March 7, 2023

By: Akansha Srivastava Shahi, Consultant, LTIMindtree

In business now and in the future, whether B2C, B2B or D2C, from small day-to-day businesses to medium-sized organizations to large markets, everyone mentions Anything-as-a-Service (XaaS) as a service trend

A subscription, which fall under the purview of XaaS, is an engaging model for businesses and consumers, which is expected to progress rapidly in coming years. While not really ‘new,’ subscriptions have been around for years. While they were limited to a specific product or service like newspapers or magazine, today, it has slowly moved towards emails or SMS subscription for notifications.

The main trendsetters are new business models that were previously unimaginable, such as subscriptions for educational content, movies and music, beauty products, personalized boxes, etc., implemented by various companies in various industries across domains. This is primarily due to changing customer mindsets and buying behaviors that revolve around saving time, with an easy transaction process.

The subscription economy is derived from payment-based business models that companies adopt and their management techniques, which we will explain in the following sections.

Traditional Business Model vs. New Business Model

Traditional models focus more on customer acquisition, whereas the main focus of new subscription models shifts towards retaining the customer by encouraging them to initiate the buy cycle after a defined interval of time, which can be daily, weekly, monthly, quarterly, or yearly.

The company and the client both profit from subscription-based revenue structures. As a customer, you have the convenience of automatically renewing a contract for a good or service you anticipate using again soon. Instead of needing to re-engage clients more frequently, a business can retain them for future transactions. You guarantee monthly recurring revenue (MRR), which can sustain your company through the most trying circumstances.

A subscription is as simple as an electricity bill – To keep the product or service active, one can simply subscribe for the product or service through an automatic recurring billing system.

Subscription model – A pivotal factor in the D2C market

The D2C market is becoming vaster – As per figures by Inc42, it is expected to reach the size of $100 billion (approx.) by 2025. With such a progressive market, how can D2C remain untouched by subscriptions?

Let’s quickly understand what D2C is. Direct-to-Customer businesses have no intermediaries between manufacturers and consumers – with the manufacturers being responsible for design, raw material, production, maintenance and selling part of the products themselves. In this busy market, subscription is proving to be a game-changer.

The D2C segment primarily comprises lifestyle products like apparel, beauty products, edible confectionaries, daily needs, eyewear etc. All of these industries facilitate basic needs for a customer on day-to-day basis, which requires attraction and retention for longer periods by providing quality through subscription models. With the option of subscribing to a daily need service – for instance, milk delivery to one’s doorstep everyday – why would anyone not want such a perk in today’s busy schedule?

D2C is also attracting customers by combining subscriptions with various promotions and occasional offers. This helps entices customers to pay less, thus helping in retaining them for the brand.

A few notable brands in the D2C space include Lenskart, Licious, Zivame, boAt, Wow Skin Science, Mamaearth, MyGlamm, Sugar Cosmetics, Country Delight etc.

Trends facilitating the swift adoption of subscription models in D2C:

• COVID-19
  The pandemic provided a way of thinking towards new areas where people do not have to struggle to thrive for their basic needs, which brought a massive change in buying patterns. Given that e-commerce was soaring, even small businesses started to adopt subscription models to help them in revenue generation and provide ease to customers when buying new products.
• The Trust Factor
  Customers either look for the quality of a product, or the value they are deriving once they subscribe to a service – if they experience a hassle-free recurring delivery of their favorite products or services with good quality, then they will remain loyal. Well-established brands who already were able to build trust with product quality accelerated their sales by providing a surplus of subscription facilities. A few well-known examples include Tearaja, Carmesi, Nykaa etc.
• Digitization
  One of the main factors contributing towards subscription-based models in businesses is digitization of payments. Customers needn’t to worry about whether they have cash for the next month’s payment – All they need is a way to pay digitally (there are options to set auto-pay by saving the payment details on different portals, with the subscription being renewed automatically at the end of the cycle).

Types of subscriptions:

There are two main variations in subscription-based businesses.

• Content-based Subscription – Customers pay to access content like eBooks, courses etc.
• Service-based Subscription – Customers pay to access the service like a movie/ product/ membership subscription, online coaching etc.

To achieve any of these variations, there are several types of subscription mechanisms available that a business can implement.

1. SaaS – Software-as-a-Service
Monthly, quarterly or annual licensing models for a software to be used as a service.
Examples – Zoom, Google Suite, Microsoft Suite, HubSpot, Shopify etc.

2. Ecommerce Subscriptions
These pertain to recurring purchases of a business or daily use products. This comprises:

Autoship Subscription – Facilitating a customer with the delivery of a product that is used consistently and required to be purchased every month or so.

Curated Subscription – Facilitating a customer with a selection of unique and random products in a curated box that is required to be purchased at regular intervals, say office snacks or supplies.

3. Premium Access or Freemium Service
Initiating free subscriptions for customers that include basic accessibilities, with an expectation that the user will upgrade to more premium features in the future.

4. Usage-based Subscriptions
A business model where recurring billing comes into play – Through IoT and AI, a customer’s behavior is tracked and as per the usage of a product or service, a bill gets generated. The best examples of usage-based subscription include Ola, Uber etc.

5. Product-based Subscriptions
Monthly or annual charges in the exchange or use of products. In other words, this can be referred to as products that are rented. For instance, office furniture, laptops, desktops etc.

6. Unlimited Usage Subscription
This facilitates a fixed price for unlimited access of goods and services. For instance, gym access for unlimited facilities, phone recharge subscription for unlimited calls or SMS etc.

7. Fixed Usage Subscriptions
This offers a fixed price for a decided quantity of goods and services. For example, an amount is paid to receive newspapers or magazines at regular intervals.

Conclusion:

As subscription-based business are on rise, various organizations are now switching over to recurring billing due to various advantages. These include:

• Customer attraction: Charging customers in timely intervals is better than them giving all their money at once for a longer usage. Subscriptions can also be clubbed with promos like ‘opt for subscription for this product every month and get the product at a lesser price,’ which helps attract the customer’s attention and helps them to stay loyal. In the case of B2B organizations, a lower price point allows you to avoid long sale negotiations.
• Increase in revenue predictability: When you run a one-time payment model, you constantly need to acquire and convert customers and generate revenue. This can get expensive. A month of deficient performance can set you back and make it harder to recoup the investment you have already made in customer acquisition. With subscription-based pricing, payments are made on a regular basis and the amount to be paid after each interval is pre-decided at the time of first purchase, which makes the MRR quite predictable.
• Increased Cross Sell and Up Sell: Due to continuous customer interactions, it becomes easy to understand user behavior and buying patterns, the path they follow, the products they see, where they click more often etc. As the pattern readability increases, it becomes easy to suggest them as related, similar, or additional complimentary items.

An overall increase in customer success is a benefit that one gets as a business. As more customers get converted into potential and actual buyers, it becomes easier to retain them for a longer time, with the possibility of existing regular users bringing in more traffic to the platform. Therefore, the goal of customer retention and success is achieved through subscription models and pricing
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In my next blog, we will try to understand how to implement such subscription variations and the frameworks available in the market.

References:

1. https://inc42.com/features/dawn-of-the-subscription-economy-among-india-d2c-startups/
2. https://insider.finology.in/startups-india/d2c-brands-in-india
3. https://www.retaildive.com/news/75-percent-dtc-brands-subscriptions-2023-report/625348/
4. https://www.business.com/articles/industries-that-take-full-advantage-of-the-subscription-business-model/
5. https://www.cbinsights.com/research/report/subscription-business-model-industries/
6. https://www.forbes.com/sites/bernardmarr/2022/05/12/everything-as-a-service-why-all-brands-must-consider-subscription-models/?sh=188b09847054
7. https://blog.aspiresys.com/digital/cloud/10-features-to-check-out-in-your-subscription-management-solution-part-1/