Many business owners experience stress due to the waiting-time between providing their product or service and payment of the customer invoice.
A lengthy wait for payment can put huge cash flow constraints on their company, or require potentially expensive forms of finance to keep business operations moving in the right direction.
But that’s not all. As a business owner, invoicing delays mean you could be left with difficult decisions around whether or not to pay yourself. There is also potential for missed business opportunities, for instance hiring staff to help grow your company further.
Plugging the working capital gap
Ensuring regular cashflow is a universal issue that affects long-established businesses as well as brand-new start-ups.
A range of solutions can be considered, including taking deposits from clients or providing interim billing. However, there are many potential advantages in adopting a subscription-based business model.
What is a subscription-based business model?
Instead of a one-off purchase, under a subscription-based business model customers make recurring weekly or monthly payments in exchange for regular access to the company’s products, services, or content.
Examples of businesses that use a subscription-based model are many and varied. They include streaming service platforms like Netflix, computer software services, online publications, subscription boxes, and e-commerce offerings such as Amazon Prime.
Customers are generally given the choice to set the regularity of their payments and the details of what they would like to access. Offering as much choice, value, and flexibility as possible may encourage customers to maintain their subscriptions over a long period of time.
How does a subscription-based business model work?
One of the reasons subscription-based business models are so widely used is because there are many different ways for them to operate.
For example, companies can choose from a wide range of subscription and pricing structures, such as a fixed monthly fee for all services, or tiered pricing that means customers can opt to access premium products for a higher fee.
As a business owner, it’s important to carry out industry due diligence to help calculate your customers’ willingness to pay. You should also ensure that your subscription model meets your pre-defined business goals before implementation.
Additional points to consider include using a reliable billing system, and that customers receive consistent service at every stage of the subscription process.
What are the advantages of a subscription-based business model?
Adopting a subscription-based business model comes with a wide range of potential advantages for both the company and its customers.
Customers benefit from convenience through regular access to products, services, and content from a trusted business. Meanwhile, businesses can enjoy recurring revenue, customer loyalty, and data-driven insights that help them continuously improve their business offering.
More advantages include:
Easier customer acquisition:
being clear about exactly what is included in a subscription will make signing up an easier decision for customers. Digital-age customers are already used to friction-free takeaway ordering and will expect to be able to select their service requirements in a similar manner.
Lower entry bar:
customers can be put off some services due to high annual costs. However, a weekly or monthly payment offering can make these costs more manageable. This will help customers manage their own cash flow whilst reducing price discrimination, which could in turn lead to greater appreciation of the value of the products, services, or content being offered.
Increased customer loyalty and reduced churn:
subscription-based models enable business owners to focus on their subscribers, which can result in a more personalised approach. Customers may also opt to continue their subscriptions if the right levels of flexibility and cost-management are provided, thus boosting the overall value of the business.
Predictable, regular income:
recurring monthly revenue allows for much more accurate and reliable business forecasting. This translates into confidence for business owners when deciding on investment opportunities, whether for new team members or technology. Predictable recurring revenue also makes a business more valuable in the eyes of investors.
Better cashflow management and reduced working capital costs:
a subscription model helps businesses fund the costs of providing client services at the point of delivery. This reduces, or even eradicates, the need for funding streams which delivers cost savings and increased profitability. Equally, bad-debt exposure is reduced by simply stopping customer access if their subscription payment is missed.
Greater business opportunities:
the improved liquidity from regular subscription payments will lead to a much stronger balance sheet, with positive key ratios that convert into improved credit ratings. This may enable the business to seize market opportunities as and when they arise, rather than being continuously held back by financial constraints.
- Scalability for growth: predictability lends itself to scale. In turn, the subscription-based model lends itself to more confident customer acquisition, as the business owner understands that working capital barriers are low and that any associated risks are mitigated.
What metrics are used in subscription-based business models?
Once your business adopts a subscription-based business model, certain key metrics can be used to track progress and help measure the overall health of the company.
These include monthly and annual recurring revenue, customer lifetime value, customer acquisition cost, and average revenue per customer. The latter can be based over a specific time period as and when required.
Analysing which subscription products and services are the most popular can also present new opportunities for upgrading or cross-selling.
Is a subscription-based business model right for every business?
Subscription-based business models offer a wide range of advantages that make them an extremely popular choice for a diverse range of industries and companies.
However, there are some scenarios where such a model may not be the most appropriate solution. For example, if your customers buy products that they only need infrequently, they may not see the benefit in starting a subscription.
It may also be more difficult to make a subscription-based model work if your customer acquisition costs are excessively high, the company serves a particularly niche audience, or your business has to customise every product or service to specific customer requirements.
How to adopt a subscription-based business model
Business looking to adopt a subscription-based model should start by conducting extensive market research. Start by answering the following questions:
Who is your target audience?
What subscription will best meet their needs?
Why would they subscribe?
- How much are they likely to pay?
It is likely that subscription-based models already exist in your industry, so it may be worth finding out more about how they work and how successful they are. You may even be able to highlight something your competitors have missed, further strengthening your own offering.
Based on research findings, you can determine exactly what your subscription will include and set a favourable pricing structure. You may also want to invest in a dedicated subscription-management platform to handle customer billing and payments.
The next step involves marketing and promotional activity to attract subscribers. Options to consider include free trials, introductory discounts, and referral programmes.
Offer consistent value to retain subscribers
It is important to remember that your subscribers will expect a consistent level of value from their weekly or monthly payment. This can be achieved by requesting regular feedback, offering subscriber-only discounts, or introducing products, services, or content exclusively for them.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: