Subscription business model

How to Succeed Using a Subscription Business Model

Let’s get straight to the truth. Succeeding using a subscription business model is really, really hard to realize. Why are they so hard to realize? Well, have you ever tried to sell a subscription? Have you ever tried to sell newspapers in front of a train station? OK, what about trying to sell credit card subscriptions at an airport?

Yes, it is awful. You might be standing there the whole day and if you’re lucky you sell one. In fact, everybody hates subscriptions. The sales person hates subscriptions because they are so hard to sell. The customers hate subscriptions because they are bound over long periods of time by a subscription model.

In fact, the only people…

In fact, the only people that seem to like subscriptions at all are the accountants. Why is that? Well, because it’s a continuous income stream guaranteed more or less for the company. You can spend every day trying to motivate your team, especially the sales people, but they won’t like it. As an investor and as an entrepreneur, I’ve encountered many entrepreneurs who basically wanted to launch subscription models for their website.

I know one specific example of an entrepreneur that had hundreds of thousands of people visit his site on a daily basis. He wanted to introduce a subscription model and he calculated on an excel sheet that if only 3% of these hundreds of thousands of people sign up for a $5 a month subscription, he would be incredibly successful.

Well what happened? After a very very long and painful process to introduce a subscription model, after marketing initiatives and many other activities, he managed to sign up only 50 people.

You read right – fifty people – out of hundreds of thousands of people who are using the website every day. Why is it so hard to realize a subscription business model? The only way that a subscription business model can be successful, is when it fulfills one of two basic criteria.

First of all, it’s an absolute necessity or secondly it has unmatched attractiveness.

Absolute necessity

What is an absolute necessity? So, for some people for example, a video subscriptions service such as Netflix, could be a necessity. This is similar for usage within businesses, for example a CRM system such as Salesforce or an email system such as Google Mail. There are some amazing Australian software products out there as well, many of which have subscriptions that millions across the world are using.

So these are considered necessities. Sometimes offering a necessity as a subscription model can be competitively pretty challenging. Sometimes your prices can be almost commodity prices. Enterprise software like resource planning software may help. However it’s possible if you’re offering a necessity to introduce a subscription business model.

Unmatched attractiveness

The second reason you might be introducing a subscription service is because you’re saying I might not have a necessity that I’m offering here however I have an unmatched attractiveness. Is my service in fact so unmatched that people will even pay a subscription to basically join it? Why would people do that?

We have noticed in this case the Golf Club effect. So what we have noticed is the following unmatched attractiveness doesn’t necessarily mean that the content of your service is better than anybody else’s. However it often means that the members of your service and the other subscribers are valuable in some way to the members that you’re attracting.

Let me illustrate this with two examples. One is coming from the financial area and another one from the area of gaming. The first example is Thomson Reuters. If you look into a brokerage house or into an investment bank, you will notice that brokers are not just sitting in front of one screen, they’re sitting in front of three or four different subscription financial information services.

Now why is that? Well, there’s Thomson Reuters, there’s Bloomberg, there are others. Why is that? That’s because Bloomberg has intrinsically such different information as a Thomson Reuters. No, it isn’t that most of these services have roughly the same information. It’s basically about the competition also being on the same services.

So what you want to do as a trader…

So what you want to do as a trader, is you want to see exactly the same information that your competitors are also seeing. If you miss one piece of information that your competitor might see, this might be the difference between success and failure.

In the gaming world, World of Warcraft is a very, very successful subscription business model. World of Warcraft is making about $10 a month from its over 10 million subscribers. Now what makes World of Warcraft so successful? Is it that the game is much better than other free games perhaps on the Internet? Not really. It’s probably also here that your friends are on world of warcraft or in the case of others that their most hated enemies are playing the game as well.

Summary

So there you have it. If you are introducing a a subscription business model, you really really need to think about the following. Is your service a necessity? Then OK, introduce the subscription service. Many services are not necessities. Is it unmatched in its attractiveness? That usually comes through a golf club effect, rather than something that’s superior in the content that you’re offering.

If one of these apply then a subscription business model might be just the right business model for you. All the best of luck!

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Lauren writes for a living, with a bunch of great brands as clients. Outside of word wrangling, Lauren enjoys tasting red wines (in moderation) and spending time on the open road.

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