Business Insight: The Subscription Business Model

It seems as if every service is transitioning to a subscription business model. Entertainment is dominated by subscription giants like Hulu and Netflix, and similarly, food subscription services such as Hello Fresh and Freshly are growing in popularity. Clothing and even home décor companies are emerging, offering unique products with a subscription-based model. This business model has grown extremely fast, and it is worth delving into its roots, its current power, and future opportunities in this market.

In an article by the Stanford Graduate school of business, alumni Tien Tzuo, who earned his MBA in 1998, credits Adobe for creating one of the first successful subscription business models. Adobe launched a subscription package for its services rather than selling each service as a specialized product. The subscription business model attracts customers through a fair monthly rate, rather than a one time purchase. Consumers like this option because it is easier for them to commit to smaller payments than one big purchase and businesses gain from a steady source of cash flow.

From a glance this model seems to be pretty self-explanatory, however many businesses are weary to implement such a radical change in their existing business model because embarking on a subscription-based business models forgoes the opportunity of selling products at full price. For many businesses this cost is too frightening. Even Tzuo admits that there is an inherent cost in adapting to a subscription based business model as shown in what he calls, the “Fish Model.” As shown in the graph, cost are likely to increase and revenues decease at the inception of the business plan. However, cost and revenues grow inversely, as over time costs decrease and revenues increase.

As a result of this behavior, companies will face a period of tribulation during the onset of the subscription- based business plan. However, if a company is able to push through those difficult times they may reap the rewards of a successful subscription base just like Adobe, The New York Times, and many other firms.

According to the article, “In recent years, the [subscription] market has grown by more than 100% a year, increasing from $57 million in sales in 2011 to $2.6 billion in 2016.” Traditional industries are now facing new challenges from businesses that are trying to change the way consumers interact with products and services. Companies such as Surf Air, a subscription-based airline company, are challenging industries that were thought to be untouchable. Banking could be the next industry to be affected by a subscription based business plan. Millennial consumers inclined to other subscription based services may be well inclined to accept a subscription based banking platform. With so much opportunity there will be a lot of competition in all industries. The first few companies to launch with a solid plan will likely gain great attention with consumers.