I’ve always been curious why companies opt for a subscription based model over a more traditional one-time payment model. I mean outside of the obvious reasons such as cash flow, and higher revenue. Let’s explore the science behind the subscription and one-time payment models and see which one is actually better not only for the customer but also for the business.
There are a few things I would like to learn about this. First, I want to understand how much more benefetial it is to the company it is to utilize a subscription model over a one-time payment model. I mean, rather than just assuming it’s better because of the constant flow of cash, I want to see some data.
Second, I want to understand what the customer prefers. What is the difference in customers who prefer subscription vs the customers who prefer one-time payments. Whats the ideal price point for a customer on both ends of the spectrum.
Finally, I want to understand if the constant flow of cash generated from a subscription model has any correlation to the quality of the product. Does having a constant stream of cash result in a better product for the customer or does it result in a lower quality product and why.
Subscription Models
There are several different subscription models to choose from. Although each of these models differ in their application, they all share a few characteristics:
- Recurring Payments
- Tiered Access
- Free Trials
- Continuous Product Updates
While not fully conclusive these are some of the features that most every subscription model share. Lets explore each of these characteristics a bit more.
Recurring Payments
This is the one constant at the core of every subscription model. Customers make repeat payments on a recurring schedule for continuous access to a product or service. These payments can range from weekly all the way to yearly. The schedule really depends on how a business wants to break down the payment schedule. I have seen weekly subscriptions such as magazines, to yearly subscriptions for software. I have even seen 2-4 year subscriptions but typically with those you’re just paying for multiple yearly subscriptions up front.
Tiered Access
Pretty much every subscription out there has different tiers. Take for example Netflix, currently they offer three tiers:
Standard with ads
You get 1080p video with ad breaks.
$6.99 / month
Standard
Same 1080p video but with no ads.
$15.49 / month
Premium
Offers 4K + HDR video with no ads.
$22.99 / month
These tiers each have their own target audience but overall offer roughly the same product with some slight tweaks to the quality of the content.
The Business
Subscription models offer businesses a steady stream of income. Rather than one off transactions, they are able to create recurring income. This allows for more accurate forecasting and budgeting. It also promotes customer loyalty leading to more long term customers. Although there are many benefits for a business to adopt a subscription model, there are numerous considerations to make about the implementation as well as the type of model your company will adopt.