Posted on 19 June, 2018 | 5 mins
We used to buy DVDs, but now we pay for unlimited access to films on demand. We once purchased music, but now stream what we want, when we want it online. Even cooking—one of man’s oldest skills—has been disrupted by food delivery boxes.
In fact, 58 million people in the UK—89% of the adult population—use some form of subscription service¹. What was once most commonly associated with the magazine industry has now entered the way many businesses charge for their products or services, affecting their entire sales management operations.
It seems like a huge opportunity. But is it the right model for your business? The answer isn’t so simple. Let’s look at a few pros and cons:
Pro 1. Can be better for cash flow
Business owners will know first-hand the differences between operational expenses and capital expenses. Some companies even try to get as much of their expenses as Opex over Capex, so income is drip-fed into the business instead of dumped into it irregularly.
Subscription services can be more manageable for this very reason. Instead of customers giving you one lump sum, you spread their payments throughout the months or years. It means you may be able to forecast your cash flow easier, with more certainty over what money is coming in, and when.
Many consumers prefer lower, more frequent and more manageable expenses, too—it’s likely part of the reason subscription sales have jumped 11% over the past year¹. So a subscription pricing model might work well for both your customers’ finances and your own.
Pro 2. Shifts focus from product to customer
One thing customers seem willing to lose as they start to favour the subscription economy is ownership of products. They’re increasingly happy to abandon that CD collection for music streaming.
For businesses, that should shift their focus away from the "product" and more towards the "service". That will be a much-needed wake-up call for many businesses that have been disregarding the importance of excellent customer experience for too long.
In reality 89% of customers say they’ve stopped shopping with a business after experiencing poor customer service, and they’re four times more likely to buy from a competitor if their problem is service-related compared to price- or product-related².
If you feel your business has been behind in its ability to understand its customers, shifting to a service model will surely force you into change—change that, studies suggest, could be for the better.
Pro 3. Chance to find a competitive advantage
Businesses are tasked with finding a competitive edge—today more than ever—and subscription services can add something new and exciting to even the most commonplace items.
A good example of this done right is Dr Squatch in the US, a company which sells soap as a monthly subscription (a soapscription?). The sales model has allowed them to quickly become the 10th largest beauty-product subscription service in the States, according to Forbes, with annual growth of 300%³.
The subscription model could very well be a good way to make your business offerings stand out, if—and it’s an important “if”—your customers or clients are actually into receiving them in this way. Which brings us to the cons...
Con 1. Your customers might not want it
Yes, there’s no point renovating your sales and pricing strategies to accommodate the subscription economy if your customers don’t want your goods or services packaged in that way.
So who’s most likely to be into subscription services, broadly speaking? Today the average UK adult spends approximately £18.49 per month on subscription services, with 35–54 year-olds generally the most involved, spending an average £62¹.
On a more individual level, businesses considering subscription services will have to find out for themselves if their customers are up for a change. Customer-relationship management (CRM) software and sales apps will offer some insight here.
CRM tools can be used for understanding your customers better. Similarly, sales apps will give you direct data over which of your products sell regularly enough to perhaps warrant a recurring subscription sales model, as well as which products you could look at bundling together for a more attractive subscription package. Your data dashboard will help you see all this information in one place.
Con 2. Involves more management
While we’ve mentioned the cash-flow benefits of subscription services, there are also money-management risks involved for the ill-prepared.
Subscription services are often only more profitable if people use them in the long term. If your customers cancel after a few months, you might have made less than you would selling your wares normally.
Also, subscription services only work because your business makes use of economies of scale to sell more products, more regularly, for less money, and that can make your margins quite fine.
On top of that, there’s the added management of making sure your supply chain is prepared to handle regular subscription sales, whether you have the staff to manage it too, and if you have the delivery capabilities to make it a success.
Again, should you need more management resources, your business apps will be a big hand here—helping you to control everything from inventory and supply-chain management to sales pipelines and staff management.
Regardless, if you’re thinking of such a shift, it’s best to be prepared for a big change across your entire business.
Con 3. Competition weighted towards “favourites”
We’re not at the point yet where every customer using subscription services gets a large portion of their goods and services delivered in this way. The fact that the average UK adult spends less than £20 on subscriptions suggests they only choose their favourite one or two services, instead of letting it influence everything they buy.
Much of the money so far is likely going to the big players—Netflix, Spotify, etc.—and the market might only get tougher from here on out, as large companies start to move in the same direction.
Last year, just before Blue Apron went public and shortly after acquiring Whole Foods, Amazon filed for a meal-delivery-service trademark that could signal its imminent entry into the market. Make-up retail giant Sephora also launched its Play series, cutting into the revenues of early, small business adopters like Ipsy.
In a market where people currently pick a few favourite businesses to subscribe to, small businesses should be aware of the appetite large companies have to come in and eat their lunch.
Weighing the opportunity
It’s easy to look at the pros of the subscription economy and see it as a golden opportunity, but it’s important for small businesses to know it also comes with cons—risks that can only be weighed up by your business.
Choosing whether to start your own subscription service relies on your customers, the way your business is set up, the products and services you sell, and the wider market competition.
Importantly, keep a close eye on your business dashboard and track the parts of your company that matter most. Business apps add some great layers of functionality, while your dashboard provides a clear overview for making better business decisions.