Subscription models reloaded: why they are a good tool for customer retention

Rather than buying a product, consumers prefer to use services whenever the mood strikes. As a result, subscription models are experiencing rapid growth worldwide in many different industries. But which ones are a win-win for both sides?

Subscription models are becoming increasingly popular and defining the future of service offerings.
Image: © kite_rin / Adobe Stock

Subscription models offer much desired flexibility

In line with the current zeitgeist, people now want to own fewer possessions and rent products instead. Subscription models promise users versatile and pragmatic solutions that can be incorporated into their active daily lives. However, the subscription model is not a new concept: newspapers, fitness clubs, and public transport companies have long been offering this service, which is a practical option for both individuals and businesses. Digital subscriptions such as Netflix, Avira, and Spotify are also growing in popularity and responding to the demands of customers who prefer continuous use of services over one-time product purchases.

In the conventional sense, purchasing a software program only involves a one-time transaction and a download. Nowadays, firms and private individuals are opting more frequently for subscription models, which allow constant access via the browser. These customizable subscription packages are designed to meet a customer need that has prevailed: while subscriptions were previously limited by fixed-term and static contracts, customization during the subscription period is now the norm.

71 %
of adults from 12 countries have subscriptions to services today.
53 %
used them 5 years ago.

Customer expectations: the cornerstone of subscription services

It’s no secret that companies collect data. At the same time, however, there is a high demand for transparency and control on the customer side. The personal option of being able to select and add services or change the way they are billed tends to encourage customers to choose subscription models and stick with them in the long term. Pay-per-use models in particular have become established as a necessary and successful option in the B2C sector.

Using new technology and readily apparent processes, providers can precisely measure what is really being consumed and used. How many miles does the average user drive with a rental car or how often do people want to update their software? The evaluation of such questions allows for flexible and transparent pricing, which is highly appreciated by users.

The most common subscription models

These business concepts are revenue models in which customers make small regular payments to use a service or product as opposed to a one-time purchase payment. The following three subscription models are the most commonly used:

  1. Subscription licensing: This form of subscription is used on the software market. In this model, the software license is not only granted for a one-time specific user quota, but rather for the ongoing use of an online cloud option. Only small payments are made per user and time slot or IT resource.
  2. Pay as you go: With this option, customers only use and pay for services when they need them. Long-term contracts are not common with this model.
  3. Metered billing: This subscription model is particularly popular for online media services. With this option, customers are only charged if they exceed a certain level of use. Many payment plans from media providers offer a certain number of free quotas, e.g. five free news articles, while all-inclusive use requires the conclusion of a contract, such as the subscription licensing model.

Advantages and disadvantages of the subscription model

It’s not only private individuals who benefit from using subscription services. Convenient payment terms and services that are continuously updated are attractive options. Therefore, companies can also benefit from the subscription-based business model. However, it is important to weigh the pros and cons before making a decision.

What are the pros?

  • Predictable and regular revenue
  • Products can also be purchased by customers with limited budgets, which makes them more attractive on the market.
  • Increased customer retention and a growing customer base
  • Constant customer contact offers the opportunity to respond to changing or new customer requirements and optimize the subscription offer.

What are the cons?

  • After a contract period of three to five years, the total cost of ownership for software models is often higher than for a licensed model.
  • To be able to offer subscription models, product providers must make extensive changes to their current business processes. Financing and liquidity issues should be clarified with regard to specific aspects of the subscription model.
  • Customer relationship management must be tailored to the subscription.

Subscription suited to the product: success with the right model

Whether food or beauty boxes, video or music streaming services, or software-as-a-service (SaaS) – subscription models are a lucrative and customer-friendly option for marketing products and services. With the right subscription management that puts customer expectations and requirements before sales, nothing stands in the way of successfully implementing this strategy. After all, customers will only opt for a subscription if they see obvious benefits and added value.