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The subscription economy: What does it mean for your startup?

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Anne de Kerchhove, CEO of digital subscription services specialist Iron, explores how tech entrepreneurs and startups can utilise the subscription-based business model. 

Subscriptions aren’t just for magazines anymore – they vary from car rentals to monthly sock deliveries. Think about it this way, when was the last time you bought a CD or DVD? Now it’s more likely that you watch movies on-demand through LoveFilm or Netflix and listen to music through Spotify. This almost unlimited choice and flexibility for customers reflects the rise of what has been dubbed ‘the subscription economy’.

We are seeing a huge shift in what consumers want and how they want it. They expect access to items at any time of the day and instantly, which is one of the biggest drivers of the subscription economy. Not only is it transforming the tried-and-tested ‘transactional’ business model, but it’s redefining the way businesses engage with customers. This new economy is built on developing close and long-lasting customer relationships, but how can tech entrepreneurs and startups benefit from the subscription economy?

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Customer data

For startups, the key when it comes to setting up a subscription-based business model is to establish whether the customer wants an ongoing relationship with you. Fundamentally the subscription-based model means the consumer is giving access to their data and access to their needs on a continuous basis. By definition, what you are trying to do by setting up a subscription-based business model is to provide personalised services. Therefore, tech businesses need to ensure that they’re leveraging this data to create a constantly personalised service.

If we look at where subscriptions have been successful in the past, telecom companies were the original kings of subscription. This then branched into entertainment with companies such as Sky. Today Netflix is an example of subscriptions done well. Netflix has been successful in tapping into the passion for content when and where you want it, but it nearly went bust because no one wanted to ‘rent’ a DVD any longer. The company turned itself around to a content producer and is now one of the most successful companies in the world. Through its clever utilisation of vast amounts of data, it moved from delivering DVDs to listening to customers and producing unique customer-desired content.

Long lasting relationships

If done right, the subscription model offers regular, predictable cash flows to businesses that can keep their customers happy. The lifetime value of customers is also much higher. If companies deliver value, customers buy again and again, instead of just once. Startups don’t have to spend money on marketing or advertising to convince that customer to buy again, so the return on the initial investment is far better. Businesses keep the customer through quality of service and experience, rather than spend. In order to do so, however, businesses have to shift their focus from individual transactions to creating and nurturing long-term relationships with their customers.

From a profitability point of view, it’s important for businesses not to offer products or services for free for too long. Of course give a free trial, but not for more than three months as the customer will believe it’s not worth paying for. A subscription is a form of marriage between the customer and the organisation, so it might take a trial period to decide it’s worth paying for, however, this can’t be too long otherwise it’s devalued.

Flexibility

Subscription services should not be seen as eternal. A customer might have a need for something for 18 months and then this need might change. Subscription-based business models need to be able to evolve with what the customer needs and allow consumers to unsubscribe at any time. A major mistake is failing to change the service over time. If you don’t have a ‘sticky’ service people won’t carry on using it. Spotify is a good example of a company successfully changing its service over time. Customers barely realise that its service is being tailored to them, but they would quickly get very frustrated if they were seeing the wrong kind of music. If a service doesn’t evolve and keep a relationship going with the consumer it’s going to fail.

The subscription economy should force a rethink of the customer relationship, context and experience. Constant contact with your customers means keeping in touch with your market, and how it evolves. Through digital subscription and the data it generates, businesses can track what people want and when they need it. Entrepreneurs and startups that want to succeed in the subscription economy need to orient themselves around customers, rather than products. They need to understand how their services are being used and, based on this insight, create the products and services that deliver a compelling customer experience.

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