The subscription: an unavoidable part of revenue recurrence

OUR ANALYSIS


Principle of operation The subscription business model consists of the provision by a company of a product or service to its customers (subscribers) in exchange for a fixed and regular payment. When the user decides to unsubscribe, he loses his access to the service or product.


Related concepts: Subscription, Leasing, Renting, Recurring revenue

Advantages of this business model Advantage for the seller The subscription allows the company to ensure regular income. This provides a high degree of financial stability because it allows for much more reliable forecasts of future revenues. It also helps to reassure potential investors. Better user retention: Subscription ensures better user retention because it allows for a better understanding of consumer expectations by responding to their problems and analyzing the data generated by them. In addition, the subscription allows for targeted marketing to customers whose data has been analysed. Better management of production: the subscription allows to ensure stability in the number of consumers and to forecast consumer trends more accurately. This stability allows for better anticipation of production needs. Advantage for the buyer For the user, the subscription business model also offers several advantages. Indeed, the subscription offers the user great ease of use, particularly with regard to invoicing, as everything is automated and there are no actions to be carried out. The subscription also offers the user a comfortable user experience, as it often guarantees that he can terminate his subscription as soon as he wishes when the offer no longer suits him or when he finds it cheaper elsewhere. Subscription is also beneficial for the user because it avoids having to buy and own products or services that are of no long-term use to them. Sellers are obliged to continuously provide quality products because the subscription can be suspended at any time. Disadvantages of this economic model : Disadvantages for the seller : First of all, to make his subscription offer attractive, the seller has to make significant investments before launching his offer to its customers. Indeed, a company offering beauty product boxes cannot be attractive if it only offers a few beauty products. Then, the subscription system obliges the seller to guarantee a sufficient level of quality in order to keep its subscribers satisfied. Indeed, since the subscription is easily cancelled, if the quality of the content drops and no longer meets the customer's expectations, the customer will not hesitate to terminate the subscription. Disadvantages for the buyer : Even if this trend is downward, many subscriptions involve a more or less long-term commitment that can block the buyer if he wants to change. If the subscription seems to be a good deal, it can become more expensive in the long term than a simple purchase, especially if the use of the product made available is low or moderate. For example, a subscription for unlimited access to a sports hall seems attractive and practical, but isn't it cheaper in the long term to pay for access to the unit? When the buyer takes out a subscription, he becomes "dependent" on the seller because he does not own the product or service from which he benefits. This is because a Spotify user will be forced to continue his subscription because if he terminates his subscription he will lose all of his recorded music and playlists. Evolution of the model over time The subscription model began in the 1960s when newspapers began to allow their readers to pay periodically for access to their magazine rather than having to pay for each newspaper. Impact of digital The business model experienced a real boom from 2011 onwards with the democratisation of the internet, which extended the sectors impacted, allowing the development of companies such as Netflix or Spotify. Impact of the sustainable revolution The sustainable revolution will also have an impact on this business model as it favours the use rather than the ownership of assets. Thus, the model contributes to a change in the way of consuming towards a more sustainable model. 4. Variations of the model Subscription for a fixed product or service: In this variant, the user pays a subscription giving him unlimited access to the services or products made available by the seller as long as the payment is made. This variant concerns subscriptions to newspapers, streaming services, boxes sent periodically. Subscription for discounts: In this type of subscription, the user pays a certain amount periodically which gives him access to advantageous prices for the products or services he is interested in. This is the case, for example, with the SNCF, which provides its customers with monthly or annual subscriptions in order to obtain advantageous rates when reserving trains. Subscriptions and extra payments: In this variant, the user pays periodically for limited access to the service or product that interests him/her. When the user exceeds the number of permitted uses, he or she is charged an extra fee. This is the case, for example, with telephone subscription providers who charge additional costs for calls made abroad or when the call or internet usage quota is exceeded. Value chain & types of stakeholders The supplier of the solution or product: This is the company with which the customer is in direct contact. It is thanks to this company that he has access to the product or service for which he is paying the subscription. The supplier receives the revenues generated by the subscription and also owns the data generated by its users. The servers: in the case of streaming or internet transactions, they are the ones used to provide the bandwidth. They must be secure in order to guarantee the security of users' personal and banking data. The suppliers: they are the ones who provide the solution provider with the products made available by the subscription. The beneficiaries (streaming): They are the ones who provide the solution provider with the elements used by the users (music, films, etc.). They may receive fixed income (payment of access rights) or variable income (depending on the number of viewings/listening sessions). Invoicing services: They are the ones who make the payments. Reference companies Netflix is a streaming platform that was created in 1998. The company started by sending films by post with a subscription system before relying on the development of streaming to digitize its offer. Today, Netflix represents 15% of the world's internet traffic, bringing together no less than 125 million paying users who generate total revenue of 15 billion dollars. Spotify is a music streaming platform founded in 2006 in Sweden. Today the company has more than 100 million subscribers and a turnover of 5 billion dollars. Dollar shave club is a razor seller created in 2011 which has decided to develop as a "club" where you have to pay a subscription to buy the products sold by the company. In 2016, the company was bought by Unilever for 1 billion dollars. Today its annual revenues are estimated at over $200 million. Wired is a monthly newspaper created in 1993. Today the company has a turnover of 18 million dollars.

Some key figures

  • By 2022, 53% of all software revenues will be generated by a subscription model.

  • By 2023, 75% of companies selling their products directly to consumers will offer subscription services.

  • 15% of online shoppers have signed up for one or more of the subscriptions to receive products on a recurring basis.

  • 4 out of 10 consumers agree that transport is necessary, but possession of a vehicle is not.

  • Companies that have adopted the subscription business model are increasing their revenues about 5 times faster than traditional peers.

  • The automobile subscription market should grow by 71% between now and 2022. Source: PYMNTS.com

  • 69% of households now subscribe to one or more video streaming subscription services.

  • Netflix: 2019: $20.2 billion in revenue

Products or services adapted to this model Thanks to the digital revolution, more and more sectors are becoming adapted to the subscription business model. Indeed, from the transport sector to the cosmetics sector, via electronic equipment, everything can now be offered in the form of a subscription. We can, for example, mention just a few of them:

  • Newspapers,

  • The telephones

  • The cars

  • Beauty products

  • Restaurants

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