Blog

September 06, 2013

Lipstick, light bulbs and razor blades: 5 ways the subscription economy is changing everything

There’s a small, independently owned video rental store up the road from our house. They’re hanging on, but my guess is it won’t be long before they go the way of Blockbuster Video: made redundant by Netflix et al.

The loss of a local video store is no big deal in the grand scheme of things unless you see it – like I do – as another sign The Demand Economy is slowly being replaced by The Subscription Economy.

In The Demand Economy, businesses rely on customers coming in (or calling, or clicking) to buy what you sell. The customer is in the driver’s seat, and your job is to try to stimulate enough demand each month to cover your nut.

By contrast, in The Subscription Economy, customers subscribe to a set of products and/or services. For those on the winning end of The Subscription Economy, life is good: customers pay in advance, revenue recurs, profits are up because they no longer need to stimulate demand each month, and the workload is smooth and predictable. They can sleep at night knowing within plus or minus 3% what their revenue is going to be the next month, and most important of all, they are building valuable, sellable companies because an acquirer can see a stream of revenue well into the future.

The Zero Sum Game

The bad news is: The Subscription Economy is a zero sum game. The pie is not getting bigger. This new breed of company is not going after a new customer wallet. In fact, The Subscription Economy is competing for the same customers as The Demand Economy – and winning handsomely:

• Instead of going to a local pharmacy to buy razor blades, 200,000 guys now subscribe to Dollar Shave Club and get razor blades sent to their doorstep each month.

• Instead of buying cosmetics at the mall, 400,000 women now pay $10/month to get a BirchBox stuffed full of cosmetic samples shipped to their door each month on a subscription model. When they try something they like, customers can simply order the full size version from the website so BirchBox gets a double shot of revenue and the mall is batting 0 for 2.

• As if local bookstores needed anything else to worry about, news came this week that two start-ups are going to begin selling an all-you-can-read e-book subscription. Think of EReatah and Oyster as Netflix for books – and you know what Netflix did to the local video store.

So the time is now to find your subscription model. It could be, like Amazon Prime’s $79/year subscription – an addition to your existing business. Or, you could pull the chute on your Demand Economy Company in favor of a subscription business. Either way, here are some business models to consider:

1. Samplers: you curate a box of cool, interesting new stuff and send it to your subscribers in a handsome monthly box. Examples include BirchBox (cosmetics), NatureBox (snacks), Standard Cocoa (chocolate) , Babba Box (kids’ crafts).

2. Consumables: you send customers a box of stuff they run out of, e.g., Dollar Shave Club (razor blades).

3. All-you-can-eat: you have a library of content, which you give customers access to for a flat fee. Examples include New Masters Academy where, for $19/month, you can have access to more than 100+ hours of art lessons on an all-you-can-learn basis.

4. Monitoring: you promise to keep an eye on things for your customers and fix stuff when it breaks or runs out. Examples include security companies, IT services providers, and Hassle Free Homes where they proactively maintain your house (change the smoke alarm batteries, furnace filter and light bulbs) in return for an annual subscription.

5. Reporting: the subscription model got its start in magazine publishing but now it is not just media giants who are profiting. Smaller companies like Marketing Sherpa are charging handsomely for niche content on a subscription basis.

For good or bad, The Subscription Economy is here. How will you play it?

  • Anthony says:

    John,

    Very accurate observations here! I’m familiar with Hassle Free Homes and Dollar Shave Club. Even though they’re at the opposite end of the spectrum in terms of pricing, they’re using a similar model to outmaneuver their competition. From a “Built-to-Sell” standpoint, implementing a subscription model can make your business more attractive and cash flow easily predictable by potential purchasers.

  • Adam Dukes says:

    An excellent post. Some great example with Birch Box and Dollar Shave Club. Dollar Shave Club hit it out of the park with their viral video, I’ve watched it a number of times.

    I do online marketing for small businesses and “recurring revenue” is a hot topic. I am taking a MaaS (Marketing as a Service) approach with a subscription model. This will make the business much more attractive when it’s time to sell, but I am sure you know that :)

  • Scott Asai says:

    This is a great post! The subscription model has been here (gyms, cell phones, Netflix, etc.) and will be here to stay. I’m always trying to think of a subscription model to use. Thanks for the reminder!

Add Comment

Follow John Warrillow

RSS Facebook Twitter
Pre-Order Built to Sell

Get your free chapter of Built to Sell: Creating a Business That Can Thrive Without You by signing up below: