Subscription services form a substantial part of the economy and are prevalent in consumer consciousness. Amazon Prime, Netflix, and Fitbit are just a few subscription services that have become household names. Subscription services are an excellent business model because they create a steady and consistent revenue stream.
Most businesses rely on customers to initiate the purchase of products or services. This forces the business to put effort into marketing strategies for customer retention. The threat of customers going elsewhere is ever present, especially with many viable choices.
It’s true that subscription companies must also keep their churn rate down. Existing customers can cancel their subscriptions. But until they do, subscription revenue is like cash flow on autopilot. Or is it?
As mentioned, subscription models rely on captive customers. But customers are not genuinely captive. Subscription revenue is at stake if poor customer experience drives them away. Here are three mistakes business owners must avoid if they want to reduce customer churn.
Why Do Customers Like The Subscription Services Business Model?
The assumption behind that question, of course, is that customers do like subscriptions. However, it is evident from statistics about subscription-based services that they do (more on that later). We’ll get to those stats, sports fans.
In the meantime, let’s explore why subscribers like streaming services and subscription boxes. That will actually help frame what they don’t like and what you should avoid.
A subscription model is where customers pay a monthly or yearly fee for the consistent delivery of or access to products and services. Subscriptions can be B2C and B2B. They can be cloud-based software solutions or tangible products delivered to your door. They can be products (digital or tangible) or services (like coaching).
Subscription services Are Convenient
Subscriptions are convenient, plain, and straightforward.
Take, for example, access to streaming services. Consumers no longer have to head down to Blockbuster to rent a movie. In fact, some consumers don’t even know what Blockbuster is—which is a shame, really, since Blockbuster was the gateway to a perfect weekend for most millennials growing up.
No Equipment Required
In any case, said consumer doesn’t need a DVD player or a TV. They can lie on their couch, unlock their smartphone, and stream a movie from the list of choices on Netflix, Hulu, Disney+, or Amazon. There is a certain convenience or sense of lightness that’s attained by not having to own your own library of DVDs…unless you collect them, of course.
No Physical Shopping Cart Needed
What about food shopping? Consumers may feel too much pressure to integrate healthy, budgeted shopping into their work-life balance. What if they could get a box of recipe-ready food delivered right to their door? That’s where a subscription box comes in.
They don’t have to go to Whole Foods, Kroger, or wherever they shop. They don’t have to meal plan. All they have to do is take the food out of its kit, follow the instructions, and enjoy some healthy meals curated by chefs and nutritionists. Maybe they can enjoy it with a glass of wine delivered via a wine club subscription…with some Netflix, of course.
Say Goodbye to Planning
Subscriptions are also mentally convenient. They take the burden of planning away, as mentioned in the example of food. But in almost every area of life, a subscriber no longer has to worry about responding to an acute incident…e.g., I want a movie now; I need dinner now; I need a hand-crafted, seasonally-themed candle now…their subscription has already planned that out.
Like all humans, consumers enjoy the feeling of being able to rely on someone or something. In this case, it’s the subscription-based business model.
Subscriptions Are Affordable
Caveat: subscriptions are not always cost-effective, but in most cases, they are.
Business to Business Affordability
Take a B2B subscription, for instance. There are subscription services that offer SMBs (small to midsize businesses), HR, payroll, and accounting. A small business that can’t afford its own HR department, or even an accountant, can pay as little as $80 to outsource these services.
This is truly wondrous compared to paying an HR manager $70,000 per year. It’s the kind that makes you want to break out a top hat or cane and start tap dancing (especially if you’re a penguin). And that’s probably why so many businesses are increasingly turning to remote, outsourced, cloud-based software solutions to manage every aspect of running their business. It’s cheaper.
Business to Consumer Affordability
Subscriptions are also often affordable for consumers (assuming that the underlying product or service is actually needed or wanted). Many utility companies are now offering home warranties to cover appliances.
Subscribers may pay $30 per month to get unlimited house calls for diagnosing appliances. For some homeowners (especially in older homes), this sure beats paying a Benjamin per hour to have someone poking around your pipes for three hours.
Compare it to Insurance
And if you need any more proof about the affordability of subscription services, look no further than the idea of insurance, in general. Insurance premiums are usually a tiny pittance compared to the cost of fixing whatever they cover. Insurance premiums can cover car accidents, home accidents, and any accident really.
Even Warren Buffet agrees. Berkshire Hathaway sells insurance policies to organizations like the NFL to cover catastrophes like a nuclear weapon hitting a football stadium. Unlikely? Yes. But think about the cost if it happened.
In any case, the “subscription” of paying insurance is more affordable than paying out of pocket to clean up the aftermath, especially when it involves radioactivity.
And now, on to the stats.
Subscription Services Market Overview By The Numbers
There you have it. Subscriptions are convenient and affordable. They make life less complicated in an era where people are more stressed out than ever (ironically enough). So now, let’s look at the numbers in the global subscriber business model.
Over the last decade, the subscription industry has grown by a whopping 435%. By 2025, it will surpass $1.5 trillion in global market valuation. The combined market cap of subscription companies that are publicly traded stands at $14 trillion. And subscription businesses have grown almost five times faster than the S&P 500.
American Consumers LOVE Subscription Services
Americans are the craziest (in a good way) about subscription services, consuming 54% of them. 21% by Europeans, 14% by China, and 12% by everybody else everywhere. One factor in this global balance may be the fact that North America started many of the most prominent digital subscription industries —Netflix, Amazon, Uber, and Adobe.
The average consumer is spending more than $273 per month on subscriptions, a 15% increase year over year. However, 89% of these consumers don’t know how much they spend on subscriptions. That might be in part because they seem to be subscribing to everything. Millennials, for example, have an average of 17 subscriptions each.
If you’re wondering what all these people are subscribing to, 98% are subscribed to at least one streaming service, while 75% have subscriptions to at least two. Hulu and chill, anyone? 53% have subscriptions to some sort of mobile app (an extensive category that could range from personal finance to gaming), 39% to news services, 37% to box subscriptions, and 34% to health programs or memberships.
Physical Product Subscriptions and Box Subscriptions
You might still be wondering about box subscriptions. Physical products represent 45% of the market valuation. Some of these products are consumer staples, such as those purveyed by Harry’s Razors. Some are food. Others are discretionary niche subscriptions…like those scented, seasonally-themed candles we mentioned earlier.
One factor fueling the subscription of physical products was the Covid Pandemic. Consumers trapped in their homes turned to subscription services to deliver a steady influx of household products and food to their bubble of mandated isolation. It’s all futuristic and utopian, thinking about a drone delivering you your monthly allotment of goods.
But the delivery of physical goods, especially in food and niche or novelty items, is also driven by the ancient consumer inkling toward novelty. Consumers are eager to see what bespoke items will be delivered to their door. They enjoy being pleasantly surprised by things they would typically have to find at The Sharper Image or a late-night infomercial.
Perhaps that’s why the subscription box model alone will be worth $65 billion by 2027, which is a lot of scented candles. Bespoke grocer HelloFresh has over 7 million subscribers alone, larger than the population of pretty much any state except 14 of them.
Clouds, Content, and Internet Gurus
SaaS (software as a service) has reached $152 billion in global market valuation, led by cloud-based companies like Salesforce, DropBox, and HubSpot. These B2B vendors help businesses facilitate their operations and growth with cloud-based software.
As mentioned earlier, the benefits for businesses are quite tangible. For instance, it’s much more effective to subscribe to a Salesforce CRM than to build and manage a proprietary customer database.
Subscription services are helping content creators get off the ground. Patreon is one such venue where artists and performers can beg friends and relatives to support their odd hobbies with a monthly donation. So far, so good, as $1.5 billion annually is being raised to fund interpretive dance, art made with cigarette butts, and bizarre cinematic explorations.
Another boomtown in the Wild West of subscriptions is edtech. Course creators on Udemy are raking in a combined $293 million per year, teaching watercolors, computer programing, tai chi, and how to improve your marriage. While most of these courses are sold as one-offs, Udemy’s B2B revenue is substantially based on subscriptions.
Internet gurus have seen the light. While one-on-one coaching has long been the pinnacle of the internet self-improvement sales funnel, membership is now tied with their top-selling product (36%), followed by courses (34%), digital downloads (30%), and forums (28%).
Why Do Businesses Like Subscription Services?
We have touched upon one reason already, and that is cash flow. Subscriptions are to companies what rental properties are to real estate investors: passive income. Sort of.
Admittedly, in both cases, there are associated expenses. But owning an apartment complex requires a lot less sweat in the trenches than flipping fixer-uppers.
Of course, some people like replacing drywall and swapping out decrepit linoleum with hardwood floors. How do you feel about those very retro mustard yellow color palettes?
In terms of customer acquisition, existing business is better business. It costs 5x more to gain a new customer than to retain an existing one. Inertia is the most powerful force in the universe, as some half-naked philosopher draped in a bed sheet once said (we’re talking Greek, here). Subscribers also are up to 70% more likely to purchase additional products from the company they subscribe to, further improving their lifetime value.
It’s true that subscription service providers cannot just rest on their laurels (to continue with analogies used by those performing sports in the nude). But successfully subscribed members must proactively cancel their membership to interrupt their contribution to the cash flow. This puts the business at an advantage over (most) businesses, which need to wait for customers to come to them.
One in the hand is worth two in the bush, as they say about birds. And business.
Subscription Service Businesses Are Scalable
Another reason that business owners embrace the subscription model is that it’s highly scalable. Take tech startups, for example. Someone with a particular software solution can sell their product to millions of end users without depleting their inventory…because there is no inventory. By selling access to a digital product, they can scale their business while avoiding some of the growing pains businesses with actual inventory have to go through.
Of course, an eCommerce business using the subscription model must go through these inventory-related growing pains. But these days, the internet also makes tangible product subscriptions extremely scalable. Entrepreneurs can penetrate global markets, sending their scented, seasonally-themed candles to exotic places seen only on Instagram (we’ll stop with the scented candles thing eventually).
The scalable nature of the subscription model makes it very appealing to business owners. Combined with the idea of passive cash flow, this is a win-win. Unless, of course, a subscription provider makes any of the following mistakes.
Mistake #1: Driving a Free Trial Off a Cliff
Free trials have been shown to convert 62% of consumers. But interestingly, paid trials retained 83% of users. This wide discrepancy may point to an underlying issue: communication or lack thereof.
As mentioned earlier, the average millennial has a subscription to 17 different things. And they most likely have more than seven social media accounts. And they may also have an attention span worse than a goldfish’s. With all that going on, they may forget they have a free trial.
Then they get their bank or credit card statements and are reminded of the monthly fee. You know…the one that kicked in after their free trial ended. Cardholders are supposed to contact a merchant (you or your business) for a return. But 85% will contact their bank first to initiate a dispute.
These chargeback disputes are almost always ruled in favor of the consumer. The merchant loses the cost of the goods or services and then gets slammed with fees from the card networks and banks.
Consumers who file a chargeback one time are nine times more likely to do it again, and 40% of cardholders will even do it within two months. You can avoid these chargebacks by proactively communicating with your subscribers during the free trial.
Send them an email and/or text letting them know their free trial is ending. This is a piece of documentation that will work in your favor if their bank contacts you. You may also consider charging for trials.
In addition to the psychology of feeling more invested, the subscriber is aware that they provided their payment information. Seeing a charge on their bank statement will not catch them by surprise. Since it is a trial period, you can lower the rate than your average periodic cost. However, keep in mind that you should still proactively communicate with your subscriber before the rate changes.
In summary, be loud and clear about free trials and when they end.
Mistake #2: Being Invisible, Unresponsive, Or Hard To Find
All businesses must be visible to their customers at all times. While this is an enormous pain to the assets, it’s necessary today. All it takes is one Twitter Troll to totally trash your business (perhaps with more or less alliteration), and you can see a dip in sales.
Social Media Presence
Social media users are 63% more likely to engage with negative information. 94% of consumers say a bad review has driven them away from a business. And it can take as many as 40 positive comments to undo one bad one.
Consumers put a lot of weight into social proof. Around 74% of them rely on social media to make a purchasing decision. Their friend’s purchases influence 81%, while 56% consider brand conversations important or more important than traditional reviews.
All of this points to the fact that a subscription business must be in front of its subscribers. That means having an account or page on Facebook, Instagram, Twitter, YouTube, and whatever else fits your business (for instance, LinkedIn if you’re a B2B subscription).
Readily Available Customer Service
But wait, there’s more. You need to be available to your subscribers to answer questions and troubleshoot. This will be a low-fi affair if you sell scented, seasonally-themed candles out of your garage. Just let your customers know you can answer calls and emails between 9:00 AM and 5:00 PM, Monday through Friday, and respond to emails within 24 hours.
But if your business is a midsize or large enterprise, you need 24/7 availability. Customer care phone support, email support, and even chat support are necessary. The rule of thumb is that the more available you are, the more likely you will lower your customer churn rate. If customers can have their grievances or confusions addressed immediately, they will be less likely to cancel their subscriptions.
The quality of your responsiveness also impacts subscription retention. Even large corporations have realized this and stopped outsourcing their customer service, returning it to domestic call centers. Customers want to know that the person they’re talking to can relate to them, understand their frustrations, and solve their issues. This means your customer care must also be helpful and friendly.
Be available and ready to help your subscribers. Otherwise, they will leave.
Mistake #3: Becoming Boring or Useless
You probably didn’t see this one coming. But consumers are wired to get bored eventually. This is one of the problems with subscription business models: too much of a good thing. Customers may be intrigued by seasonally themed scented candles, but what happens when they’ve already got pumpkin pie last year?
Subscription services need to keep things fresh. Over time, the novelty of a subscription may fade, and subscribers will want additional value. For example, box subscriptions, which have a 10% annual churn rate.
This essentially means that after five years, half of your subscribers have left, and after a decade, they’re all gone. There are only so many holiday scents to go through!
This is where switching it up can reduce churn. For instance, to beat a dead horse with scented candle references, you can market related subscriptions to subscribers. Have you seen our throw pillow of the month? How about our tea of the month? Or whatever else relates to essential oils infused into melted crayons.
Business subscription services are well aware of this issue and have teams devoted to customer care and retention. For instance, take the software industry. Account managers regularly check in with clients to see how the software works. As the customer’s business grows or changes, these account managers and sales engineers, and product managers can develop new products for the client.
If some measure of proactivity is not taken, whether a B2B or B2C relationship, the business risks churn and/or losing the customer to someone else. Do not become boring, old, or useless to your customers. Stay in touch. Upsell. Keep it fresh!
How to Start A Subscription Service Business: The Payment Gateway
Now that you’ve seen what not to do and why subscription services are so great, you’re probably wondering how to get a slice of this pie. One thing you’ll need is a good payment gateway.
As recurring payments are the lifeblood of a subscription business, solutions like PayPal, Square, and Venmo will only go so far. These payment aggregators have flat rates that are terrible for scalable, growing businesses. They also have legendarily lousy customer support.
If you have any questions about collecting payments in the subscription model, call or contact us using the form below. We’d love to hear about your business and subscribers, whether you’re selling software or scented candles.