Innovation Tactics

Develop innovation ideas you can be proud of

  • Premium Products
  • Free resources

December 16, 2016

Subscription business model: examples and ideas

The subscription business model has long existed for magazines and newspapers. But in recent years it has found its way into many industries. It has become the dominant business model in some of them. It has its merits in replacing ownership with access in some cases. In other cases it offers convenience. And yet in other cases, it provides a  membership proposition instead of a one-time transaction.

It is remarkable how many industries now use the subscription business model:

Consumables, staples, etc

  • Dollar Shave Club: Shaving and grooming products sent to your doorstep on a subscription basis (monthly or bi-monthly).
  • Birchbox: A range of grooming products for women and men on subscription basis delivered to your home.
  • Blue Apron: a subscription-based delivery of food (all being ingredients to a new recipe) several times a week. As with many subscription services you can skip weeks.
  • Sightglass Coffee and Starbucks Reserve®: coffee beans delivered to your home.
Sightglass-coffee-subscription-business-model
Sightglass Coffee subscription model, options on coffee type, quantity delivery frequency
  • Amazon Subscribe&Save: Over 100,000 products (in the US store) can be used on a regular schedule basis. Subscribers get savings in the vicinity of 15% with the subscription program. A pretty compelling offer.
  • Walmart started a trial subscription service called “Goodies” which they discontinued after about 1 year (in 2013).

Binge read later: don’t have time to read now? Download our ebooks on the Subscription Business Model at the end of this article and get a knowledge burst later (or click this link).

Clothing

  • Trunk Club: Men’s clothing, subscribers get sent a selection of clothes put together by a (human) style guide after an interview. You have 10 days to return it. What you keep, gets billed to you. They are targeting guys who like to dress well (read: are willing to spend well) but hate to go shopping.
  • Wittlebee: a subscription based service for kids clothing.
  • Kent and Lime, Outfittery, MeUndies are other clothing start-ups using a subscription model. Kent and Lime are testing an algorithm that tries to determine the preferences of their customers.

Books, magazines

The subscription business model has been the standard business model for magazines and newspapers forever. Later it extended to other media, such as books and CD, DVD. (Fortunately, this has evolved from the dodgy late night TV ads for monthly book club subscriptions to much better things now.)

  • Amazon’s Kindle Unlimited: unlimited reading of 1 million titles, including books (on the Kindle or the Kindle app on any tablet/phone), audiobooks, magazines on an ongoing subscription basis.
  • Scribd: offering monthly subscriptions which includes (at the time of writing) 3 books, 1 audiobook per month plus access to other documents.
  • Oyster another book subscription service that has closed down with many of their employees now working for Google. Who knows what Google’s plans are …
  • JSTOR: A not-for-profit online library aggregating over 2,000 academic journals. It offers access on a monthly (or annual) subscription basis.
  • Many financial portals offer free access to a limited part of their articles but require a subscription for the majority of their core offerings (Barrons, CNN Money, The Street and many others). These are often the store-front for investment banks or brokerages.
  • Specialised magazines: Harvard Business review, Bloomberg Businessweek and thousands more.
  • Newspapers: Most traditional newspapers have moved from their offline subscription model to the online equivalent: Wall Street Journal, Financial Times, NYT and much more, with some offering free access (e.g. Bloomberg).
Kindle-unlimited-subscription-business-model
With access to over 1 million titles Amazon’s Kindle Unlimited puts the bar very high for other book subscription model businesses

Despite providing a large archive of past articles and an excellent reputation some of these old-established newspapers and magazines are likely going to feel the pressure from the bundled offers, especially Amazon. It is not unlikely there will be an emerging mass of magazines (of all flavours and genres) and newspapers that will be willing to be hosted under the Amazon umbrella for increased chances to grab market share from the big players. Very specialised offerings like the (not-for-profit) JSTOR, a library portal for academic publications, may be exceptions.

Music, TV, movies

  • There is an almost endless list of internet radio stations of which many are free (paid for by advertising). Often the ad-free version of the station comes at a subscription pricing.
  • Spotify: a music streaming offering is available for free but only with a limitation feature set and ads included. This business model is called fremium and can, under the right circumstances, be a great companion to the subscription model. After coming late to the party Apple has launched their own Apple Music streaming offering.
Spotify-freemium-vs-premium-business-model-pricing
Spotify’s freemium vs premium. When done right freemium is a great companion business model, e.g. for its direct network effects
  • Pay/cable TV: TV used to be free in many countries. By now only the pretty old stuff is available on free TV. A majority of offerings are in subscription packages. These are often combined with other stuff, e.g. broadband internet, games, various bundles of genres.
  • Netflix started as a subscription offering to rent out DVDs by mail and expanded their offerings from there. They are offering streaming with no need for set-top-boxes. Netflix has been growing fast (now in 190 countries) with their simple (and reasonable) pricing/subscription model. When I checked for this article I found 26 options for Foxtel compared to 3 for Netflix. Their growth allowed them to add a vast range of shows to their offering.
  • Amazon Prime: Gives you access to selected TV streaming products, 2 million songs, playlists, thousands of books and magazines (a smaller subset of the Kindle Unlimited subscription), online storage and saves you the delivery costs for your other purchases. All this comes at a reasonable monthly subscription (or on annual basis at lower cost).

Amazon Prime is interesting in that it combines a heterogeneous mix of offerings. It gives access to a wide range of products which, however, are only a subset of their overall product range (thousands of books/magazines of the total of over a million). This is combined with free-of-charge delivery (which was the originating offer) and so on.

If your company also has a wide range of dissimilar products, Prime’s success should be an encouragement for you to mix things up. Walmart in comparison stays – literally – within the box: their Beauty Box only contains toiletry products (and it seems to be their only subscription product at this stage).

Software & apps

  • Like many other software companies Adobe now offers all their Creative products on a subscription basis. This is a huge shift from just a few years ago. There are compelling incentives for individuals and businesses to take up one of these offers (despite in-built switching barriers). Adobe offers individual products as well a bundle of all their products.
Adobe-subscription-business-model-pricing1
From many hundreds of dollars per software purchase in the past to a $23 dollar subscription a month, Adobe’s subscription business model. Includes significant discounts for the “all apps” bundle.
  • Even mighty Microsoft are offering their Office products on a subscription basis.
  • Salesforce, like all cloud-based applications (Dropbox, Evernote and what ever you are looking for) offer their products on a subscription basis. Almost all Software-as-a-Service (SaaS) are based on subscription business models (any exceptions?).
  • This is similar with Infrastructure-as-a-Service (IaaS) such as computing power. However, there is a fine line to pay-per-use. E.g. Amazon Web Service allows you to ramp up and down your requirements instantly, which falls into pay-per-use business model rather than a monthly subscription. It’s worth keeping these fine differences in mind when you think about your own opportunities. They might make a profound difference to your customer and your revenues.

Many more

  • Internet service providers, mobile phone providers and other utilities also offer subscription packages for a certain amount of usage (and a penalty rate pay-per-use if you exceed your monthly usage). Others use an access fee plus pay-per-use. Again there are different options which may incentivise certain users. It can be worthwhile experimenting on this front. These business models also need to align with your cost structure (e.g. the cost of maintaining physical owned infrastructure) or input materials (which may be able to be hedged temporarily but not forever.)
  • Cars and other durable goods: there are an increasing amount of offerings opportunities for durable goods, most notably cars. Business models typically cover (monthly/annual) subscription plus pay-per-use or a one-off registration plus pay-per-use. Zipcar was one of the early car “sharing” providers but many have followed suit. This includes manufacturers, such as BMW’s DriveNow.
  • Increasingly, in urban areas you might find many local services being offered on a regular/subscription basis, such as lawn moving, snow ploughing, dog walking and more.
  • Fitness and health clubs also operate on a subscription basis, even though these are membership business models which again have some subtle differences to subscriptions business model.

Win-win(?) …

The subscription business model has already entered many consumer industries. And you will understand there are differences depending on the product and other factors.

This business model is the de-facto standard for cloud-based end-user software but also taking hold in business-to-business software. The benefits are quite obvious here. The wide availability of broadband fast internet has enabled to cut the distribution costs, removed middlemen (retailers).

Further on, the lumpiness of revenues has been smoothened. Imagine Microsoft assumes the next version of their Office Suite will do at least as well as the previous one (and then some). But in reality, there are good/successful versions of Office and then there are crappy (performing) ones. This is a huge risk to their R&D CapEx investments (and ROIC) and disappointing for their investors as well.

Revenue from subscription business models are generally more stable and allow the earnings to be allocated to more frequent (but smaller) upgrades. Marketing costs for the usual song-and-dance for each new product should come down. Not having to support decade-old versions of products (such as operating systems) is another benefit.

Whilst we don’t know the exact numbers it seems that the benefits for the software subscription business models have been shared between the companies and the customer (though I have my own guess who captured the larger part).

… may pose a challenge for some

While this sounds intuitively right for some industries (such as cloud-based software), it may not necessarily do this for some others.

Business models like DriveNow may work (only) due to the idiosyncrasies in automotive accounting (what constitutes a “sale,” depreciation and determination of residual value). It will remain to be seen how this model will fit into the overall transforming personal mobility industry (with self-driving cars, electric vehicles, etc).

Even some of the larger start-ups like Dollar Shave Club and Spotify are in a constant struggle to make profits. Spotify has 100 million users of which 40% are paid subscribers but they are still to make profits ($173 loss on ~$2bn revenue).

Spotify-profit-revenue
Despite 40 million paying subscribers Spotify shows how hard it is to be profitable in the music industry

I have deliberately listed a broad range of subscription providers in the list above. Next week I will talk about the characteristics of the subscription business model.


Your opportunity

There is a tug-of-war between the old established brick-and-mortar providers and new start-ups that try to capture a niche in the market place.

It will interesting to follow how the smaller players will do (take e.g. Sunglass Coffee) compared to the larger players (Starbucks). And how the specialised large players (like Starbucks) will do compared to the giants (like Amazon). At the end all three offer coffee on subscription basis (but Amazon offer – obviously – much more). In this case all three providers have brick-and-mortar stores and the subscription model is additional revenue.

But what about those that have a pure internet presence?

Take action now & boost your innovation skills

Where does your company fit in?

I will elaborate more on the subscription business model next week. For now, assess where you stand. Do a similar exercise as I have done here by looking at your industry and even adjacent ones if they compete in the same market.

Subscription-business-model

Download the worksheets & examples as pdf (click here)

  1. Are there any subscription business models in your industry?
  2. What are their offers? If you offer anything on a subscription basis what is it? How do your offers compare to your competitor’s?
  3. Are there new players who try to capture a small niche within your industry? Where do they want to expand to?
  4. Are there technological trends that may enable a subscription service for your industry if it is not yet a business model?

This is a great starting point. We will expand on your answers the next week in order to identify the opportunities, refinements and potential outlook for your industry.


One more chance to take a peek at what I believe will add more value to your innovation journey than anything else that I have published … (click here)


On a parting thought

The subscription business model has entered many industries in the last 5-10 years (putting aside the traditional users of it, being newspapers, magazines). There is still a lot of movement, momentum seems to be building up. With reduced short distance transport costs (such as drones and various forms of autonomous vehicles) it will become more interesting for lower value goods (consumable and durable) to move to a subscription business model.

Many start-ups have been leading the way so far. They have used the subscription business model as a novel (unique) positioning. The best that some of them can hope for will be to share TrunkClub’s fate. TrunkClub have been taken over by department store giant Nordstrom for $350m in 2014. But in November 2016 Nordstrom took a 50% write down on TrunkClub due to (ongoing) lack of profitability. By then TrunkClub’s angel investors, venture capitalists and founders would have achieved their goal of getting fantastic returns on their investment.

The Dollar Shave Club has been taken over by Unilever for $1b while not being profitable. However, they have built a brand and captured a 5% market share in the US but in this case, it seems a large share of the benefits have been captured by the consumer.

I believe there are large opportunities for established companies (remember the likes of Microsoft, Adobe, Amazon). And now read about 12 Ways to make the Subscription Business Model work that helps  you identify more opportunities for your company


Creative Commons License
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.


If you liked this article, please share:

Article by Dr Murat Uenlue / Subscription Business Model

About Dr Murat Uenlue

Murat Uenlue, PhD ("IoT"), Program Management Professional (PgMP), Project Management Professional (PMP). Project Manager of multi-billion dollar projects and business cases. Current and former Advisor and Consultant to great start-ups. Best way to contact me is LinkedIn (click here).

We write for

We share MBA-level innovation and business management knowledge with Entrepreneurs, Founder-CEOs, App Creators, Startups, Professionals, Executives, MBA Students/Graduates, Business School Professors and other smart people.

We share world-leading content on:

  1. The Platform Business Model
  2. The Subscription Business Model

In-depth Knowledge

Follow us!

follow us on LinkedIn where we share new articles and resources:


Free downloads

About me

Dr Murat Uenlue, PgMP, PMP
– PhD in System Development (“IoT”)
– Program Management Professional (PgMP)
– Project Management Professional (PMP)
– Program managed innovative multi-billion dollar projects & multi-billion dollar business cases
– Founder-owner Innovationtactics.com
– VP Global Sales and Marketing at an amazing start-up (to be disclosed soon)
– Current and former Advisor to start-ups ranging from early phase companies to multi-million user platforms
More about me here

Wow – I highly recommend the @InnoTactics blog that I just stumbled across – awesome MBA-level analysis of companies like Uber, Airbnb, Tripadvisor, etc – https://t.co/UshELRoMYu

— Joe Robison (@josephrobison) January 1, 2019


This is one of the best guides to platform businesses I’ve ever seen. Wow.

Incredible piece of work by ⁦@InnoTactics⁩ https://t.co/wyRD3NC2oj

— Adam Wilk (@AKWilk) October 5, 2018

About us

About us

Contact

Privacy

Terms & Conditions

Resources

Get access our free downloads

Click here if you have already created an account

Premium Products

Latest articles

  • Can the Value Chain help App creators? Example Apple News
  • What exactly is disruptive innovation? What’s the playbook? Plus example Airbnb
  • How to create a Sharing Economy App and its business model
  • Airbnb Business Model Canvas

© InnovationTactics.com - all rights reserved
Privacy --- Terms & Conditions