High Profits, Low Cost: Why Subscription Businesses May Be Taking Over The Market

In today’s highly competitive world, it can be hard to have a "stand out" business. Running a successful business requires you to not only appeal to customers, but to find a way to retain them for many years to come. Because this can be challenging, many entrepreneurs are turning to the subscription business model in order to achieve long-term returns. We are going to dive a little into what this is, and why customers may prefer over it standard business models.

What is a subscription business?

A subscription business is when a company offers their services via monthly payments instead of a one-time payment. This is often organized under a one-year commitment with the chance to renew at the end of each year.

Subscription businesses are beneficial because they make it easier to project revenue in advance, which allows for more efficient planning.

Also, (as some of us may know personally) subscriptions can be hard to let go of. Once we get used to the comfort of having a particular service, we can't really think of NOT having it, even if they don’t use it often. Plus, the low monthly costs of many of these services can make it easily justifiable to keep. 

What type of companies use subscription models?

There is almost no limit to what services can be provided on a subscription basis. Nowadays people have subscriptions to cars, clothing rentals, streaming services, meal kits and much more. Let’s look at a company that has achieved great success by using a subscription model.  

Netflix

Netflix was launched in 1998 as a DVD subscription service. Before they launched into streaming, they charged a monthly fee so that subscribers could select which DVDs they wanted delivered and in which order they wanted them to arrive. As soon as customers returned their last DVD, the next would be sent directly to their house.

This service soon became wildly popular. Netflix eliminated pesky late fees and trips to the video store, and for a very reasonable fee customers could still see all of the latest films. 

In 2007 Netflix began a streaming service, and by 2010 they had transformed into an entirely online library.

Today, Netflix has over 200 million subscribers and brings in billions of dollars in revenue from 190 countries. But why exactly are they so successful?

Netflix saw a great opportunity in the streaming services market. Founders, Reed Hastings and Marc Rudolph, recognized the need for a large media library, with low fees, that could be accessed from the comfort of their customers' homes.

And, while paying for a year upfront would probably scare most customers away, a low monthly fee seemed more than reasonable for the amount of films and television shows the service gave subscribers access to. 

Another reason Netflix has been so popular is because of their original content. Since 2013, Netflix has been producing  original shows and films that have made the subscription all the more necessary for people who want to remain in the know. Shows like Stranger Things and Squid Game are only available on Netflix, which makes the service seem that much more exclusive and appealing. 

The meteoric rise of Netflix resulted in a surge of other streaming services eager to compete. One of them, Disney+ and their affiliated services, managed to surpass Netflix in subscriber numbers in early 2022. However, Netflix is still a shining example of a successful subscription service, and its popularity is unlikely to seriously decline any time soon. 

Why do customers like subscription services?

Customers are often drawn to subscription services because it allows them to access services that they might not be able to afford on their own. For example, clothing subscriptions are becoming increasingly popular, and allow subscribers to wear designer clothing at a fraction of the price they’d pay for the piece up front. 

Another reason why customers like subscription services is the ability it gives them to sample a service. Someone with a car subscription might want to try out a new car each month to find out what they like. Someone with a clothing rental might want clothes for a special event one day, but a low-key date the next.

Lots of subscription services are about helping customers find out what they like, from books to cosmetics to wine to meditation practices. Customers don’t want to commit to something they don’t like, so having a subscription often lets them try out items until they find something they love. Then, once they’ve found it, they can continue their subscription by experimenting within the area they enjoy. 

Many subscription businesses also offer a trial period so that customers can see if they like the provided services. If the business is designed well, then that trial period should be all that is required to hook the customer into a long-term commitment. 

Conclusion

Subscription models offer lots of possibilities to entrepreneurs, and more and more businesses are seeing the benefits. If you are filling a gap in the market and are offering a wide range of interesting and frequently improving services, then a subscription model might be the best fit for you.