Is Subscription the Future of your Business?

Netflix Subscription

As we get more comfortable with technology, and we see a gradual shift of offline behaviour to online- Things that consumers naturally did offline are now beginning to do online. Subscription is one just behaviour that has been a part of our non-digital life from time immemorial. We’ve subscribed to newspapers, electric service, milk delivery, club memberships, gym memberships, cable TV, home/office rental and the likes.

With technology enabled services permeating into our daily lives, think about your most frequent daily actions that are turning into digital subscriptions: your daily news in the morning from ET/NYT, your gym/yoga class with Cult/FitPass, your milk delivery with DailyNinja/MilkBaskets, taking your ride to work with UberPass/Ola, watching GoT on Hotstar, your office at the co-working space, the gmail (MS Office, Adobe, and other software) you use at work, your lunch order through Swiggy Super, ordering your groceries on Amazon Prime.

It’s all through some kind of subscription!

In the B2B domain, subscription has become the norm for all software and services. Even for products- a number of hardware manufacturers now offer a pay-as-you-go subscription model, instead of paying upfront for the hardware.

Now, even in B2C, the subscription business model is becoming even more pervasive.

Below are a few examples, to show how pervasive it is becoming:

• Ecommerce: Amazon Prime, Flipkart Plus.

• Entertainment: Netflix, Hotstar. Youtube/iTunes tried pay as you go and now have moved to subscription. The DTH/cable service products were always on a subscription model.

• News: ET Prime, NYTimes, HBR, Ken, etc.

• Hospitality: Zomato Gold, Swiggy Super, etc. I think even Oyo is offering a subscription model.

• Transportation: Uber/Ola are also doing it. Zoomcar offers cars on subscription.

• Real Estate: The ‘we’ economy and the rental business. wework, welive, …

• Healthcare: Insurance, health plans, gyms, preventive health services.

• Education: Has traditionally always been this model. It’s the same with the tech enabled companies like Byjus, Unacademy.

• Monthly Subscription Boxes: Covering toys (Flintobox, MagicCrate), beauty, food, accessories, clothes, books & growing.

• Groceries: Bigbasket also has a subscription now. Your daily milk delivery was anyway a subscription, now it’s turning tech enabled.

• Consumer Goods: Your favourite companies are testing subscription models here: Nike is trying ‘shoes on subscription’ model(and from what I hear, good initial traction) Apple wants to you upgrade your devices (so might as well offer an iPhone subscription that costs $60-100 p.m. with free upgrades/replacements, instead of having to drop $1,000 each time the consumer wants to buy a new phone).

Your basic utilities and some of the oldest existing businesses already have you on a subscription model. Your electricity, water, maintenance, telecom, office/home rental, security, everything is a subscription business.

The new age companies seem to just be catching up with it now! Now instead of watching renting one movie at a time, you can watch as many as you want.

It’s not that these new companies weren’t aware of this model, it’s just that these digital economy enabled businesses need to go through a phase of evolution, adoption, business model development, infrastructure building, and other factors before you can move into this model (covered later in the article).

If you think about the evolution of digital economy enabled businesses, they’ve gone through 4 phases:

• Phase 1: Early internet plays were mainly Content model (Yahoo, etc)

• Phase 2: Next came the interaction based, Community models(Facebook, Pinterest)

• Phase 3: Then came wave of transaction businesses (Uber, Grocery, Food delivery, etc)

• Phase 4: Currently we’re seeing a wave of Subscription models (Netflix, Prime, …)

Content and community model businesses are supported by ad revenue. Where as the transactions and subscription businesses are supported by paying consumers. As consumers build trust in digital services, they spend more money directly on these platforms.

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Why do it: Benefits of a subscription business

There are 3 core benefits of considering the subscription model for your business:

Better Retention: If there was one holy grail for businesses, it is to get retention right. Instead of acquiring customers repeatedly for each transaction, what if you could just ask your current customers to keep buying again and again and again. Over time these retained customers spend more money also. So, each transaction starts becoming more and more profitable.

For any business, Retention >> Acquisition

And subscriptions are a great way to improve retention further.

There are some subscriptions like Netflix which charge Rs 500–800 per month, but I’ll take the example of Swiggy Super which charges about Rs 99 for a 3 month subscription. For most consumers, that’s not a significant amount, but just because they have paid the Rs 99, they’re more likely to order from Swiggy than from any other option. They’re basically leverage the ‘sunk cost’ fallacy with consumers.

Subscription Usage Loop

With this leading to ‘habit forming’, Swiggy becomes the default food delivery option, and the comfort leads to more transactions. Both Swiggy and their competition are similar in their ability to deliver, but it’s the sheer habit forming, that leads to more usage, more transactions, more spends, and profitable customers.

Note: If you can get this loop to work, you can invest more in CAC, because you know the LTV of this user will be high. For example, health insurance companies in India are willing to invest significantly in acquiring a new consumer, because the likelihood of the consumer staying is up to 7 years.

Predictable cash flow: The other golden thing to solve for in your business is predictable cash flows. With subscribers, businesses can better predict incomes, than with the customers paying for individual transactions. Netflix knows I have a higher likelihood of paying next month’s subscription, than if I paid individually for each movie/show, which is highly unpredictable, and loaded with friction. With more predictable revenues, businesses can invest deeper into improving the service. Thus Netflix subscription model won over the Youtube pay-per-use model.

Better cash flow: With a subscription the consumer pays upfront which improves payment cycles, vs the transaction model, where the consumer pays later.  If customer collections and vendor payments are timed well, early payments from customers can allow businesses to cycle the cash for their operational expenses, and be able to run their business financially more efficiently.  So better payment cycles and lower credit interest can make a significant different to your bottom line!

Instead of paying Rs 199 per month, you could offer Rs 1,999 for the full year for a win-win model. Consumer gets 16% discount on the full year subscription, so they’re tempted to pay upfront. As a business, you know this customer is retained for a whole year, assured cash flows for the whole year for this customer, and advance payments, the trifecta.

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When to consider your subscription business

Sure subscription model is often good for business, but the question is when to do it. IMHO, there are 3 factors:

Rides on an existing value proposition or behaviour: Simply put a subscription works for the consumer when it leverages an existing behaviour. For example, Amazon offers Prime to its customer, because shopping from Amazon is an existing behaviour for them, and they already place trust in it. Alternatively if its a new service like a gym membership, the consumer knows that its a behaviour which has predictable usage Higher the frequency of use, the higher the chance of subscription But if you’re launching a new subscription brand, then to get customers to switch from their current pay-per-use to your platform, the offering must be significantly better- that’s a combination of pricing, benefit, predictability and Trust in your brand.

Clear ROI: Its a no-brainer because we live in a country of ‘kitna deti hai’, but nuance on providing ROI is an important one.  It should be clear that buying this subscription is clearly worth the value, i.e. the value derived from the service (ROI)/the cost of subscription >>1. This especially applies to new concept subscriptions (like Amazon Prime, Zomato Gold, Practo Plus, etc), which require consumers to take a leap of faith.

In terms of ROI:

• At the risk of being prescriptive, ROI >2 is a must for better uptake. Higher the ROI, the better In some cases, its just perceived ROI, like Prime Video, which is hard to put a dollar value to by itself, but if you compare to Hotstar/Netflix, then it seems like a Rs 1000–2000 value at minimum.

• The faster the consumer is able to get their ROI, the higher the update. Case in point, Zomato Gold. It takes 2 meals in the metro to get an ROI on the Rs 999 to be in the black. Everything after that is just curry.

Larger business opportunity: For your business doing a subscription should be make it better- More users, more usage, more revenue, more profits, better outcomes

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Things to note about the subscription business

Cash flow & billing is not revenue: For a year long subscription, monthly revenue from new subscribers is 1/12th of annual billing amount. So, if a consumer paid Rs 1,999 for the yearly subscription, that’s great for cash flow, but revenue is technically Rs 1,999/12 = ~Rs 166.

Subscriber has higher expectations: When consumers subscribe and place their trust in your product/service, they have higher expectations- that things should work better. So, ensure that as a business, you’re ready to provide an enhanced level of service: this could be improved reliability, better support, etc.

What they buy for, what they use can be different: In general, what gets consumers to buy a subscription service may be the shiny bells & whistles, but what they use most often are the workhorse factors. So, ensure your workhorses are ready to deliver.  For example, while Netflix may advertise Sacred Games to sell its subscription, but consumers who subscribe probably watch Friends or How I Met Your Mother a lot more (or Peppa Pig, in my household). So, ensure that you have the shiny ball for your sales pitch, and the workhorse for daily use case.

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Question is: Is your business ready to be a subscription? If it is, then you have to start thinking about pricing, frequency, value delivery, differentiation, payment model. Here’s a framework to structure a subscription product.