The Subscription Model: What’s All the Hype?

When a dairy in rural Vermont made the first milk delivery back in 1785, it soon became mainstream to have your milk delivered from the local dairy directly to your front door on a subscription basis. The American milkman certainly played a role in what has escalated to the subscription model of business.

Years later, the magazine and newspaper industry honed in on it and enabled their readership to receive yearly, monthly or daily print deliveries for a monthly or annual fee. Now, this very model in which companies focus on selling a product or service in exchange for a monthly or yearly subscription fee is exploding. One after another, today’s entrepreneurs are increasingly utilizing this strategy, creating opportunities in stagnant markets and eventually disrupting entire industries.

The classic case is Netflix. After competing with Blockbuster, it booted the company from the game and took the movie entertainment industry by storm with an IPO in 2002, eventually earning a 75% share of today’s U.S. market, according to Forbes. Netflix’s defeat of Blockbuster may have been a direct result of the former’s specific business model. Blockbuster charged customers per movie rental and employed inconvenient late fees when films were returned after the return deadline, while Netflix replaced rental and late fees with a simple monthly subscription fee for unlimited television and movie streaming.

For those who aren’t familiar, Netflix requires a relatively low monthly fee in exchange for access to thousands of shows and movies streamed to your television and just about any other smart device on the market today. Recognizing its own popularity, and therefore, potential to increase profits, Netflix began producing and streaming a slew of original series and movies, becoming a player in the entertainment production side of the industry as well.

Back in 2006, entrepreneurs Daniel Ek and Martin Lorentzon founded Spotify, which transformed the music industry. Spotify was actually created as a response to the global piracy problem that greatly affected the music industry at the time through illegal platforms like LimeWire. Apple’s iTunes platform required consumers to purchase each song or album individually, which tended to add up quickly, Spotify provided an app that enabled access to music streaming from as many artists as you want whenever and wherever you want for a low monthly fee. This subscription model has expanded to special student and family plan subscription pricing. Spotify pursued a direct listing on the New York Stock Exchange and is now a public company as of April.

It’s no coincidence that both of these entertainment giants experienced such growth. According to Investopedia, the rise of technology and Software as a Service (SaaS) products greatly contributed to the popularity of the subscription model of business as it permits consistent access to the delivery of a good or service, offering tremendous convenience to consumers. This way, consumers end up paying a smaller amount for their goods and services as the cost of subscriptions is generally less than that of the accumulation of individual purchases.

Vendors tend to prefer the subscription model as well. It essentially generates continuous revenue streams as consumers are automatically charged each month or year until customer cancelation. This consistent source of funds is what has made these companies extremely attractive to venture capitalists and investors. Moreover, while VCs have been rushing to translate subscriptions to just about every other product and service category, entrepreneurs are eager to join the shift from a single sale business model to a recurring revenue one and push to earn said VC backing.

Dollar Shave Club was founded in 2012 and is just one of these companies. The founders set out to replace the generally high-priced disposable razors retailers keep locked up in their toiletry aisles. This company provides new razor blades shipped directly to consumers for a monthly subscription fee. Additionally, Chewy figured out how to include pets in the mix. It sells pet food and supplies and offers reorders for a monthly subscription fee. PetSmart acquired Chewy for $3.35 billion last April according to Inc.com.

A New York City-based cosmetics company known as Birchbox offers a box shipped to consumers that is filled with about five selected samples of beauty products each month for a subscription fee. Rent the Runway enables women to literally rent the runway by ordering designer clothing to their homes and returning it typically after use. The company introduced a subscription model, allowing consumers to keep four items of clothing at a time with unlimited exchanges each month. Another New York City-based startup, MM.Lafleur, launched a weekly box they call the “Bento Box” that delivers polished, professional outfits direct to consumers for every day of the work week. Its target consumers are working women. Companies continue joining the trend and dive right into industries from all directions.

Movie Pass has employed the subscription business model to bring once consistent moviegoers back to movie theaters in an ever so stagnant industry. It has partnered with movie theaters to provide flexible access to watch their movies for a monthly fee instead of purchasing tickets on a per movie basis. AMC recently decided to join the subscription shift and compete against Movie Pass with its own subscription movie pass. While Movie Pass had to readjust its model and raise its subscription fee to keep up with rising movie ticket prices, AMC’s pass has started at a hefty price of $19.95 a month in hopes of maintaining convenience while staying afloat with rising prices.

An extensive report by Inc.com noted that meal delivery kits, which operate primarily on a subscription basis, are not as sustainable as one may believe. For example, more than half of subscribers to  HelloFresh and Blue Apron canceled their subscriptions within one month of signing up and just 20 percent remained after six months.

When it comes to the subscription model of business, customer retention is key in order to maintain the glorious recurring revenue stream. It becomes a massive hurdle and a tremendous cost for these companies’ sales and marketing teams when too much effort is devoted to customer acquisition rather than to product development and expansion.

Convenience coupled with recurring revenue generation has encouraged mutually beneficial relationships between busy consumers and profit-seeking entrepreneurs and VCs. This has welcomed more variations of the subscription model than ever before. What’s next?