The subscription business model
is a business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazine
Magazines, periodicals, glossies or serials are publications, generally published on a regular schedule, containing a variety of articles. They are generally financed by advertising, by a purchase price, by pre-paid magazine subscriptions, or all three...
s and newspaper
A newspaper is a scheduled publication containing news of current events, informative articles, diverse features and advertising. It usually is printed on relatively inexpensive, low-grade paper such as newsprint. By 2007, there were 6580 daily newspapers in the world selling 395 million copies a...
s, but is now used by many businesses and websites.
The first UK subscription newsletter was the London Property Letter
The London Property Letter published by Sylvester Stein was one of the first newsletters in the UK. It was a mail-order magazine sold on subscription to anyone looking to invest in property in the London area. It highlighted up-and-coming areas and advised on purchase and rental...
launched in the early 1960s by Sylvester Stein, previously editor of South Africa's Drum
magazine. The London Property Letter
utilized the standing order
A Standing Order is an instruction a bank account holder gives to their bank to pay a set amount at regular intervals to another account. The instruction is sometimes known as a banker's order....
payment where the subscriber signed up for a continuous annual payment from his or her bank account. Around the same time, the Consumer's Association launched Which?
magazine using the same standing order techniques.
In 1982, Running
magazine was launched by Sylvester Stein
Sylvester Stein is a writer, publisher and athlete.Stein grew up in Durban, son of a mathematics professor. His sister and brother are both life scientists....
to cater for the new jogging and running craze that had arrived from the USA. The standing order subscription model was adapted for use on this and other consumer news trade magazines by Peter Hobday, appointed publishing director of Running magazine
by Sylvester Stein in 1982. Peter Hobday increased the subscription sales of Running Magazine
to become the highest circulation title the athletics field. Running
magazine eventually evolved into Runner's World
Runner's World is a globally circulated monthly magazine for runners of all skills sets, published by Rodale Press in Emmaus, Pennsylvania, in the United States...
Rather than selling products individually, a subscription sells periodic (monthly or yearly or seasonal) use or access to a product
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
or service, or, in the case of such non-profit organizations as opera companies or symphony orchestras, it sells tickets to the entire run of five to fifteen scheduled performances for an entire season. Thus, a one-time sale of a product can become a recurring sale and can build brand loyalty
The American Marketing Association defines brand loyalty as:# The situation in which a consumer generally buys the same manufacturer-originated product or service repeatedly over time rather than buying from multiple suppliers within the category .# The degree to which a consumer consistently...
. It is used for anything where a user is tracked in both a subscribed and unsubscribed status.
A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...
s to some types of organizations, such as trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s, are also known as subscriptions.
Industries that use this model include mail order
Mail order is a term which describes the buying of goods or services by mail delivery. The buyer places an order for the desired products with the merchant through some remote method such as through a telephone call or web site. Then, the products are delivered to the customer...
book sales club
A book sales club is a subscription-based method of selling and purchasing books. It is more often called simply a book club, a term that is also used to describe a book discussion club, which can cause confusion.-How book sales clubs work:...
s and music
Music is an art form whose medium is sound and silence. Its common elements are pitch , rhythm , dynamics, and the sonic qualities of timbre and texture...
sales clubs, cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...
, satellite television
Satellite television is television programming delivered by the means of communications satellite and received by an outdoor antenna, usually a parabolic mirror generally referred to as a satellite dish, and as far as household usage is concerned, a satellite receiver either in the form of an...
providers with pay-TV channels, satellite radio
Satellite radio is an analogue or digital radio signal that is relayed through one or more satellites and thus can be received in a much wider geographical area than terrestrial FM radio stations...
, telephone companies, cell phone companies, internet providers, software providers, business solutions providers, financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
firms, fitness clubs, and pharmaceuticals, as well as the traditional newspapers, magazines and academic journal
An academic journal is a peer-reviewed periodical in which scholarship relating to a particular academic discipline is published. Academic journals serve as forums for the introduction and presentation for scrutiny of new research, and the critique of existing research...
Renewal of a subscription may be periodic and activated automatically, so that the cost of a new period is automatically paid for by a pre-authorized charge to a credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
or a checking account. In the U.S., recurring card charges must be disclosed in writing to the cardholder at least 10 days before each
A common model on web sites, colloquially becoming known as the freemium
Freemium is a business model that works by offering a product or service free of charge while charging a premium for advanced features, functionality, or related products and services...
model, is to provide content for free, but restrict access to premium features (for example, archives) to paying subscribers. In this case, the subscriber-only content is said to be behind a paywall
or - in a scholarly context - closed access
, which alludes to the alternative model of open access
Open access refers to unrestricted access via the Internet to articles published in scholarly journals, and also increasingly to book chapters or monographs....
. The razor and blades business model (also called the bait-and-hook model) is an attempt to approximate the subscription model, but with a formal agreement by both parties.
Types of subscriptions
There are different categories of subscriptions:
- A subscription for a fixed set of goods or services, such as one copy of each issue of a newspaper or magazine for a definite period of time.
- A subscription for unlimited use of a service or collection of services. Usage may be personal and non-transferable, for a family, or under certain circumstances, for a group utilizing a service at one time.
- For example, a subscription to a rail pass by a company may not be individualized, but might permit all employees of that firm to use the service. For goods with an unlimited supply and for many luxury services, subscriptions of this type are rare.
- A subscription for basic access or minimal service plus some additional charge depending on usage. A basic telephone service pays a pre-determined fee for monthly use but may have extra charges for additional services such as long-distance calls, directory services and pay-per-call services. Often referred as Freemium Business model.
Effect on the vendor
Businesses benefit because they are assured a predictable and constant revenue stream from subscribed individuals for the duration of the subscriber's agreement. Not only does this greatly reduce uncertainty and the riskiness of the enterprise, but it often provides payment in advance (as with magazines, concert tickets), while allowing customers to become greatly attached to using the service and, therefore, more likely to extend by signing an agreement for the next period close to when the current agreement expires.
In integrated software solutions, for example, the subscription pricing structure is designed so that the revenue stream from the recurring subscriptions is considerably greater than the revenue from simple one-time purchases. In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any specific issue. This reduces customer acquisition costs, and allows personalized marketing
Personalized marketing is an extreme form of product differentiation. Whereas product differentiation tries to differentiate a product from competing ones, personalization tries to make a unique product offering for each customer.-Internet marketing:Personalized marketing had been most practical...
or database marketing
Database marketing is a form of direct marketing using databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes...
. However, a requirement of the system is that the business must have in place an accurate, reliable and timely way to manage and track subscriptions.
From a marketing-analyst perspective, it has the added benefit that the vendor knows the number of currently active members, since a subscription typically involves a contractual agreement. This so-called 'contractual' setting facilitates customer relationship management
Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
to a large extent because the analyst knows who is an active customer and who recently churned.
Additional benefits include a higher average customer lifetime value (ACLV) than that of nonrecurring business models, greater customer inertia and a more committed customer base as it transitions from purchase to opt-out decisions, and more potential for upselling and cross-selling other products or services.
Effect on the customer
Consumers may find subscriptions convenient if they believe that they will buy a product on a regular basis and that they might save money. For repeated delivery of the product or service, the customer also saves time.
Subscriptions which exist to support clubs and organizations call their subscribers "members" and they are given access to a group with similar interests. An example might be the Computer Science Book Club.
Subscription pricing can make it easier to pay for expensive items, since it can often be paid for over a period of time and thus can make the product seem more affordable. On the other hand, most newspaper and magazine-type subscriptions are paid upfront, and this might actually prevent some customers from signing up.
An unlimited use subscription to a service for a fixed price is an advantage for consumers using those services frequently. However, it could be a disadvantage to a customer who plans to use the service frequently, but later does not. The commitment to paying for a package may have been more expensive than a single purchase would have been.
In addition, subscription models increase the possibility of vendor lock-in
In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...
, and consumers may find repeated payments to be onerous. Finally, subscription models often require or allow the business to gather substantial amounts of information from the customer (such as magazine mailing lists) and this raises issues of privacy
Privacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively...
Christopher Lochhead, Chief Marketing Officer
Chief Marketing Officer is a corporate title referring to an executive responsible for various marketing activities in an organization...
of Mercury Interactive
Mercury is now part of Hewlett-Packard. The combination of Mercury Interactive and HP OpenView formed HP Software Division, a global business unit within HP Enterprise Business...
A subscription model may be beneficial for the software buyer if it forces the supplier to improve its product. Accordingly, a psychological phenomenon may occur when a customer renews a subscription, that may not occur during a one-time transaction: if the buyer is not satisfied with the service, he/she can simply leave the subscription to expire and find another seller.
This is in contrast to many one-time transactions, when customers are forced to make significant commitments through high software prices. Some feel that historically, the "one-time-purchase" model does not give sellers incentive to maintain relationships with their customers (after all, why should they care once they've received their money?). Some who favor a subscription model for software do so because it may change this situation.
The subscription model should align customer and vendor toward common goals, as both stand to benefit if the customer receives value from the subscription. The customer that receives value is more likely to renew the subscription and possibly at an increased rate. The customer that does not receive value will, in theory, return to the marketplace.
In today's wired world, the customer's Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
process is more and more influenced by online newspaper and magazine subscription price comparison search engines.
Effect on the environment
Because customers may not need all the items received, this can lead to waste and an adverse effect on the environment, depending on the products. Greater volumes of production, greater energy and natural resource consumption, and subsequently greater disposal costs are incurred.
Subscription models might also create the opposite effect. This can be illustrated by subscribing to a service for mowing lawns. The effective use of a single mower increases when mowing for a collection of homes, instead of every family owning their own lawnmower which are not used as much as the service providing mower, the use of resources for producing lawnmowers therefore decreases while lawns stay cut.