The value of an idea lies in the using of it.” -Thomas Edison
What I tell founders is not to sweat the business model too much at first. The most important task at first is to build something people want. If you don’t do that, it won’t matter how clever your business model is. Paul Graham
A business model is an “abstract representation of an organization, be it conceptual, textual, and/or graphical, of all core interrelated architectural, co-operational, and financial arrangements designed and developed by an organization presently and in the future, as well as all core products and/or services the organization offers, or will offer, based on these arrangements that are needed to achieve its strategic goals and objectives.”
A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. The process of business model construction is part of business strategy.
In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose,business process, target customers, offerings, strategies, infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies including culture. The literature has provided very diverse interpretations and definitions of a business model. A systematic review and analysis of manager responses to a survey defines business models as the design of organizational structures to enact a commercial opportunity. Further extensions to this design logic emphasize the use of narrative or coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily successful growth firms.
Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they are also used by managers inside companies to explore possibilities for future development. Well-known business models can operate as “recipes” for creative managers. Business models are also referred to in some instances within the context of accounting for purposes of public reporting.
The subscription business model is abusiness model where a customer must pay a subscription price to have access to the product/service. The model was pioneered bymagazines and newspapers, but is now used by many businesses and websites.
Rather than selling products individually, a subscription sells periodic (monthly or yearly or seasonal) use or access to a product orservice, or, in the case of such non-profit organizations as opera companies orsymphony 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. It is used for anything where a user is tracked in both a subscribed and unsubscribed status.
Membership fees to some types of organizations, such as trade unions, are also known as subscriptions.
Industries that use this model include mail order book sales clubs and music sales clubs,cable television, satellite television providers with pay-TV channels, satellite radio,telephone companies, cell phone companies,internet providers, software providers,websites (e.g., blogging websites), business solutions providers, financial services firms,fitness clubs, lawn mowing and snowplowing services and pharmaceuticals, as well as the traditional newspapers, magazines andacademic journals.
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 or a checking account.
A common model on websites, colloquially becoming known as the freemium model, is to provide one tier of content for free, but restrict access to premium features (for example, archives) to paying subscrib
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. The subtypes are:
- 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.
- A pay-as-you-go subscription where you subscribe to purchase a product periodically. This is also known as the convenience model because it is a convenience for the customer to not have to remember to go find their product and buy it periodically. This model has been popularized by companies like Dollar Shave Club, Birchbox, and OrderGroove. Based on their success, many other retailers have begun offer subscription model services.
- 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. When the basic service is offered free-of-charge, this business model is often referred as freemium
“The subscription business model is in the midst of exponential growth and is completely transforming the purchasing habits and priorities of the consumer,” says Donny Gamble Jr., financial expert and founder of PersonalIncome.org. “In the past, skeptics dismissed the subscription model as being ‘all hype,’ but recent trends have proven the opposite is true.”
As consumer behavior increasingly favors access, simplicity, and convenience, a model in which customers commit to recurring purchases of a customized set of goods has been met with astonishing success. As it turns out, this model actually encourages consumers to buy more consistently. Reduced costs, global consumer access, and rapid growth potential make subscription-based businesses an optimal investment in the domain of e-commerce.
Gamble predicts that the future ofinvestments will become increasingly subscription-based. Here’s why:
1. Lower overhead costs
E-commerce greatly reduces the conventional costs of conducting business. It eliminates the need to purchase or rent and further maintain a physical retail store(s). No sales and executive staff are required to run a store, and loss of potential revenue due to limited business hours is of no concern. A subscription-based model further reduces potential costs toward attracting and retaining customers through advertising amid shifting trends. Customers receive the same order for the same price with few surprises. The experience can be taken care of online all at once, eliminating travel to multiple stores without any guarantee of finding the same products. The checkout process is automated and inventory planning is streamlined. This allows valuable time and resources to be allocated elsewhere, boosting profit margins in the process.
2. Efficient customer acquisition
The internet provides instant access to an endless stream of potential customers. “Strong branding, coupled with the permeation of every social media channel, is key,” says Gamble.
They can proactively meet the customers where they are by developing a presence on popular social hubs like Instagram, Pinterest, Twitter, and Facebook. Blogs and demo videos are fantastic (and free) ways to increase brand visibility.
3. Partnerships to increase product assortment
Gamble suggests that partnering with or acquiring brands within an industry allows for the rapid expansion of product lines without having to expend resources for the development of proprietary products.
In order to be scalable, a business must be able to increase revenue with minimal to no incremental cost. As a business prepares to expand into new markets, it must analyze customer trends and predict behavior as accurately as possible. This is where the subscription-based business model truly shines. A subscription service promotes customer retention with payment transpiring at a fixed monthly interval. As a result, customer lifetime value can be more precisely evaluated. Proof of recurring revenue significantly boosts a company’s value. This serves to inspire more confidence in the investor, supporting a business that can make more reliable predictions about its future.
5. Free marketing through partnerships
“Joint venture partnerships and affiliate programs are useful in leveraging the assets between companies in order to reap rewards for all parties involved,” Gamble explains. Exposure to new markets and networks could greatly increase web traffic and sales. This is especially worthwhile for the subscription-based company if the first-time customer is met with the option to subscribe for services on a long-term basis. A repeat customer is thereby earned in exchange for a commission on a one-time affiliate sale. Furthermore, the alliance itself can cast a positive reflection. An endorsement from a reputable partner can increase a company’s credibility simply by association. Pooling resources with other companies in order to offer special deals on premium products or services is an effective strategy to solidify the relationship with current customers and lure new ones into the fold.
6. Global appeal
The internet has wiped out all the geographical boundaries that limit traditional commerce. The world is the storefront, business runs 24 hours, 7 days a week, and arguably every single person of the target demographic is a possible client. Connection and communication are direct and instantaneous, promoting the highest-quality customer service and invaluable feedback for the company. During the peak of this exponential growth spurt, many companies are pursuing international acquisitions. This scenario is most feasible with a subscription-based business, stimulating growth through fostering long-lasting relationships with customers across the globe beyond the usual transient one-time transaction.
Positive impact of a service-based business
Subscriptions allow you as a company to plan resources and predict revenue. Your client wants to change the focus of the project? No problem — nothing is “out of scope” because there isn’t a scope. Service subscriptions allow you to be flexible in your tactics without having inconsistent service due to recalculating costs. It gives your company the ability to provide different types of services, not just deliverables. This is also a benefit to the client, as they always know that resources (whatever they may need) will be available to them as their needs change. It gives the option to change their objectives on the spot and adjust the game plan month over month.
2. Ability to scale
If client needs change dramatically, a subscription will give them the ability to scale work up or down, without worrying about contracts. For instance, if a client is in the middle of a website redesign, and they suddenly need to invest funds into a special product initiative they are rolling out, they have the ability to decrease their subscription for a few months. Work will still continue but at a slower pace.
On the other hand, if the client just closed a round of funding and needs to accelerate the launch of their SaaS site to satisfy investors, they can increase their subscription to increase the pace. Or let’s say a client is opening another location and is in need of more design work, the graphic artist could increase their service subscription to meet the needs for that month. Subscriptions allow clients the security of knowing that everything is month-to-month, and nothing is set in stone — especially scope.
As a company, subscriptions also allow you to scale if you continue to add value to the client and impact their bottom line.
3. Stronger relationships
The subscription model is also not about getting a project done and then moving on to the next client. It allows us as a service provider to grow a relationship with the client and cater to their business or design needs as they change. It builds a substantial level of trust since the client knows that you have their best interests in mind and understand their business.
Moreover, it also forces service providers to be accountable in their client relationships. In a project, the goal is to finish, whereas with a subscription, the goal is to accomplish the objective — and continue to provide value over time. We must always be pushing for innovation and exploring ways to make a greater impact, to be proactive instead of reactive. For instance, lawyers would look to drafting stronger contracts and proactively looking out for trademark infringements, using new tools to do so.
Subscriptions can work
Services must adapt to avoid falling behind like Blockbuster. There are already a number of successful service providers using the subscription model. Global web and software developer Pivotal Labs offers their services through coaching subscriptions — clients retain their team’s expertise and learn their processes by working side-by-side with them on location. Their success didn’t go unnoticed.
Product and SaaS service subscriptions offer value to both the company and to the customer. Following their lead, professional service providers such as web designers, marketers, financial advisors and more can reap the benefits of subscriptions and grow their companies. Sure, it’s a bit different than the way things are usually done — but if we can do it, you can, too.