At the beginning of 2018, there were over 2,000,000 apps on Apple Store and even more–3,800,000 apps–on Google Play. Together, this makes up nearly 6 million apps internet users can choose from. The same problem plagues highly saturated market, like publishing in a digital age where big name content publishers are competing with millions of startup bloggers and creators. The problem is identical: how to effectively monetize the business. What adds to the problem is that for nearly any category of application or content there is a relatively good solution available for free.
Given the circumstances, it’s no wonder finding an efficient business model is anything but easy. What makes the situation even worse is that when it comes to identifying a business model, there is no one-size-fits-all solution. What works perfectly well for one business or content creator might not be the right thing to do for another. Some companies thrive on a classic paid model, while others need to look for alternatives.
Today we’ll discuss one of the most commonly used monetization model companies like Netflix, Pandora, Dropbox, and HeadSpace rely on—the subscription revenue model. By examining this model, we’ll be reviewing the benefits and obstacles to this format and try to understand why subscriptions seems to work well for companies like Netflix, but less effectively for traditional content publishers like print media.
Subscription Monetization Model: What Is It?
Generally speaking, subscription businesses have been booming in the last few years. If applied the right way and used for quality products or content, this business model can be the best way to generate stable revenue.
Here’s how to best conceptualize the model:
The subscription business model is based on the idea of receiving recurring revenue (usually monthly or annually) for providing prolonged access to a product or service.
The major goal of companies with the subscription monetization model is to receive multiple payments from the same person. That’s why companies and publishers that rely on this model do well to emphasize customer retention rather than acquisition.
Given the nature of the subscription monetization model, it is especially popular with companies and publishers providing content (music, streaming video, online lessons) or software that is used regularly (anti-viruses, CRM platforms).
Why the Subscription Revenue Model Is Gaining Momentum
There are several reasons why the subscription monetization model is gaining steam. This model has become increasingly popular with businesses because it:
- Provides predictable, recurring revenue
This motivator is the biggest and probably most obvious. While pay-per-download or lifetime access payments allow companies to make more money immediately, subscriptions guarantee ongoing financial support from users. From a customer’s perspective, paying a small monthly fee is normally more attractive than making a one-time payment that might be harder on their wallet.
- Is suitable for price diversification
Subscription monetization models allow price diversification. It is possible to charge different prices depending on the level of functionality or access a customer needs. Again, it is a good thing for customers, too. Depending on their needs, they can pick the most reasonable option in terms of price and functionality.
- Promotes engaged users
When customers decide to subscribe, they tend to be more engaged with an application, software, or content as they’re motivated to “cash in” on the full value of their purchase. Imagine how much benefit this effect has on new users of a pricey fitness app or online course.
- Is psychologically attractive to customers
What makes subscriptions so popular with customers is that they do not feel like a serious commitment. There’s no need to pay a large sum of money right away, and there’s an opportunity to cancel a subscription at any time. At the same time, it’s not about psychological pricing tricks. The comfort customers feel is 100% justified since they actually can cancel the subscription or restart it whenever they want.
- Makes marketing a lot easier
The subscription is a form of commitment. Unlike so-called now-and-then buyers, subscribers agree to pay regularly, which means there’s no need to convince them to pay for what you offer over and over again. This is a win-win situation for both customers and marketers. Customers aren’t annoyed with too many marketing messages—they bought into the product already and marketers won’t need to spend extra resources on constantly recovering users.
Understandably, a growing number of businesses are switching to subscriptions. If you think it’s too good to be true, it can be. This business model is not without its flaws.
What Are the Biggest Challenges of Subscription Model?
Whether you start a subscription-based business or are considering a switch from one-time to recurring billing, you should be well-aware of the obstacles you may face on the way.
- The subscription revenue model is not suitable for all businesses.
If you want customers to keep paying you monthly or annually, you need to stay useful, interesting, and relevant long-term. If you offer content, it needs to be high-quality and regularly updated. If it’s software for professionals (photographers, marketers, sales people, accountants), it needs to stay up-to-date with recent industry trends. The subscription model is only suitable for something that is constantly improved (content) or something consumed regularly (professional software, fitness apps, hygiene items delivery). If you offer something people use from time-to-time, people won’t likely agree to regular payments.
- There will be issues with expired cards/exceeding credit limits.
Credit and debit cards have expiration dates and limits. The card your customer used to make the first and second monthly payment might not work for the third one. What is the right thing to do in this case? Should you limit access until a new card is added? Probably yes. Will this affect customer experience negatively if he or she just forgot to update the card? Again, probably yes. Does it mean you should forgive delayed payments? Probably no. That’s not how businesses become successful.
- It requires regular creation and update of high-quality content.
To entice people to maintain subscriptions, you will need to continuously work on creating new content (if it’s content people pay you for) or improving software so it remains up-to-date and has clear competitive advantages. This means you’ll need both financial and human resources to maintains your product’s worth to the people who pay for it. Those who fail on this part should not be surprised if people start to cancel their subscriptions.
- Subscription models will have to compete with quality free options.
This competition is largely what has hurt traditional media publishers and content mediums like newspapers. While subscription options have carried over into digital media, the price point has largely not warranted consumer follow-through—particularly when bloggers and free news sites are providing similar options for free. To compete in this sphere, many publishers and content creators have turned to (excessive) advertising placements to cover costs. Increasingly, however, ad-free media has itself become a selling point that justifies subscription from a user standpoint—a fact that services like Hulu and Spotify have capitalized on.
- Subscription fatigue might be a problem.
Although relatively new, this problem is already considered a big deal in online business community. If you’ve never heard about this term before, try Googling and you’ll see dozens of articles suggesting “how to combat subscription fatigue” and offering “a cure for subscription fatigue.”
The term “subscription fatigue” stands for the state of emotional overwhelm most people reach as a result of having too many subscriptions and feeling nervous about not making the most of the apps and software they regularly pay for.
What looks like a natural consequence of living in a modern world poses a big threat to businesses who rely on subscriptions as their major source of revenue. To stay valuable and worth-paying-for, your business should not just meet but exceed expectations of users. For positive thinkers, however, the phenomenon of “subscription fatigue” might serve as the greatest motivation to continuously improve their products.
The Subscription Revenue Model: Customer’s Perspective
When looking from a customer’s perspective, the subscription revenue model is a little controversial. On the one hand, subscriptions are a transparent and honest way to support content creators of all kinds–from aspiring musicians to app developers and big news publishers. On the other hand, however, subscriptions feel like a commitment, which is something customers tend to resist.
Big publishers could be a telling example of such resistance. As ad blocking is on the rise and publishers can no longer rely on advertising as their primary revenue channel, they ask readers to pay a small subscription fee to support them. Apparently, not everyone is ready for that.
It looks like for most people the idea of paying for online service like fitness apps or budget planners is easier to digest compared to the idea of paying for news. It might be that people are just too used to having access to news for free and this habit is slow to change.
It is worth being said, though, that the world’s leading publishers such as The New York Times and The Washington Post do not face the same problem. In fact, they can be a living proof of subscription revenue model working quite effectively in publishing.
The Final Word On Subscription Revenue Model
Despite obstacles and challenges associated with subscription revenue model, it can still be the best bet for your online business. If you’re well-educated on the topic, things like “subscription fatigue” or “expired credit card issues” won’t be like a bolt from the blue for you, which means you’ll be able to mitigate the risks and prevent the problems from appearing in the first place.