Key Insights
- Over the past few years, industries everywhere have begun using a subscription-based business model
- While convenience and recurring revenue are the top reasons for its popularity, the model does come with its own set of challenges
- Businesses must overcome these roadblocks to cater to the ever-increasing consumer demands
- For the model to be successful, enterprises must have a laser-sharp focus on not just subscription management, but also customer management, financial planning, and performance metrics
It started with magazines and telecom companies and trickled down to the music and video streaming sector.
At present, a wide variety of businesses–from meal boxes to cars to even electronic equipment–have embraced the subscription-based model.
Virtually any product or service can be sold through a subscription-based business model. Sectors that have not jumped on the bandwagon will do so in the future.
The trend to the subscription-based model continues to grow at a CAGR of 17.9% and is forecast to represent 83% of total software revenue by 2025, as per a report by IDC.
Despite its tremendous uptake, the subscription-based business model is not as straightforward as it sounds. There are multiple roadblocks that subscription businesses must be prepared for to provide a stellar experience and a hassle-free customer journey.
But before we jump into the unique challenges of subscription-based businesses, let’s look at what the domain is all about and why the model is growing so fast.
What are Subscription-based Businesses?
A subscription-based service model is based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue.
Such a model focuses on customer retention rather than customer acquisition.
Take Spotify or Netflix for example. Closer home, we have businesses such as Zomato, MakeMyTrip, and many others where customers can opt for memberships to avail exclusive deals.
Subscription-based business models benefit both the company and its customers.
As a customer, you can automatically repurchase a product or service. As a business, you retain customers for future sales rather than needing to re-engage with them on a more frequent basis.
Why are Subscription-based Businesses Becoming So Popular?
Subscription-based businesses are popular for one main reason: convenience.
The shift to online shopping and availing of products or services from the comfort of one’s home was rising even before the pandemic. With lockdowns in place and storefronts closed, the need for recurring goods and services rose sharply.
So, even when the pandemic had a negative effect on much of the economy, the subscription-based market grew about 12% at that time, as per the Subscription Economy Index by Zuora.
Digital media, video streaming, and eLearning platforms had subscriptions grow by over 25%, according to the same report.
Several factors are driving the surge. For businesses looking to shift towards a subscription-based service model, three factors reign supreme:
- Predictability
- Recurring revenue
- Customer insight
Additionally, such a model offers more definitive revenue sources that business trailblazers can rely on for planning and investment.
Customer insight is another bonus. When businesses have consistent relationships with their customers, they are better equipped to track and gain deeper insights into how customers interact with their offerings.
Overcoming the 6 Unique Challenges in Subscription-based businesses
Many subscription-based businesses are enjoying unprecedented popularity.
However, plenty can go wrong if there is a gap in alignment between pricing, product, and customer management.
Let’s look at six of the most common challenges plaguing subscription-based businesses.
1. Providing Multiple Subscription Billing Models
Subscription plans are all about flexibility. It should cater to each customer’s unique demands. This means that there is no one-size-fits-all solution to pricing models.
Any subscription-based business must offer multiple categories of billing models so that customers have the choice and freedom to choose what they like.
Taking into consideration that the model you opt for has a direct impact on revenue, there are a few you can make way for:
- Freemium: This type of subscription plan allows customers to get started for free with the option to pay when/if they wish to upgrade
- Fixed Schedule and Pricing: In this type of plan, customers are charged a fixed amount at a time period for a pre-decided quantity of the product
- Tiered/pay-per-unit pricing: In this type of plan, the customer is charged based on the quantity purchased as per the pre-defined tiers
2. Customer Management
Subscription-based businesses tend to have a significant number of users at any given time, making it a tough task for businesses to manage all the customer records.
An inaccurate customer management database can have a damaging effect on the customer relationship if mistakes are made. Mostly, these mistakes often come down to repetitive manual tasks that lead to human error.
Additionally, any gap in customer data would lead to inadequate information flow among the staff. In this case, they would not know if customers are on trial or if their subscription period has ended.
You can avoid this by using an effective subscription management system that categorizes where in the sales process your customer is, giving you relevant data of any previous interactions.
3. Flexibility and Real-Time Modifications
Even when you have a detailed pricing plan, your customer might want to upgrade, downgrade, cancel or change their plan a few days before their billing. You must provide them the flexibility to change their plan without having to wait for the next billing date.
Real-time modifications are another area to look into.
Additionally, the changes your customers are making to their plans need to be properly accounted for and communicated to the customer. By doing this, you ensure that their experience remains the same, hassle-free, and smooth.
4. Reducing Churn
While subscription-based businesses don’t typically have to worry about their service losing novelty, they do need to ensure that their service is always adding value to their customers’ lives.
Routine surveys are a great way to assess what your customers like and dislike about your product or service. Creating stackable loyalty reward programs is another way to keep your customers delighted.
These tactics can help you keep your customers engaged and prevent them from buying products from a competing business.
You can regularly surprise your customers with reward points so they feel genuinely valued. This goes a long way in decreasing dissatisfaction and, consequently, reducing churn.
5. Go for Automation
Giving your customers flexibility also means more complexities for your business.
As a subscription-based business, your customers have various options for customizations, enhancements, and convenience to pause or resume their plan and to upgrade or downgrade. But this also makes invoice management a challenge.
Manual billing is completely out of question, considering the massive amount of data you would have to stay up-to-date with. You must automate your billing system so that invoices are generated and sent to customers without any delay.
6. Tracking the Progress
Rather than measuring success by tracking Monthly Recurring Revenue (MRR), churn, and recurring profit margins individually, combine them.
A combination will allow businesses following a subscription-based business model to have more actionable insights and answer critical questions about the company’s overall financial health. A real-time dashboard can help you visualize the progress better.
Riding the Subscription Wave
