Why you should consider subscription pricing

January 17, 2014  |  Deborah Aarts for Profit  |  Comments

Everything from brick-and-mortar cafés to online shops have adopted monthly rates

At the Tsiferblat chain of cafés in eastern Europe, the coffee is free. So are the cookies and the Wi-Fi and the communal meeting rooms. Regulars don’t pay for what they consume; they pay a usage fee to access all of the shops’ amenities. Tsiferblat (that’s “clock face” in Russian) is like a private club, and it’s proving so popular among young professionals in Russia and Ukraine that imitators are popping up fast.

Dollar Shave Club takes advantage of both e-commerce innovations and the age-old subscription pricing model

In the U.S., meanwhile, more than 400,000 trend-watchers open their mailboxes once a month to find a small box filled with five samples of new products, ranging from makeup to food. This is Birchbox, the best-known of several companies that, for regular fees, deliver batches of new goods curated to the tastes of style-maven subscribers.

Today’s buyer likes the idea of “all you can eat” much more than à la carte.

In living rooms around the world, more than 40 million people blaze through a vast arsenal of movies and TV shows available over Netflix. A growing number are doing likewise for books and magazines via such new services as Oyster and Next Issue.*

These are very different examples of the subscription business model, which is gaining prevalence in ever more niches of the economy. Subscription-based pricing has been around since the dawn of newspaper delivery, but the rise of cloud-based and streaming services online that proved well suited to subscriptions have boosted the model’s appeal. The 2008 economic downturn added more fuel. “[Subscriptions] gave individuals and companies a way to access goods and services without having to pay the full price,” says Denis Pombriant, a consultant and author of The Subscription Economy: How Subscriptions Improve Business. “Now, even though the economy has bounced back, the notion of subscriptions is cemented in the culture.”

André Weber agrees. “Consumers are averse to big, upfront payments,” says the New York-based partner with strategy and marketing consultancy Simon-Kucher & Partners. Today’s buyer likes the idea of “all you can eat” much more than à la carte. “That, in turn, is changing how companies charge for their offerings,” he says.

A recent international survey commissioned by subscription-billing software firm Zuora Inc. found that 84% of respondent companies expect to see subscriptions increase as a percentage of their overall revenue.

Andrew Gregson, a Kelowna, B.C.-based business coach who specializes in pricing strategy, says that all companies should at least consider adopting subscription prices, if only for part of their business. While a subscription will generally deliver a lower immediate sale, it will bring recurring revenue, often from a larger clientele. “When someone buys something off you in a single transaction, you may never see them again,” Gregson explains. “But when they subscribe to your product or service, you dip into their pocket each month.”

Subscription pricing won’t suit every firm, Gregson admits, but he believes a lot more industries should use it than do today. Professional and medical services, for example, could greatly benefit from subscription pricing that allows clients broad access for a set fee; Gregson also cites law, accounting, veterinary services and dentistry as areas in which this model could be game-changing. “Think of how much business these organizations lose,” he says, “because someone doesn’t want to pay $200 to have their dog’s paw looked at.” According to Gregson, these consumers would find it more palatable to pay a modest monthly subscription fee that would cover them in case of a big expenditure—similar to insurance.

Other businesses that specialize in infrequent and usually expensive transactions—think: plumbing and auto repair—might also expand their client rosters by applying this model. So long as there is a critical mass of customers and clear usage limits, Gregson believes, subscriptions could at least supplement existing price structures of specialty service providers.

Another big area of opportunity is in big-ticket consumer items, says Pombriant.

While subscriptions are already popular among car-sharing services, the model could support niche vehicle offerings, such as moving vans or electric cars. Sellers of major household items could also greatly benefit by offering, for example, furniture subscriptions that enable trend-conscious homeowners to swap out the couch every few seasons or appliance subscriptions for developing-world consumers who can’t afford to pay for such products outright.

Purveyors of less pricey goods also are tapping into the subscription trend, says Weber. Witness the success of the U.S.-based Dollar Shave Club, which offers subscribers a steady supply of shaving equipment. “For companies that sell predictable, repeatable amounts of goods, this makes a lot of sense,” says Weber—and those could range from coffee and pet food to underwear.

As more and more companies experiment with subscriptions, they will need help with logistics and their ordering and billing software, which opens the door for new service providers. (It’s worth noting that Zuora recently raised US$50 million in venture capital.) Newbies to the subscription business model also require diagnostics to identify large users whom they can upsell to larger packages.

Armed with such tools, many businesses could get a big boost from the switch. Three years ago, Toronto-based Luxe Box moved from straight e-commerce to subscriptions. The firm, which now ships monthly samples of new beauty products, has found the new approach much more profitable. “There’s such an appetite in the market for subscription-based models,” says Luxe Box’s vice-president, Angela Chow. “It tells you the cash flow you can expect. That’s worth a lot.”

This story originally appeared in Profit

* Rogers operates Next Issue Canada, as well as Marketing and MarketingMag.ca

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