Everything You Need to Know About the Subscription Revenue Model
3 min read

Everything You Need to Know About the Subscription Revenue Model

Everything You Need to Know About the Subscription Revenue Model

The idea of Subscription came from the books and newspapers trade during the 17th and the 18th century. Subscription is a term coined for the recurring exchange of services and products provided in terms of money and value.

The Subscription Model can help you build customer relationships and capitalize on high returns. The recurring payment system ensures that as long as you provide value to customers, they will continue using products/services.

This model falls under one of the two broad categories of the Revenue Model. The second one is a one-time payment.

It is necessary to find the correct revenue model for a company to make a profitable business.

However, there has been significant growth in subscription revenue models over the past 5 years.

In 2005, Bill Gates quoted in The New York Times

PEOPLE hate, hate, hate to subscribe to things on the Internet”

– Bill Gates

Back in the 2000s to 2010, there was remarkably less hype about subscription models. Now, with the advent of Industry 4.0, the Subscription Revenue Model has set trends through increasing Internet connectivity and the availability of data.

Some of the basic terminologies and definitions while dealing with the Subscription Revenue Model:

  1. Customer Lifetime Value (CLV): is the amount a person is expected to spend on your product from the start of the first sale.
  2. Cost Per Acquisition (CPA): This is used to determine how much a marketer should be spending on new customers till they are converted into leads.

The aim of the Subscription Revenue Model is to enhance Customer Lifetime Value (CLV) while reducing the Cost Per Acquisition (CPA).

This article comprises

  • Why big tech giants like Apple is shifting toward the Subscription Revenue Model
  • Interesting facts from McKinsey related to Subscription Revenue Model
  • Challenges that companies face during the shift and later
  • Who is benefited from the subscription revenue model?

Apple’s Transition From One-Payment to Apple-One

Apple’s Revenue model is 70/30%. That means that 30% of the revenue the app makes after a one-time payment of a user, would belong to Apple. The rest 70% of the revenue would go to the software company.

Apple noticed the fall in its revenue due to software companies putting their applications for free on the AppStore. Later, redirecting the customer to their main website once they downloaded the app for free.

The continuous decrease in margins might be the potential reason behind Apple introducing Apple-One. It offers various services like Apple Music, News, Arcade for an Individual/Family as a subscription. You can have access to any of their platforms by paying a significant amount.

Statistics

In a McKinsey Study, these points were noteworthy:

  • “Churn rates are high, however, and consumers quickly cancel services that do not deliver superior end-to-end experiences.”
  • “The subscription e-commerce market has grown by more than 100 per cent a year over the past five years.”
  • Out of 5,000 US consumers “The median number of subscriptions an active subscriber holds is two, but nearly 35 per cent have three or more.”

Challenges in Subscription Model

The main challenge here is customer retention. According to McKinsey, 53% of overall customers heard about the Subscription Revenue Model. Out of them, only 8% are currently subscribed. There is room for several improvements.

This can be done by acquiring the remaining 47%.

Another challenge is a sudden shift from a one-time payment to the subscription model can cause a loss in customers. For companies having larger customers using a one-time payment model, various strategies like A/B testing, the market survey should be conducted before drastically shifted the previous model to a subscription model.

Who Benefits From the Subscription Revenue Model?

According to a new Scientific study, tangible delivery goods like groceries, food the subscription model has a negative impact on their operational performances (Increased costs) in contrast to having profits for marketing areas.

As there is a fixed monthly subscription fee for such delivery services, the monthly spending of customers increased. With this, the customers’ purchase frequency increased. This in turn had more loss on the operational side of the business than the profits it made on the marketing side.

The increased number of customers subscribed was still not beneficial for the company.

Hence, the subscription model can be ideal for SaaS companies without bearing the operational cost as such. For E-commerce, food delivery businesses, we can set a minimum order amount on top of a subscription fee as Amazon does, to be on a profit side.

Conclusion

The Subscription Revenue Model is created to put customers in the centre and develop services and products according to their interests. We can see a significant shift in many companies’ product-centric approach to a customer-centric approach.

The possibility of a subscription model sustaining in the markets exists.


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