If you are in the business is selling products or services that are delivered for a one-off payment, then at the beginning of each year your plan is to sell as much as you sold last year - and some. That is called growth. That is also called 'hard work'. You have to maintain a relationship with your customers, who may only purchase from you once a year. You must persuade them to visit your physical or online shop and then you have to close the sale - again.
Subscription businesses benefit from having a recurring revenue stream and an ongoing customer, and billing, relationship. Recurring revenue businesses have more certainty, better cash flow and less bad debt. At the beginning of each year you have the revenue you had last (less churn) and you can build on top of that. Your revenue compounds and if your cost base does not grow in the same linear fashion, then your margins should grow too. This is why subscription businesses with 'monthly recurring revenue' (MRR) or annual recurring revenue (ARR) are worth significantly more. A retailer might be valued based on cash flow or profits, whereas a recurring revenue business may be worth many multiples of revenues, provided that revenues are growing. What would you rather buy, an empty order book on the 1st January, or one that had most of the previous year’s sales sitting in it to build on.
Jeff Bezos has a background in hedge funds and quantitative analysis - he is a numbers guy and Amazon has been built systematically to sell and create value. That is why it will be the first business worth $2 trillion.
In case you were not aware, Amazon has the world’s largest subscription-based cloud computing business (AWS) and now has a subscription content service (Amazon Video). But, its best known business, the one most of us interact with on a weekly basis, is its online shop. Amazon Prime has turned a shop into a subscription business by adding value to repeat customers. There are now 105 million Amazon Prime subscribers in the US alone, which is two-thirds of the consumer population. Assuming the $12.99 per month price for Prime, it would generate $16.3 billion per year, before a customer buys anything. Jeff Bezos has turned a shop into a subscription business and that is genius.
There are also subscription products and eventually Amazon will no doubt send you subscription boxes of stuff its Artificial Intelligence knows you need before you realise yourself - forget '1-Click' retail, that is 'No Click'.
Prime Your Business
Subscriptions can be charged for services or content that are used or consumed over time, and you may not notice how many subscriptions you are paying each month.Apple sells you a phone, but then charges you each month to use iCloud to backup your photos and data. I recently bought a dog cam and even that has an option to upload footage to the cloud for a subscription. Have a look through your bank statements, or iTunes account, and count the number of subscriptions you have probably forgotten about. Apps are a great example of software-as-a-service (SaaS), where you pay to use the software each month instead of purchasing a one-off perpetual licence. Once your data is managed by a company, it is hard to move and leaving becomes very difficult.Microsoft has moved its entire business model (e.g. Office 365) to a subscription model and this is the reason why it is still one of the world's most valuable companies, even after completely missing huge opportunities in mobile, search and social media.
Ask yourself, can you add value to your customers in ways that will allow you to generate MRR or ARR - ARR is even better for cash flow as you receive a year's payment in advance. You might have a newsletter that customers, or potential customers, subscribe too, which is a small step in the right direction. Can you build something into your service that requires an ongoing subscription or ongoing relationship through, for example, content that you can bill for. As I always say, you have to move up the value pyramid (see video here) as there is no point competing with behemoths selling average products, at average prices to the average consumer. The more specialist you are, the more value you can offer. If you are an expert in your field, can you curate content or products and charge for that service?If you aggregate products and services, or special offers, for a specific customer-type, can you charge them a small fee to access that value? Five hundred people paying £2 per month starts to add up.
The nemesis of subscription business is churn - i.e. people cancelling their subscriptions. So, manage you subscriber base carefully and maintain a relationship. Have a retention process when somebody informs you that they want to cancel, but don’t be too pushy. At the very least, find out why they cancelled. Make your subscribers advocates for your business and offer them value for signing up somebody they know.
Almost any business has the potential to add some form of subscription model - even if it’s just a discount on a likely classic car annual maintenance spend in return for monthly payments. Or, provide an improved service for those that sign up. That is all that Amazon does.
So, if possible, 'Prime' your business.
I have put together 10 hours and 76 lessons at: http://www.startupwithpierslinney.com