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How to Secure Recurring Revenue for Your Business

by John Mullins

9 minute read

    For many of us, subscriptions are something we rarely pay attention to but benefit from every day.

    subscription model

    We have Netflix, Audible, and many of the newspapers, magazine, cell phones and TV programming are purchased by subscription. The gas and electric utilities that heat and light our homes come that way, too. Even organic vegetables, in some places, arrive to our doorstep each week by subscription.

     

     

    Businesses that offer subscriptions are essentially adopting one of the five models to grow a business by using their customer’s cash. One of the biggest benefits these businesses enjoy is predictable sales when a customer subscribes. This recurring revenue secures the cash flow needed to grow and makes the business capital-efficient. 

    In this article, we’ll look into the features that support a subscription model and how subscription models have been applied in some surprising settings. We’ll also explore why some subscription-based businesses have stumbled.

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    3 Features That Support Subscription Models

    First, let’s briefly cover the three features of products or services which are best suited for a subscription model.

    1. Regular and predictable demand
      The product or service people subscribe to is something the customer wants or needs in a regular and predictable way.
    2. It’s easier than having to remember to get it
      If a customer uses the product or service regularly, they would rather pay to guarantee regular product delivery or access to the service instead of dealing with the inconvenience of having to remember to get it or making a special trip to get it.

    3. It’s cheaper than buying the goods or services individually
      For example, a person subscribed to Netflix could watch one movie a day in a month. The monthly price for this is significantly cheaper than the cost of watching these movies in the cinema.

    Now that we’ve covered the basics of what makes subscription models effective, let’s look into some interesting ways the subscription model has been applied to grow their business.

     

    Subscription Models for Software: SaaS

    Rather than buying software in a shrink-wrapped box or downloading it, it’s become commonplace to simply subscribe to the software we need. This model is known as ‘software as a service’, or SaaS for short.

     

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    Salesforce.com was an early SaaS pioneer. In 2012, their software subscription revenue reached $56 billion in the United States alone. There are a few reasons the SaaS model works so well. These include:

    • Users will always be running the latest version so they never have to worry about outdated features.
    • It typically requires a much smaller upfront cost than buying a similar software outright.
    • A user often enjoys the additional value of unlimited online support as part of the deal.

    Software companies that switch to SaaS model will benefit from a predictable recurring revenue.subscription model It also costs them less to support and market their software through the cloud than by other means.

    Even Microsoft, the longtime leader in selling shrink-wrapped or downloaded software the old-fashion way, began adopting a SaaS model when they introduced a subscription-based Office Home Premium product in March 2013. At a subscription price of $100 per year, it’s become Microsoft’s fastest product ever to hit an annual revenue of $1 billion.

    If you are an aspiring software entrepreneur or a mid-market software company, SaaS models must be at the center of your strategic thinking. If you don’t have an attractively priced SaaS offering, one of your competitors surely soon will.

     

    Educating the World through Subscription: TutorVista

    Conventional models of education are usually based on a fixed fee for a certain number of classes, such as fixed semester fees or hourly charges for tuition. TutorVista broke this convention by applying the subscription model in a novel way for the education industry.

    subscription model

    Krishnan Ganesh started TutorVista with three Indian teachers to help American teens who needed help with their homework. Classes were conducted with a headset and webcam at each end, a VoIP connection, and an “erasable whiteboard” on their computer screens on which both teacher and student could write — one in red, the other in blue.

    The idea for TutorVista was conceived when Ganesh was traveling in the United States in early 2005. During his visit, he was shocked by the amount of media debate over the crises in the U.S. school education system. When he dug into the issue deeper, he found that while the public school system is good and the teachers were good, personalized education was simply unaffordable.

    subscription modelWhen TutorVista initially started, it followed the conventional hour rate model. Knowing that face-to-face tutoring in the United States is usually priced at $60 per hour, Ganesh priced his offering at $20 per hour.

    After running the business on hourly rates for a while, Ganesh discovered that parents prefered a subscription of $100 per month for an “all you can learn” model. Paid in advance every month, students could receive all the tutoring they wanted, 24/7. When TutorVista switched to the subscription model, they enhanced customer adoption and retention, AND their cash flow.

    TutorVista’s subscription model became key to its growth. When renewal rates after the trial subscriptions quickly materialized north of 50 percent, growing the business was simply a matter of adding more fuel. VC funds provided it, and Ganesh sold the business to Pearson in six short years for more than $200 million.

    While the customer-funded subscription model was not responsible for TutorVista’s entire journey, it did give the company a great start and a capital-efficient model to grow on.

     

    Launching A Startup On A Shoestring
    (Plus Customer Funding)

    In July 2009, Sam Pollaro and his wife, Sarah, launched their site, PetalsForThePeople.com, having spent practically no money — just a couple of thousand dollars on a graphic designer and some printed materials. Their customers’ cash would fund the rest of their journey through the subscription model.

    For a weekly or biweekly subscription, consumers could collect a small bundle of flowers or have it delivered.

    Sarah, who had previously run a small floral design business, would then upload a tutorial video showing customers how to arrange the flowers selected for that week. Customers would simply log on into their online members’ area to view the video.

    subscription modelUnlike a local florist, who never really knew what demand would be like from one day to the next, the Pollaros would know exactly how many subscribers they had and therefore could provide their customers flowers that were truly fresh. Since customers were arranging the flowers themselves, they could also provide these flowers at a very affordable price — the cost of several weeks of subscription was equal to about the price of a single high-end delivered bouquet.

    By June 2010, the couple had acquired a few hundred subscribers and was running smoothly on cruise control. Employees were packing and delivering flowers like clockwork. They were still relatively small, however. That was when Bryan Burkhart came into the picture.

     

    Replicating The Success Of Proven Subscription Models

    Bryan Burkhart was looking for a new business idea. He became interested in floral businesses when he discovered that the flower industry was a $35 billion dollar market in the United States alone.

    Not knowing anything about flowers, he began meeting up with florists to learn more. What he discovered was many flaws in the typical retail florist’s business model, from unnecessary storefronts to massive spoilage and the considerable markup needed to cover these losses.

    subscrption model

    Burkhart then met Sarah Pollaro through the introduction of a mutual acquaintance and had an epiphany to replicate her efficient subscription-based model for flowers. Burkhart then started H.Bloom, a service that offers flower subscriptions primarily to corporate customers.

    Since Burkhart had experience raising money from investors, he was able to raise $1.1 million in seed funding. Positioning H.Bloom as “the Netflix of flowers”, they enabled customers to sign up for luxurious flowers with convenient delivery at really affordable prices, beautifully arranged and delivered automatically.

    subscription modelIn June 2010, after the Pollaros contacted Burkhart, the two companies reached an agreement where H.Bloom bought the customer list of Petals for the People and hired Sarah Pollaro as H.Bloom’s creative director. H.Bloom continued to grow and by 2011 was on track to reach $2 million in revenue, leading to another round of financing for $4.7 million. By July 2013, new branches were opening up in Boston, Atlanta, Los Angeles and Las Vegas.

    Together, H.Bloom’s seed funding with Petals for the People’s initial subscription model, had revolutionized the flower industry.

     

    Why Some Have Struggled With Subscription Models

    Not every company has succeeded with the subscription model. Those that struggle usually fail because their offer did not meet the features that support a subscription model mentioned at the beginning of this article:

    • Regular and predictable demand
    • It’s easier than having to remember to get it
    • It’s cheaper than buying the goods or services individually

    subscription model

    Manpacks.com is one company that did not do well with the subscription model. They delivered socks, underwear, and other men’s essentials such as cologne on a quarterly subscription basis. subscription modelsUnlike flowers that perish, underwear can last for a very long time and cologne doesn’t have a predictable usage. So there was never a need to have a regular stream of underwear or cologne delivered.

    It is the same for shoes. When reality-star Kim Kardashian launched ShoeDazzle, a subscription service that offers a new pair of shoes each month, she was able to attract millions of VC funding. Due to her celebrity status, ShoeDazzle initially rocketed to a large number of early subscribers and impressive sales numbers. But do women, even shoe addicts, really need a monthly subscription for shoes?

    It soon became apparent that there wasn’t enough demand for a regular supply of shoes. ShoeDazzle’s novelty quickly wore off and the company struggled, forcing them to replace their CEO and lay off employees. In March 2012, ShoeDazzle decided to drop its $39.95 monthly subscription model and expand into lingerie and dresses.

     

    A Success Checklist For Subscription Models

    To determine if your offering could succeed on a subscription model, here’s an initial checklist of questions to ask yourself.

    1. Does a subscription model make your offering both better and cheaper for your customer?
    2. Are you selling perishables, consumables, or durables? Ideally, perishables and consumables work better for subscription models. It also works well for the software that can run on the SaaS model.
    3. Is there a predictable and regular demand for the offer?

    If you are able to offer consumables, perishables or software which people use in a predictable and regular way, and you are able to make it better and cheaper for them through subscription, then there is a really good chance you can use the subscription model to grow your business using customer funds.

     

    Start Scaling Your Business
    Without VC

    Business growth requires cash, and it doesn’t have to be from venture capital. Join John Mullins in our brand new 9-week course, “Scaling Your Business Without VC”, and get step-by-step guidance on how you can implement customer-funded strategies to protect the future and fund the growth of your mid-market company.


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    The next round of applications close on September 12, and acceptance is limited to 75 selected leaders. Apply here now.

     

    John Mullins

    John Mullins

    Associate Professor of Management Practice in Marketing and Entrepreneurship. An award-winning teacher and scholar and one of the world’s foremost thought leaders in entrepreneurship, John brings to his teaching and research 20 years of executive experience in high-growth retailing firms, including two ventures he founded and one he took public. Since becoming an entrepreneurship professor in 1992, John has published five books, dozens of cases and more than 50 articles in a variety of outlets, including Harvard Business Review, the MIT Sloan Management Review, and The Wall Street Journal. His research has won national and international awards from the Marketing Science Institute, the American Marketing Association, and the Richard D. Irwin Foundation. He is a frequent and sought-after speaker and educator for audiences in entrepreneurship and venture capital.

    Profesor asociado de gestión en marketing y emprendimiento. Es un profesor galardonado, y uno de los principales líderes mundiales en pensamiento emprendedor, John aporta a su docencia e investigación 20 años de experiencia ejecutiva en empresas de rápido crecimiento, incluidas dos empresas que fundó y una que hizo pública. Desde 1992 ha publicado 5 libros, docenas de casos de estudio y más de 50 artículos en reconocidos medios como Harvard Business Review, MIT Sloan Management Review y The Wall Street Journal. Con sus investigaciones ha ganado premios nacionales e internacionales del Marketing Science Institute, la American Marketing Association entre otros. Es un orador muy solicitado para conferencias sobre emprendimiento y capital de riesgo.

     
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