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The Subscription Economy May Be Revolutionary—But It’s Not Without Risks

December 6, 2021
By James Gussie

The subscription economy is here to stay, and it has the potential to change how we buy goods. But as with any revolution-driven industry, there are risks that must be considered before jumping in head first.

The “disadvantages of subscription business model” is a topic that has been discussed before. The risks of the subscription economy are not always clear.

When I first began working in the financial services business in 2003, going to meetings on the road was simple: I got a taxi. Executives have done so for more than seventy-five years.

And, in a series of Microsoft Office files on my laptop, I had everything I needed to conduct my meeting—software I had bought on CD ROM and put on my system in a one-time transaction.

Back then, the more successful and time-pressed among my contemporaries (who were too busy to handle all those time-consuming activities like picking up dry cleaning or groceries) handled the issue by employing an assistant.

Things have changed dramatically in recent years; you may now choose to pay a monthly fee to firms who supply such services. I’ve replaced what used to be a one-time transaction—taking a taxi to a meeting—with a monthly membership fee to a firm like Zipcar, which allows me to rent a car in almost any location, whenever I need it. That CDROM version of Microsoft Office that I purchased is now a cloud-based software service that I subscribe to. This concept is used by all software as a service (SaaS) organizations.

This new paradigm is dubbed the subscription economy by Tien Tzuo, CEO of Zuora, and he thinks it is the beginning of a revolution. Many retailers and enterprises have started to use subscription-based pricing instead of conventional pay-for-product pricing methods. The company strategy entails regular monthly earnings and consistently good customer service, but it is not without risk.

Table of Contents

Explaining the Subscription Economy

The subscription economy is not to be confused with the long-discussed sharing economy. It resembles the software as a service (SaaS) approach more closely. Simply described, it is a service model in which the emphasis has switched from completing single transactions to providing continuing support to consumers on a monthly basis.

For example, if you want personalized training regimens and workout assistance, you may subscribe to Daily Burn and get assistance whenever you need it. Do you need to regularly transfer or store data on the cloud? Consider using Amazon Web Services. If you like a nice bike ride but don’t want to invest in one, you may join a bike sharing program and ride anytime you want. These are just a handful of the thousands of subscription businesses that make up the subscription economy.

What is the origin of the subscription business model?

Subscription-based pricing structures have been existed for hundreds of years, but their popularity has recently exploded due to a fundamental shift in consumer expectations over the previous 10 years.

This shift resulted from the rise of mobile and cloud-based technologies, which allow everyone to communicate with enterprises at any time and from any location. Consumers were used to obtaining what they wanted on demand after years of utilizing this technology. Simultaneously, people began to demand more and higher standards of service. And, since consumers were used to their software being updated on a regular basis, they came to anticipate the items and services they purchased to improve over time as well.

As businesses responded to these new demands, a fundamental transformation in how they service consumers occurred.

What has changed as a result of the subscription model of business?

Companies have shifted their emphasis in the subscription economy from creating, selling, and delivering things (conventional transactions) to building and monetizing long-term relationships.

The major engine of development in the conventional “production model” based on a succession of one-time transactions was constantly gaining new clients. The business driver in a subscription-based environment is now how effectively you service your current customer base. It’s all about creating fantastic customer experiences, ongoing relationship monitoring and enhancement, and, ultimately, client retention.

In this context, a company’s capacity to give value to its consumers is the most powerful lever it possesses. That is how loyalty is developed.

To provide outstanding value, you must first have a better understanding of your clients than ever before. I’ve spent my whole career listening to folks speak about how important it is to understand consumer wants and pain areas. But, because to the subscription model, that process has now been elevated to a whole new level. We now have the capacity to get a substantially deeper knowledge of consumers for the first time.

This is due to the fact that we now have access to so much more data. Everything is recorded, including payment preferences, product selections, sales history, browsing behaviors, and return trends. And the tools required to filter through all of that huge data and turn it into relevant business analytics is now freely accessible.

When businesses succeed in delivering on this new model, customer happiness and retention skyrocket. Subscriptions help smooth out cash flow, decrease volatility, and make forecasting more accurate than in a production model firm since each client has a significantly greater lifetime value. However, there are certain hazards associated with these possibilities.

There are three hazards associated with the subscription business model.

1. Not knowing how to approach things in a different way

The most significant danger of implementing a subscription business model is failing to recognize how it differs from the old model and failing to take the appropriate steps.

Companies must specifically plan all of their business operations to ensure that everything they do is focused on delivering on task one—providing exceptional value to all consumers.

2. Inability to provide value

Customers will cancel their memberships if you fail to give that value. Churn will increase, but lifetime value will decrease. Next, read this article to learn more about measuring metrics like churn and lifetime value.

3. Failure to build up proper invoicing and technical infrastructure

Similarly, failing to invest in and grasp the technologies required to gather and evaluate the data that will disclose what customers want might result in comparable outcomes.

There are also chargebacks, which are a less evident but possibly substantial danger.

Customers are automatically invoiced on a monthly basis, generally as a recurring credit card payment, under the subscription model. This is a handy procedure for both the corporation and the client, but it must be carefully managed.

We all know that recurring payments have a higher than average decrease rate in my industry. In other circumstances, this is the result of blatant deception. However, in a small proportion of situations, the decrease is due to expired or inaccurate card information. In any case, an excessive number of declines will raise your Chargeback to Transaction Ratio (CTR), which might have major consequences for your firm.

Why is it important to have a low chargeback to transaction ratio?

Card companies use a company’s CTR to decide if you fit into their high-risk vendor category. It shows them how well you maintain card data up to date and manage fraud protection. If your CTR exceeds 1%, you’ll be put on a watch list and face higher credit card processing costs.

Companies that use the subscription model must regularly monitor credit card information to prevent chargeback risk. This entails highlighting cards that are about to expire and urging consumers to update their information. Make it simple for customers to contact you with inquiries before disputing a charge to minimize refused transactions due to consumer misunderstanding (i.e., they don’t recognize your company’s billing name).

To avoid a negative effect on CTR from fraud, look for payment processors and card providers that have strong chargeback management systems. All chargebacks are promptly flagged by these software solutions, allowing the organization to rapidly rectify the issue. To detect possible fraud, the finest software use artificial intelligence algorithms. They keep a close eye on all transactions in real time, searching for suspicious trends or conduct that raises red flags. Top subscription companies have the people and systems in place to track and handle chargebacks so they don’t become a financial drain.

Wrap up

The subscription economy is growing in popularity because it capitalizes on businesses’ ability to provide excellent client experiences on a daily basis while also generating a consistent income stream.

You may effectively manage the model’s risks by employing big data and cutting-edge service procedures to maintain the greatest levels of customer happiness, while simultaneously ensuring that you use the finest vendor technology and internal processes to prevent accidental credit card denials and fraud.

The dangers are real, but they can be mitigated, making the subscription model a benefit for well-prepared businesses.

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Frequently Asked Questions

What is the subscription economy?

A: The subscription economy is a business model that relies on the recurring revenue generated by consumers willingness to pay for services or goods over an extended period of time. For example, a subscription box service, such as Dollar Shave Club, might charge people $5 per month and deliver new products each month in exchange.