Would you pay to own a product if you could access it without owning it? The answer most likely is going to be a no.
The customers think the same way. Hence, we are seeing a shift toward subscription economy – where, instead of owning exclusive rights to the product, customers are preferring to access the products through subscription. Consider Netflix – where you don’t have to buy a film to watch it, but rather pay a subscription fee and gain access to unlimited media content.
The Reasons For This Shift In Consumer Preferences Are Obvious:
1. They Get To Experience Products at Lower Costs
Subscriptions frequently present an economical alternative to traditional purchasing. The ability to access a range of products or services at a fraction of the cost of ownership appeals to budget-conscious customers seeking value without compromise.
2. They Gain Easy Access To a Variety Of Products And Services
The allure of hassle-free convenience cannot be overstated. Subscribers revel in the simplicity of having products and services at their fingertips, obliterating the need for continuous repurchasing decisions.
3. Subscription Is a Low Investment Decision
Committing to a subscription requires a relatively modest initial investment compared to traditional outright purchases. This low entry barrier empowers consumers to experiment with new offerings, confident that they aren't putting too much on the line.
Why Subscribe To The Subscription Economy?
The subscription economy's trajectory has been relatively swift. According to a report by McKinsey and Company, in 2000, a mere 1% of companies offered subscription services. Fast-forward to 2025 and this figure is projected to reach an astonishing 50%. Consumers are actively embracing this shift too. In 2000, individuals subscribed to an average of 2.2 services. By 2023, that number escalated to a staggering 10.6 subscriptions per person.
Exponential Rise in Business Valuation
A Forbes article underscores a significant disparity between two companies both generating $100 million in revenue. One company relentlessly chases sales each month to sustain revenue, while the other thrives on a subscription model with customers paying $49.99 monthly. This recurring revenue structure can inflate the latter company's valuation up to eight times higher than its counterpart.
The Power of Recurring Revenue
Central to the subscription economy is the concept of recurring revenue. Unlike traditional models reliant on sporadic transactions, subscription-based enterprises enjoy a consistent income stream. Imagine customers contributing a set fee every month—this steady influx empowers businesses to predict cash flow, make informed decisions, and fuel strategic growth.
Industries Riding the Subscription Wave
While names like Netflix, Spotify, and Amazon are synonymous with subscription models, this trend permeates a myriad of industries. From software and beauty to fitness, books, and even wine, numerous sectors are capitalizing on the potential of recurring revenue. Whether it's meal kits, language learning platforms, or pet supplies, the subscription model has become the bedrock for businesses aiming for sustained success.
Key To Thriving In The Subscription Economy – Keep Them Coming Back
Subscription-based products thrive on getting the user hooked to them – this makes them religiously renew their subscription on a consistent basis, while the business gets to earn a steady stream of revenue.
The hook model by Nir Eyal shows the principles at the core of habit-forming products that get users hooked:
1. Trigger
External Triggers: These are stimuli from the user's environment that prompt a specific action. For subscription-based digital products, these triggers could manifest as eye-catching advertisements, engaging social media posts, compelling email campaigns, or personalized recommendations based on user preferences.
Internal Triggers: These are emotional or psychological cues that arise within the user, driving them to take action. In the context of subscription-based products, internal triggers might include feelings of boredom, loneliness, or the need for entertainment, motivating users to interact with the product.
2. Action
This phase centers on the behavior that the user performs to address the trigger. For subscription-based digital products, the corrected action might involve the following sequence:
3. Variable Reward
Here, users find gratification or value as a result of completing the preceding action. Subscription-based digital products can incorporate variable rewards by providing a spectrum of benefits to users. These rewards could encompass exclusive content access, personalized recommendations, enhanced features, social recognition within the platform, and more.
4. Investment
This stage revolves around encouraging users to invest resources—whether time, effort, money, or data—into the product. Increased investment enhances user commitment. In the context of subscription-based products, investment strategies may involve:
If a user already has habits around an offering, then the loop may be shortened – where only a trigger may be enough to make the prospect invest.
Implementing a Subscription-Based Revenue Model
There are several ways to buy your ticket to the subscription economy. Here are few that will work for most businesses;
1. Making a Shift to Subscription Model
Imagine a software company that previously sold its software as a one-time purchase. By shifting to a subscription model, they can offer continuous updates, support, and new features for a monthly fee, fostering long-term customer relationships.
2. Adding Subscription-Based Services
Consider the Otis Elevator Company's transformation. The company originally sold elevators and supporting equipment. However, they decided to leverage IoT and analytics to offer Otis One, a subscription-based elevator management platform. By providing real-time insights and proactive issue predictions, Otis now generates 55% of its revenue from services and 45% from new equipment sales.
3. Creating a New Product Based on Subscription Model
Though shifting your existing product to a subscription model, and adding a subscription-based service to complement your already established offering are both extremely effective, they may not work in all scenarios. To thrive in a subscription economy, you may have to create a product from scratch. A tech startup could develop a product or a service that allows users access through subscription.
Prevalent Applications of Subscription Model in Digital Product Development
SaaS
SaaS refers to cloud-based software that is hosted online and is accessible to users over the Internet. Instead of downloading software on your desktop or business network to run and update, you access an application via an internet browser.
With SaaS, businesses typically charge customers a recurring fee (usually monthly or annually) to access the software. This model provides a predictable revenue stream for companies. Examples include Microsoft 365, Salesforce, and Dropbox.
PaaS
PaaS provides a platform and environment for developers to build, deploy, and manage applications without the complexity of building and maintaining the infrastructure typically associated with developing and deploying an app.
Like SaaS, PaaS providers generally charge on a subscription basis. This could be based on the resources used, features accessed, or a flat fee. The pricing can also vary depending on the number of developers using the platform or the amount of computational resources consumed. Examples include Google App Engine and Microsoft Azure.
CRM
CRM software providers, especially those offering cloud-based solutions, charge businesses a subscription fee to use their platforms. The fee could be per user or based on the tier of service chosen. Salesforce, HubSpot, and Microsoft Dynamics are popular CRM platforms that use this model.
eCommerce
While traditional eCommerce generally involves direct sales, there are subscription-based models in this space too. Businesses can charge customers on a recurring basis for products or services. Subscription boxes (like monthly beauty or snack boxes) are examples. Additionally, some platforms charge sellers a monthly fee for hosting their online stores or providing tools and features to enhance their sales.
Conclusion
Both individual consumers and business organizations are preferring subscription-based products and this offers businesses an opportunity to earn recurring revenues and thrive in the subscription economy. However, to do so, businesses must make a transition in their offering, and incorporate subscription-based models.
Among all the products, digital products such as software, mobile apps, and games can successfully work on subscription models. If you plan to launch a subscription-based digital product or enhance one, consider partnering with Cubix – a leading digital product development company with an impressive portfolio filled with top-notch projects.
Share your idea with us and let’s build a product that will help you thrive in the subscription economy.
