stagger pricing, so ensure you have a very basic pricing option and provide more luxury options for a higher price point. Remember, you want only slight variations between your packages so people don’t fall between them and put you in the ‘too hard’ basket.
You’ll also want to be able to provide a repeated value to your existing customers to ensure you don’t hit any subscription fatigue. If your service is given too often or the products are too repetitive, you’ll find it hard to maintain recurring revenue through customer retention.
2. Consider upsell opportunities.
Now you have your packages, you can add opportunities for your customers to add additional products or services as a one-off or across their entire package. This will depend on your industry, but some examples are:
- Treatments for blow dry club memberships.
- Roadside assistance for car servicing memberships.
- Exclusive classes for gym memberships.
- Window cleaning for cleaning memberships.
- An additional product at a discounted price for a product subscription.
- Additional floral arrangements for a flower delivery subscription.
The options are endless.
3. Streamline your payment options.
The key to having long-term subscription or membership clients is to take the hassle of having to enter their payment details every single time they utilise their membership or subscription. Of course, the simplest way to do this is to have direct debit setup available on sign-up.
If you give the option to receive a discount for paying for several months at a time, consider offering a buy now, pay later service, like Afterpay or Zip. Your business may not be eligible for some BNPL service providers, but there are many options available now to cover almost any product or service.
4. Implement easy self-service infrastructure.
According to a study run by Harvard, 81% of customers prefer to attempt to resolve a matter themselves before resorting to customer support. The moral of the story is, the more user friendly your sign-up and management system is for customers, the better.
Of course, you can keep your sign-up process easy with an in-store sign-up or a form users fill out. Or, to maximise your retention, you could have a dashboard built where users can sign up and manage their own payment details, delivery address, subscription or membership levels, add-ons and more.
It’s actually quite simple to create a user management system for a subscription model. WooCommerce is just one option, allowing you to build the user manager inside your website.
5. Utilise introductory offers to kickstart your growth.
When you have one-off product or services, you may be able to offer a discount to entice new customers. However, one of the great things about an ongoing subscription or membership customer base is being able to run offers for free trials, higher discounts on a bulk flat yearly fee or waiving setup fees.
This is where it’s important to have a smart website to build optimised landing pages for your different offerings. From there, you can build out your paid marketing based around your offers to increase traffic to the landing pages and sales. Paid ads also offer deeper customer insights to help you find which offers and campaigns resonate best with the audience, allowing you to convert more monthly subscriptions.
Read more: Why you need brand awareness Facebook Ads.
You’ll also want to be running an organic marketing campaign to ensure you’re providing value back to your audience for good customer experience and to become business leaders. Being active on the social media platforms where your ideal customer is exploring is a necessity, but you may also consider blogs to answer frequently asked questions, provide how-tos and much more.
Some of the first subscription box companies (think Dollar Shave Club and bellabox) also tapped into influencer marketing through unboxing videos. This may be something to consider to showcase exactly how you’ll be saving subscribers money, time or stress.
6. Ask for help.
Before meeting the subscription economy head-on, be sure to seek out help. Consult with your bookkeeper, a business coach or whoever can help you find out if a recurring revenue sales strategy is right for your business.
You may also want to speak to a digital marketing service, like Localsearch, to see how your business’s branding and advertising can help decrease your customer churn and increase your predictable revenue. Localsearch is here to guide you with a free business needs analysis and quote. Contact us now to setup a time that suits you.
But will a subscription business model work for you?
- Do you have a product or service consumers use or order on a regular or recurring basis?
- Would your customers benefit from being able to break down payments into a smaller weekly, fortnightly or monthly fee?
- Do your customers regularly purchase products together that may work as a subscription box?
- Do you receive or have access to new types of what you sell you could offer as a subscription box each month?
- Can you book your customers in ahead of time, such as every 3 to 6 months?
If you answered yes to any of these questions, a subscription pricing structure or payment plan solution may be right for your business. Now is the time to sit down and work out how you can be in the 75% of businesses in 2023 with one of the many types of subscription business models.