Subscription pricing model – is it right for you?

Subscription pricing model – is it right for you?

You may have seen a growing trend for companies to offer subscription services as part of their business model but what are the advantages of pricing in this way and is it right for you?

In recent years the move towards subscription pricing has been inexorable with companies as diverse as Microsoft, Adobe and Sage all looking towards Software as a Service or SaaS as a way of charging their customers.

Indeed this model has not been confined to simply online software offerings. Customers may have been able to subscribe for their magazine and newspapers for years but they can now buy their coffee (pactcoffee.com), razors (beardedcolonel.co.uk) and even boxer shorts (breifd.co.uk) in this way and no office would be complete of course without the ubiquitous Graze boxes adorning the desks.

What are the advantages?

The rapid increase of subscription pricing in the marketplace suggests that there are a number of advantages to the seller for this mode of operation.

Selling a service that costs a small amount of cash upfront is much easier than a very large annual or one off charge. The customer is bound to feel less pain when faced with a charge that is around one twelfth that of the yearly value.

The company will also benefit from having a stable income stream. Many small monthly charges soon add up and this makes for much more accurate forecasting of cash flow.

It is also likely that the income stream across the year will be greater than the sum of the single point of sale method. The firm is often able to charge more for the benefit of paying in 12 slices although it is important that this isn’t presented as any credit offering due to UK consumer credit regulations.

For businesses that rely upon the customer remembering to order, the subscription model will also increase sales as the goods or services are supplied until the customer says ‘stop’ rather than only when the purchaser requests them.By using this innate inertia they should also experience a smaller loss of customers as they tend not to move to other providers.

Given the smaller invoice amount it is a fair assumption to think that default rates are likely to be less with this model and firms could hope to experience a lower bad debt rate as a result.

The company also has an inbuilt opportunity to market to the customer as there will presumably be a monthly contact through an invoice or charge note. There’s good evidence that not only does this way of working increase customer engagement but there is greater loyalty too.

Who is it good for?

The question however is whether the subscription model can be utilsed in other forms of business.

As we have seen the subscription model works well for software companies where the product is licenced for the customers’ use across the year. As an example Adobe have recently started offering their photography and video software through a SaaS model where subscribers pay a small amount for monthly access to the latest products.

Transactional goods are also suitable for this operational method. Wine clubs have proliferated and companies such as Laithwaites, Virgin and even brands like The Spectator have launched subscription services.

Subscriptions shouldn’t be thought of as simply a B2C method of selling either. Any good that is used regularly could be sold this way. Imagine for instance a garage that regularly uses items such as degreaser, vinyl gloves and seat covers or a hairdresser using shampoos, conditioners and dyes getting a box delivered with all the essentials in every month.

Similarly this model isn’t confined to goods but is easily transferrable to services. Many people have probably agreed for the window cleaner to call every month or a weekly domestic cleaner to visit and this sort of service selling could be used by many professionals.

We are starting to see the growth of accountants charging their monthly fee across the year and HR professionals charging monthly for a service that is then delivered as and when needed together with regular contact through newsletters etc.

It is probably easier to look at companies that are not suitable for subscription selling. Services that are one off in nature such as house builders and electricians may  have difficulty working in this way although it is arguable that parts of their services could be subscription based.

What is not in doubt is that moving to a subscription based business model will require some creative thinking by most businesses with companies having to assess how they will structure their services to provide a balance between making it attractive to customers whilst still staying profitable for the firm.

It is clear that for many companies a subscription service is an attractive way of working with many benefits, not just for the company but for its customer too.

 

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