It’s quite a shift: an increasing number of companies are moving from the single sale model to a recurring revenue model. Mum & You and many others are the best-known subscription marketers.
Subscription Business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue. They focus on customer retention over customer acquisition. This model helps you to capitalize on the compounding value of customer relationships. That means as long as your customers continually see the value your company provides for them, they’ll continue to pay you for it. Here are some pointers which define Why subscription business models work –
Price Value – The product price value in a Subscription Model is beneficial for the brands and customers. In a subscription model pricing of a product is less or discounted to acquire more customers. Some brands like Mum & You also offer their customers to create customized flexi subscription bundles where customers can add product & quantities as per their requirements.
Recurring Revenue – In the Subscription Business model, brands offer the consumer to pay monthly or pre-pay (pay in one-go and get product delivered as per cycle). This makes the revenue model of the company stronger because it guarantees sales over a period rather than a single purchase. This makes revenue forecasting and business easier since a company can project its sales farther out with more accuracy.
Customer Retention – In a Subscription model there is a high retention rate of customer every month depending on the value the company provides to the customer. However, in a single purchase model, 90% of the customers are lost after first-month purchase*.
Lifetime Value (LTV) – One of the key benefits of Subscription Business models are customer LTV. It’s easy to forecast or project How much revenue the brand will make after 12-months or 24-months. This is calculated by numbers of customers, frequency of orders, Average order value and Gross margin.
Customer Acquisition Cost (CAC) – The amount of money spent on acquiring a customer is CAC. Lower the CAC in the Subscription model higher are the profits brand make.
LTV: CAC - For example, if we spend $10 to acquire a customer and assume that on the average customer will spend $100 over 2 years with us. Let’s further assume we have a 50% Gross margin – so we make $50 in profit per $100 of revenue. We, therefore, have a 5:1 LTV: CAC ratio, once a group of customers have been with us for 2 years. In another way, we make $50 in profit for every $10 we invest in acquiring a customer.
Customer Journey – In a Subscription model, brands know what their customers had bought repeatedly and basis this data brands can cross-sell their other products through Email, Notifications, SMS, etc. The cost of marketing a new product to the existing customers will be very lesser.
Subscription Business model can be optimized in many ways and begins by understanding your goals and establishing benchmarks. By doing so and watching them as they change over time, businesses will develop a better sense of what is working and areas that require improvement. With technology, almost any product or service can now be a subscription model provided the product or parts beckon repeat orders.