The subscription business model: advantages, challenges and trends

Today you will find a subscription service for pretty much anything, ranging from streaming music and movies online, all the way to receiving several pair of brand new black socks each month.

The subscription business model, where customers pay a fee on a recurring basis (usually monthly) for a product or service is proving to be very popular amongst both: consumers and businesses. Demand is also growing as global revenues for companies offering software as a service on a subscription basis are also expected to reach USD 106 billion in 2016, an increase of 21% from 2015 spending levels, according to a recent research by Forrester.

Advantages

The main advantage for businesses who offer subscriptions is that they can enjoy a healthy stream of recurring revenue.

Convenience for both - the business and customer - is also another factor which makes subscriptions very popular. Users can choose if they want to scale up or down depending on their needs, all they need to do is choose a plan, add their payment details and are then billed recurring basis without having to update their details every time a payment is due and when an order is needed – it just lands on their doorstep

Whereas businesses can rely on a certain level of income and retain the majority of their customers for longer periods, this means the longer a customer is subscribed the higher the lifetime value will be. But it also allows them to better predict the volume and demand to help order the right quantities.

Challenges

While the company grows, the requirements of a subscription model increase - especially with regards to pricing flexibility, up & down grading of subscription plans as well as the handling of fixed fees vs. usage based fees. Next to that, international expansion creates new challenges, by having not only different languages per country, but also different VAT rules come into place. Since January 2015 for electronically supplied services the taxation of the buyer´s country apply.

Having a certain amount of customers in the database, many processes can´t be run manually anymore. By automating payments several cases can occur, which compromise the process, e.g. the credit card might be outdated, the bank account is not covered or the subscription got extended without knowledge of the customer. Pre-dunning, such as sending automated emails before the card expires or the subscription extends, can help. Also a clear structured, automated process for cancelling subcriptions will be necessary.

A big part of those challenges, especially when it comes to automated payment processing, can be overcome by using an external service provider, so that businesses can focus on their product, service and business growth.

Trends

We will continue to see new subscription services arrive on the scene, as businesses begin to notice the additional value they can deliver to their customers. Amazon has already started by allowing customers to purchase subscription on items such as deodorant and batteries which enable customers to save money in the long term. Making it one of the main reasons why Adobe and Microsoft switched to a subscription model for Microsoft Office and Creative Suite respectively.

The novelty factor is still there for businesses who embrace the subscription model which helps attract a lot of free attention. Lootchest is one of those businesses where people can subscribe monthly to receiving a box full of the coolest gaming and geek products.

Additionally, we will also see more online payment providers developing products with more advanced recurring payments functionality to cater to the growing needs of subscription-based businesses.

About Mark Fabian Henkel

Mark Fabian Henkel is co-founder and CEO of PAYMILL. Prior to PAYMILL he worked as COO for Rocket Internet Munich, before he founded the FinTech startup in 2012 together with Jörg Sutara and Dr. Stefan Sambol. 

 About PAYMILL

Paymill’s developer friendly REST API lets merchants accept online payments directly in your website and mobile application while benefiting from multiple payment methods. Available across Europe, online businesses are able to accept online payments globally, enabling them to scale internationally from the get-go. The API gives full control of the checkout and can be used as a payment gateway. Thus you can deliver a user experience optimized for higher conversions. And with heavy-duty security measures already built-in – you can rest easy knowing your data secured.