Why Your Business Needs to “Get with the Times”
Potential investors in a business don’t view all revenue sources as equally valuable. Recurring revenue from repeat customers is more valuable to investors. These subscription service growth strategy examples show how valuable this revenue stream is for almost every business.
Following a subscription service growth strategy can deliver benefits for investors, customers and businesses.
- Investors favor recurring revenue and subscription services because of increased predictability and visibility for making decisions, as well as other benefits such as flexibility and scalability.
- Customers are drawn to the subscription service’s convenience and seemingly more transparent pricing, with flat-rate fees, tiered pricing options and seamless payment from auto renewals.
- Businesses choose subscription services because they encourage brand loyalty, make it easier to adjust pricing with tiered alternatives, and encourage customer retention, in addition to adding to the value for potential investors.
Subscription services are a large and rapidly growing market.
- While exact estimates vary, one source puts global subscription services at $120 billion in 2022.
- A second estimate suggests a larger market, with software as a service (SaaS) revenues of $131 billion in 2021. 53% of software revenue is projected to come from subscriptions in 2022.
With the subscription service market size and rapid growth, perhaps it’s not surprising that American consumers underestimate the amount they spend monthly on subscription services, by a factor of 2.5. Research finds that customers who have a subscription from a membership often spend more.
Increasing Monthly Spend on Subscription Services: Small Business Growth Strategy Example
While I recognize that Insight to Action’s monthly spending for business subscription services is modest when compared to Vistage small and mid-sized companies, our total out-of-pocket spending is increasing significantly.
For example, we signed on with Docusign and Asana, for a total cost of over $1,900 annually. We added Asana because our team is working fully remotely and asynchronously. We added paid Docusign to make signing a contract with our firm easier for our customers.
As of this writing in late 2022 at Insight to Action, there are over $400 in monthly business-related subscription service expenses, despite efforts to keep this spending in check. These include:
- Microsoft 365 Business Basic: $6.99/month
- Zoom One Pro: $15.29/month
- Constant Contact Plus: $45/month
- Wall Street Journal: $53.58/month
- Google Workspace (formerly GSuite): $55/month
- LinkedIn Sales Navigator Professional: $99/month
- Asana: $152.45/month
In addition to over $5,000 annually from the monthly services, annual subscription services add another $3,000 in annual costs. These include:
- Drop Box Plus: $119.88/year
- Docusign: $120/year
- Dashlane: $192/year
- Go Daddy: $199/year
- NWBOC: $200/year
- Hootsuite: $588/year
- QuickBooks Plus: $860/year
- RocketReach: $888/year
It’s fair to say that some of these services are delivering great value, while others are candidates for elimination. Most likely, we won’t be continuing with RocketReach. Others are not readily replaceable, such as QuickBooks. Others will require a more expensive replacement.
For instance, we recently realized that despite our best efforts, our website is loading very slowly, due to the hosting service, and we need to migrate to another provider who will be more costly. With most business customers starting their buying process online, we can’t afford to have a slow-loading website.
Subscription Service Growth Strategy Example: Amazon
Amazon is a poster child for subscription services, with Amazon Prime claiming over 200 million members, and an increase of 30 to 50 million in the past two years. Another estimate places Amazon Prime members at 172 million in December 2021.
Total subscription services for Amazon grew to $17 billion in the first six months of 2022, up from $15 billion compared with the same period prior year.
Beyond Amazon Prime, these revenues include:
“Annual and monthly fees associated with Amazon Prime memberships, as well as digital video, audiobook, digital music, e-book, and other non-AWS subscription services.”
At $139 per month, and with 172 to 200 million Amazon Prime members, that translates to around $24 to $28 billion for 2022 in subscription revenues for Amazon Prime, with the rest coming from the other services.
In February 2022, Amazon Prime saw a substantial price increase from $119 to $139 annually and from $12.99 to $14.99 monthly, so it will be interesting to see if this causes a reduction in the number of members (similar to the Netflix price increase example).
In addition to increasing price, Amazon continues to expand subscription revenues by adding additional services.
Even though Amazon’s own online store revenues are down (from $106 billion for the six months ending June 2021 to $102 million for the six months ending 2022), my company’s business spending with Amazon is up.
While I might like to support local retailers and reward product innovators, I still find myself opting for the convenience of Amazon for more of my business office supply purchases.
For example, I regularly purchased the 3M easel pads that we use for in-person meetings from the local Office Depot in Manhattan Beach. When they ran out of stock in June, the only practical option that could get them to us in time was Amazon. After making an unsuccessful trip to Office Depot for this staple item, I find that I am less inclined to visit the store for other basics like file folders or paper for the printer.
Recognizing that Amazon’s main operating profit driver is still AWS, which contributes 74% of operating profit, Amazon’s subscription services growth strategy still appears to be delivering results (And this is not the first time we’ve recognized Amazon as a growth strategy example).
Subscription Service Growth Strategy Example: Netflix
While it lost 970,000 subscribers in the most recent reporting period , Netflix is another exemplar of subscription services, with 220.67 million subscribers as of June 2022.
Netflix was very public about the fact that their price increase and resulting loss of subscribers was intentional and that loss of subscribers was offset by the higher revenues from the remaining customers at the higher price. Specifically, in May 2022, the Netflix price increase was:
“The basic streaming plan is now priced at $9.99, up from $8.99, and the standard plan that allows for HD streaming is priced at $15.49, up from $13.99 per month.”
Similar to Amazon, it will be revealing to see if Netflix returns to the subscriber growth in given this price increase. And it’s instructive to note that Netflix retains its “Good, Better, Best” pricing strategy.
Netflix subscription growth strategy is part of the overall consumer movement to streaming. Deloitte estimates that 63% of US households now subscribe to video streaming subscription services, and my household is one of many who subscribe. Our household’s new subscriptions are prompted by the desire to access specific programming content, such as The Mandalorian on Disney+.
In fact, exclusivity is a top reason why consumers subscribe. This can be exclusivity in product, content or service along with bundles and discounts.
“40% say that having exclusive access to content or services is a main reason for signing up for a subscription.”
Subscription Service Growth Strategy Examples: Additional Online Categories
Meal kits are a popular subscription service category. They promise an answer to the age-old question of “what’s for dinner?” According to CNET, some the top 2022 choices include:
- Blue Apron “for beginners”
- EveryPlate “affordable”
- Gobble “gourmet”
- Green Chef “organic”
- HelloFresh “for those with food allergies”
- Home Chef “for picky eaters and families”
- Purple Carrot “for vegans/vegetarians”
- Sunbasket “best overall”
During COVID, 39% of Americans gained weight, giving addition heft to the weight loss and weight management market.
Weight loss and weight management sports a wide range of subscription services offerings. As we wrote about in “Customer Segmentation Template for Weight Management Market,” these consumers are diverse. Services include:
- Meal programs like Jenny Craig
- Popular weight loss apps like Noom
- Weight Watchers with an app, as well as food products
A third category example is household cleaning products. Several of the subscription services earned top marks:
- Grove Collaborative
- Honest Company Essentials Kit (the brand has a broader product line than cleaning)
Subscription Service Growth Strategy Examples: In-Person
I’m a member of several groups that I go to in person at least once a month or more frequently.
The first is my gym membership, which is billed monthly. I took a long pause from the gym during COVID, and relied on jogging, beach bike rides, hiking and yoga at home to keep fit. However, I find it’s a good time investment to go to the gym for types of exercise that were difficult for me during COVID. Our local El Segundo gym, Bay Club, offers in-person classes in yoga and bodypump that I regularly attend.
I find that in-person yoga is much easier for me, and weightlifting workouts are an area that I skipped entirely when working out from home.
The Bay Club innovated to offer a Shared Membership program that goes beyond the typical couples and partner choice. I’ve also elected this option.
“Come together for a membership you can share with up to 5 friends and family members. Here’s how it works:
- You and up to 5 additional people can belong under one membership. Share with anyone – no need to live in the same household.
- Your primary member becomes leader of the pack. Count on them to manage account details and own financial responsibility.
- Pack Leader can flexibly add someone at any time, as well as remove any member by the 25th of each month.
- Share the Bay Club with friends and family across different regions by selecting a Club West Gold membership.
- Participants in a Shared Membership may book one sport in advance per location, per day. Same day bookings welcome.”
Another in-person group I’m a member of is Vistage. In Vistage, I meet monthly with local business executives who share a common purposes of driving growth with excellence in leadership.
Recurring revenue firm Recurly gives other examples of subscription service behavior extending to in-person retail environments, such as car washes, restaurants and trampoline parks. Theresa McEndree, Chief Marketing Officer at Recurly says,
“Consumers love subscriptions. As people return to in-person experiences, they are carrying their love of subscriptions with them. It’s exciting to see accelerated growth in these categories,”
“For in-person businesses, subscriptions drive recurring revenue, loyalty, and growth as consumers establish their new spending habits and behaviors. We are beginning to see some exciting new subscription categories and concepts emerge, from trampoline parks to car washes to restaurants.”
Subscription Service Growth Strategy Example: Challenges to the Model
Some organizations are subscription growth strategy pure plays or natives that were exclusively designed to focus on subscription services.
Other organizations will need to rethink and overhaul their product and service offerings to capture the benefits of recurring revenue from subscription services. That means an investment to determine the feasibility and costs as well as modeling the upside of the move.
One major barrier can also be a lack of commitment to a subscription strategy. Some other challenges to subscription service models include:
- High cancellation and customer churn– lack of retention. Billing more frequently can cause customers to cancel as they see the charge each month on their credit card statement when compared to a yearly charge
- Increased competition from other providers
- The need to provide new value
With the growth in this market, a cottage industry is in place to support a business committed to a subscription service model. For instance, billing service management providers participate In this $5.4 billion 2022 market.
Despite the challenges for those businesses new to a subscription service model, this revenue stream seems to be the way of the future. Consumers have made clear their preference. Don’t be the left behind, like the music CD promoter in a Spotify world.