True, subscription business models traditionally cater to digital goods and services. They are more popular among B2C—say, Netflix, Spotify, and The New York Times.
The subscription economy extends its footholds to B2B, particularly product subscriptions, which are expected to have exponential growth in the coming years. Product-as-a-Service—a necessary off-shoot of XaaS, especially since we now live in a climate-vulnerable world traditionally run by a linear economy—is gaining traction in many industries that manufacture or manage durable goods that have an extended life cycle. PaaS is a crucial component of the circular economy, the industry-wide way of tackling our linear consumption. Easily, we came up with ten benefits of a subscription model to support you make that decision for your business.
But first.
Let’s crunch some numbers
Across Europe, 5% of an average individual’s expenses are on subscriptions. By 2025, the subscription economy will have a $481 billion turnover. That staggering figure shows that the subscription economy is here for good.
The benefits of a subscription model are too good to ignore, and passing on it is detrimental and harmful to businesses.
These sectors—mobility, micromobility, baby goods and equipment, furniture, fashion, consumer electronics, heavy machinery, and gym and leisure equipment—can harvest the huge potential of the circular economy. With this valuation in mind, it brings us to the question, where does your business stand?
What is the importance of subscription?
In a nutshell, subscription-based pricing is the best way to go! It attracts more potential customers than any other type of payment. The cheaper your product becomes, however short term it may seem at first glance (and let's be honest here: sometimes excessive prices can quickly become a turnoff), longterm success will always come back around because people want quality service for their money without having an upfront cost that could lead them down some shady path or another - which we all know isn't worth paying extra just so somebody has enough time on their hands later when they don't need what you're selling anymore anyway. Low financial barrier inherent to subscription business model attracts more customers.
Why do customers prefer subscriptions?
The subscription's popularity can be boiled down to three reasons.
1. Convenience
With the tap of one hand, a customer can have everything they want. Subscriptions started with streaming services such as Netflix and Spotify, SaaS products like Trello and circuly ;-), and other DTC products. Subscriptions offer convenience to both customers for the very reasons we mentioned above and to businesses since there is nothing more telling of a healthy and thriving business than a recurring revenue.
2. Usership
The younger the consumer is, the more subscription. Give it five years, the economy will be fueled by subscription, from digital consumption (YT, Netflix, Instragram, Tiktok) to Product-as-a-Service (#Maas, #Daas, #Eaas). Millennials and Gen Z fuel the subscription economy. They are more aligned, learned, and nuanced about the state of the world they inherited, and the burden is on them to reverse the climate crisis we are in, and the shift to usership over ownership is one of their ways in fighting the battle.
3. Sustainability
The push for sustainability is no joke. It becomes one of the core strategies for many businesses, and customers are getting smarter. They do check if the brands they use and consume have long-term sustainability goals.
But.
What stops businesses from adding the subscription business model to their revenue strategies?
Because there is a heartbreaking catch—normal e-commerce shops are not made for rentals, as concisely experienced by circuly’s cofounder Nick Huijs when he launched a subscription business for baby strollers of his own
A limited subscription management solution caters to renting out long-lasting tangible products. But every day, the list of companies piloting a subscription for their products is increasing.
To help you decide whether a subscription business model is good for your business, we give you 10 benefits of a subscription model, necessary for businesses selling or manufacturing tangible consumer products that have more than one life cycle.
1. The subscription-based business model is great for diversifying revenue streams
Next to volume growth and price growth, subscription/rental business models are a great way to diversify your business’ revenue stream.
Revenue stream diversification is plain textbook. The classic don’t put all your eggs in one basket. Big corporations’ revenue expansions come from mergers and acquisitions, volume expansion, price increases, and corporate venturing.
However, the above-stated points are not the only and, more importantly, the best way to diversify revenue. In contrast to M&A and corporate venturing, innovating business models through innovative business development, piloting a subscription business model, for example, is a better and more sustainable approach to diversifying revenue.
2. Subscription model can support you in tapping into new customer segments
In 2021, 81% of homes in the U.K. alone had more than one kind of subscription service, compared with 65% in 2020. Meanwhile, the average American had at least four subscriptions. With many retailers planning to make subscriptions and rentals an essential part of their business strategy shortly, this crucial model is set to become even more competitive.
Car sales have been dropping as well. To address the growing segment that demands flexible usership instead of car ownership, many car manufacturers such as Volkswagen and Jaguar incorporate car subscriptions as one of their business strategies.
With the boom of remote work culture and the growing borderlessness of our world, millennials, Gen Z, and their ilk prefer the flexibility the subscription economy offers.
Unbeatable fact: the younger the consumer is, the more subscriptions they have. Give it five years, the subscription economy will be the economic norm, from digital consumption (YT, Netflix, Instagram, Tiktok) to Product-as-a-Service (#Maas, #Daas, #Eaas).
3. Subscription business model can support your organisation in reaching your sustainability development goals (SDG).
28% of the furniture sold worldwide, a staggering €84 billion market, is manufactured by European Union member states. Awesome, isn’t it? But in Europe alone, 80% to 90% of the furniture waste in Municipal Solid Waste (MSW) is incinerated or sent to landfill every year. Only 10%, sadly, is recycled. With the untapped market, furniture rental is not a novelty. This is a recurring pattern across industries and businesses that must tackle manufacturing and supply chain issues, especially in the looming economic downturn.
That being said, environmental concerns influence consumers’ purchasing decisions. According to research by the European Commission, 56% of European consumers disclosed that ecological issues have a pressing influence on their purchasing decisions. They consume products that are better for the environment. Plus, Europe is pushing for digitalization and circular economy as two of its 2030 Sustainability Development Goals.
Circular economy and digitalization are the backbones of a subscription model, so your business will be on the right side of the fence. Financially. And environmentally.
4. Subscription business unlocks environmental, social, and governance (ESG) goals
According to Ellen Macarthur Foundation, climate emergency and other societal challenges pose substantial investment risks increasingly recognized by the financial sector. With the pressure of the government and ESG-centric businesses, a thriving number of financial institutions and investors identify the circular economy as an important and impactful framework. Thus, financial institutions that provide funding to businesses, in various scales, play a decisive role in catalysing and realising this economic shift.
What does it have to do with start-ups and enterprise businesses? As we have mentioned earlier, the product-as-a-service business model, by nature, supports circular economy as it ends the use-dump product cycle. It aligns your business more with the environmental, governmental, and societal goals many institutional investors look into.
Yes, business-wise, it makes your business more appealing to investors and funding.
5. Recurring billing offers a stable recurring revenue stream.
Time is valuable. It is money. It is irreversible. Well, let’s leave the time-traveling talk for later.
A subscription model allows you to lock in your customers for an extended period—daily, weekly, and even annual subscription. It is your call.
Subscription business revenue escalated by 437% in the past ten years. Companies that launched businesses with circuly, for example, only needed five months to earn a monthly recurring revenue of 10k.
On top of that, businesses that manage their subscription operations see an almost 40% growth rate every month. With a subscription business model, you know exactly how much money you’re going to make each month. That’s because customers are billed on a recurring basis. And as long as you can keep your customers happy and keep voluntary or involuntary subscription churn low, they’ll continue to pay their subscription fees. Of course, starting a subscription business isn’t without its challenges. You’ll need to figure out how to acquire and retain customers. But if you can overcome those hurdles, you’ll be well on your way to success.
6. Subscription billing increases customer loyalty and satisfaction.
Subscription-based pricing is a great way to increase customer loyalty and satisfaction. Customers appreciate the convenience and predictability of subscription-based pricing, which gives them a sense of security, knowing they will always have access to your product or service. In addition, subscription-based pricing eliminates the need for customers to constantly keep track of their usage, leading to billing mistakes and frustration. As a result, subscription-based pricing is a win-win for businesses and customers.
Based on research, nearly 70% feel more connected with businesses that offer them a direct subscription experience than those companies that only provide a one-time transaction experience. What is the implication of this data to your business transitioning to a subscription model? Less money is spent on remarketing and retaining existing customers, and you can focus more on other aspects of your business.
7. Subscription revenue creates better upsell and cross-sell opportunities.
One of the benefits of having a subscription business is that you have more opportunities to cross-sell and upsell products and services to your customers. For example, let’s say you have a parent customer who is subscribed to your stroller. You know that they’re interested in getting a kid’s bike, so you could offer her a discount on your stroller and kid’s bike subscription. Or, if you have a customer who is subscribed to your gym equipment, you could offer him a discount on your new strength training machines. By offering discounts and promotions on products and services your customers are interested in, you can increase your sales and grow your business.
8. Subscription makes it easier to manage customer accounts.
The subscription-based business model has a lot of advantages. For one, it’s easier to manage customer accounts. All customers are tracked in one place, since thankfully, there is now software solely dedicated to subscription management for product-as-a-service business models. This makes it easy to keep track of who’s paying and when and identify any potential areas of churn.
Since it is recurring transaction, the vendor-user relationship is ongoing. Sellers have multiple opportunities to create a lasting relationship with the customer, and in the long run, spend less in acquiring or retaining customers.
From an account management perspective, when customers pay on a recurring basis, they are more likely to convey issues to the vendor because they usually want to continue using the product. This makes it easier to manage customer accounts because the customer provides direct feedback and is more involved with the product.
Subscription businesses are also more predictable, which makes planning and forecasting much simpler. In short, subscription models have a lot of advantages that make them appealing to businesses and customers!
9. Subscription business generates demand for new products due to low financial barriers
Subscriptions help in generating demand for new products by making it easier for customers to try out new products with low financial barriers.
Paying $30 a month is way more appealing than paying $600 in one go. High prices create a barrier between your product and the consumer. The subscription business model is the perfect solution to break that barrier.
Plus, a low financial barrier reduces the risk and uncertainty in trying out a new product. If the product is good or needs improvement, instantly, your business will receive real-time feedback from the customer.
Suppose the product, unfortunately, does not meet the user's demands. In that case, the consumer is not stuck with it for good, and your business can further develop the product with the inputs provided by the customer.
10. Subscription model makes your business competitive in the market.
Consumers are demanding sustainable and convenient solutions. As a result, your competitors have either already launched or are launching such a business model.
75% of millennials are eco-conscious to the point of changing their buying habits to favor environmentally friendly products. 74% of Germans believe that environmental pollution is a crucial concern, and 69% fear climate crisis. Accordingly, 68% of Germans demand companies act and conduct their businesses sustainably. Petra Süptitz, a sustainability and consumer insights expert, said that sustainability is deeply anchored in German’s personal values.
Meanwhile, in the US, millennials make a significant contribution to the $1 trillion parents spend annually on raising their children. One of their pressing demands? Sustainability.
To address this growing demand for sustainable consumption, businesses must rethink their strategies.
With many retailers planning to make subscriptions and rentals a key part of their business strategy, this crucial model is set to become even more competitive.
Conclusion
The subscription economy has grown almost five times faster than the S&P 500. It is the present and the future of the circular economy. Adding the subscription-based business model to your existing revenue streams keeps your business in sync with how industries are conducted and how consumers consume.
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