Subscription Models

Volume 18 Letter 11

Volume 18 Newsletter 11

Most companies today operate on a Sales Model.  They create great looking web pages and dispatch armies of sales people to pound on customer doors in an all-out effort to convince them to make a one time purchase.   However, in many industries today the product offerings have become ubiquitous.  With little distinction between products, factors like price, convenience, risk reduction or minimizing downtime have become the differentiators.  If this is the case in your industry a ‘subscription payment model’ might be for you.   Watch how Dollar Shave Club used a subscriptionpayment model and shaved more than a few whiskers off Gillette’s dominant market share.

The men’s shaving industry has been lucrative, and competitive, for ages.   Product innovation has driven market share since the introduction of the safety razor back in the 1900’s.   The 1970’s ushered in the Trac II shaver with the claim that two blades were better than one and the 2000’s saw the Mach III revolution – yup three blades!  Today we have the five blade Fusion; add in glides strips, springs, different handles and you get the picture.  With unit costs hovering around 10 cents per blade the profit margins on razors are eye popping.  The highest cost in the men’s grooming industry isn’t the razor, it’s the sales force and distribution costs.

The next revolution in shaving wasn’t a new blade but rather a new way to purchase a razor.  Dollar Shave Club, started by two entrepreneurs in California, began selling razors on a subscription model.  Members sign up on line and receive their razors monthly in the mail;  no need to go to the store to stock up and no need to sift through store coupons, fancy packaging and end aisle displays, while agonizing to determine the best deal.  Dollar Shave eliminates all that hassle.  Here’s how it works and why it’s potentially important to you.

A subscription model provides the opportunity to build a relationship with customers while providing a steady stream of revenue for the company.   Rather than going head to head with Gillette by hiring hordes of people, maintaining miles of shelf space and handing out coupons and discounts, Dollar Shave Club avoids these sales costs and passes the savings back to consumers in exchange for a monthly subscription.   Customers save money, energy and time and Dollar Shave builds deeper relationships by recommending other grooming products etc. that might enhance their customer’s lives.

Lest you think this only applies to consumer products – think again.  Subscription models equally apply to b2b and b2c markets.  In many businesses, sales force and marketing expenses are the number one or number two expense item along with cost of goods.   By re-directing much of the expense of the sales model, resources can be channeled into creating superior customer value.   In a b2b example, aircraft engine manufacturers have stopped selling engines.   Instead, they sell “power by the hour”.  Airlines pay for the time they’re flying allowing them to better link revenues (flights) with expenses (flying time).   Engine suppliers own the engine and have a strong incentive to improve performance and remove third party maintenance providers.

What can we learn from the subscription model:

  1. Subscription models eliminate high sales costs and re-directs the focus onto customer retention rather than on customer acquisition.
  2. The goal of a Subscription Model is to build a long-term relationship by changing customer behaviour.   Contrast this to a Sales Model that seeks a one-time purchase by changing a customer’s mind.
  3. Innovation isn’t always a new product, but it always delivers superior value.    In Dollar Shave’s case superior value was a new way of distributionand for aircraft engines it’s pay for performance

If sales and marketing costs are a large portion of your expenses, a subscription model could eliminate a big chunk of these costs allowing resources to be re-directed to creating additional customer value.    Could a subscription model add value to your business?

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