MAG Insights

Announcements from the MAG & Featured Articles

Innovate Now: Leveraging Payments to Enhance Your Business Model (MAG Quarterly- Volume Six, Issue Two)

  

By Pat Behrens, Consultant, W. Capra Consulting Group

June 7, 2018

The subscription-based business model offers clear advantages, and many merchants may be overlooking opportunities for their business to grow in this space. Companies like Netflix and Hulu naturally lean toward a subscription revenue model, but less obvious products have found their way into the subscription space as well.

The Subscription-Based Market

“Subscription boxes,” such as those offered by Blue Apron and Dollar Shave Club, allow customers to automate essentials and remove one-off trips to the store. Food and beauty products alone accounted for 68% of subscription box site visits last year.(1) Companies in this space have recognized that customers respond positively to this shopping experience and are seeing significant growth in revenue. From 2013 to 2014, Dollar Shave Club’s revenue projections tripled, reaching $60 million dollars.(2) In 2016, UK-based transnational Unilever purchased Dollar Shave Club for $1 billion in cash.(3)

The Subscription Model: Benefits and Gotchas

Subscription-based business models offer benefits to merchants that one-time purchase models do not – i.e., the ability to better plan resources, predict revenue, and develop a more trusting relationship with customers. These models can be a source of incremental revenue as well – Amazon generates $9 billion in revenue before its Prime members purchase any products.(4) Amazon can also can expect customers to spend more – customers who currently subscribe to Amazon’s Prime membership spend almost double what non-Prime customers spend ($1300 per year vs. $700 per year).(4)

With companies large and small starting to shift towards subscription models, no company wants to be the next Blockbuster. In 2000, Netflix founder Reed Hastings attempted to partner with Blockbuster, offering his company to Blockbuster for $50 million dollars.(5) At the time, the video rental industry was not running on a subscription-based model, and Blockbuster CEO John Antioco refused. Over the next 10 years, consumer shopping preferences began to change, and the rest is history. In 2010, Blockbuster – with a valuation of $24 million with $1.1 billion in losses (2) – went bankrupt. As of 2015, Netflix – having reached 50 million subscribers across 40 different countries – had a valuation of $32.9 billion, over 650 times the asking price in 2000.

A conversion to subscription-based revenue models will not lead to unilateral success across verticals. But it’s important to consider that even luxury automotive companies like Cadillac (6) and Porsche (7), established firms whose industries have never traditionally operated in a subscription-based model, are experimenting with monthly subscriptions that give customers on-demand access to an entire range of vehicles.

Simply put, the old ideas of what customer’s will subscribe to are no longer relevant.  With the recent incredible growth in subscription revenue, and in light of cautionary tales like Blockbuster, now is the time to reevaluate whether a subscription-based revenue model is right for your business.
 
For further discussion, contact Pat at pbehrens@wcapra.com.
 
Sources:
1 – https://www.forbes.com/sites/richardkestenbaum/2017/08/10/subscription-businesses-are-exploding-with-growth/#383a70d26678
2 – https://www.entrepreneur.com/article/243573
3 – http://fortune.com/2016/07/19/unilever-buys-dollar-shave-club-for-1-billion/
4 – http://fortune.com/2017/10/18/amazon-prime-customer-spending/
5 – http://www.businessinsider.com/blockbuster-ceo-passed-up-chance-to-buy-netflix-for-50-million-2015-7
6 – https://www.forbes.com/sites/dalebuss/2017/01/05/cadillac-launches-book-vehicle-subscription-service-as-new-user-model-for-new-age/#14f9abe4a849
7 – https://www.cerillion.com/Blog/October-2017/Fancy-a-Porsche-subscription-service