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Subscription business model

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The subscription business model is a business model that has long been used by magazines and record clubs, but the application of this model is spreading. Rather than sell products directly, more and more companies are selling monthly or yearly access to a product or service. This, in effect, converts a one-time sale of a product into a recurring sale of a service.

In addition to magazines, book clubs, and record clubs, many other industries are using the subscription model. They include telephone companies, newspapers, cable television providers, cell phone companies, internet providers, pay-TV channels, software providers, business solutions providers, and financial services firms. Also there are passes for public transport, swimming pools, zoos, etc., with or without automatic periodic renewal.

In addition one can have a subscription on a discount pass.

The razor and blades business model (also called the bait and hook model) is an attempt to approximate the subscription model.

Contents

Effect on the vendor

Businesses benefit because they are assured a constant revenue stream. This greatly reduces uncertainty and the riskiness of the enterprise. Also, in many cases (such as integrated software solutions), 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 or database marketing.

Subscription business models also have their drawbacks. The business must commit to a large infrastructure to manage and track subscriptions.

Effect on the customer

Consumers can also benefit. If they were going to purchase the product regularly any way, they will benefit from the convenience. They only have to make one purchase decision, then sit back and wait for the product to arrive. It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. There are also many people that use regular subscriptions to fulfil a need for belonging. Subscriptions can do this by presenting themselves as clubs. The subscribers are "members". They, and others of similar interest belong to a group (example: Computer Science Book Club). Subscription pricing can blunt the sting of paying for expensive items. By spreading the cost over a period of time, the purchase seems more affordable.

Advantages and disadvantages for software customers

However there are also drawbacks to subscription models. Often, as in the case of software, the customer may wish to pay a one time fee for the security of knowing that no further payment is necessary. Also subscription models increase the possibility of vendor lock-in, 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.

There is a contrarian view, according to Christopher Lochhead, chief marketing officer of Mercury Interactive (as cited in the CNET News.com article listed in the "References" section). A subscription model may be beneficial for the software customer if it forces the supplier to improve its product. According to this idea, a psychological phenomenon may occur when a customer renews a subscription, that may not occur during a one-time transaction: before renewing a subscription, the customer may find it easy to sever his/her relationship with the supplier if he/she feels it is not delivering a valuable service. At that point, the customer may even find a competing supplier. 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 has nullified the incentive for software suppliers 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.

Effect on the environment

Because customers may receive items they don't need, this can have a negative effect on the environment, depending on the products, requiring greater volumes of production, greater energy and natural resource consumption, and subsequently greater disposal costs.

See also

Finding related topics

References

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