In a world of Netflix and Birchbox, many entrepreneurs will tell you that subscription-based models are the future of business. In fact, 70 percent of business leaders say the subscription approach is key to their company’s future prospects.
Subscription services have a lot of benefits for business owners, the most notable of which is predictable revenue. Cable companies figured this out years ago. When customers are happy with a product, monthly revenue flows in. It’s easy to forecast revenue and plan for the future when you’re automatically charging customers at a scheduled cadence.
Although subscription models make sense for a lot of reasons, they do come with pitfalls. But rest assured that for each potential challenge, there is an answer:
Risk No. 1: Churn, either at the beginning or after a big change
Predictability is a key benefit of a subscription-based model; however, subscription creation and change can still create uncertainty. If the subscription service itself is still in the startup phase, it can be difficult to predict how many customers will sign up and how many will cancel after the first month.
Soulution: Conduct customer research, including surveys and focus groups with current subscribers, as well as research into additional segments you expect to reach by making any significant changes. Then, if you decide to move forward with the change, you must carefully manage the communication process with your existing customers.
Allot 12 months for your customer base to become familiar with your new subscription service. Watch for cancellations after you make a change to your service, such as a price increase or a change in the product or delivery. The reality is that if you change what you’re offering, it will no longer be valuable enough to some customers to justify the price, and it might become more valuable to others who will start a subscription.
Do your best to retain current customers. Consider grandfathering them into a special rate as a “thank you” for their loyalty and flexibility. Be transparent about why you’re making the change. Invite them to provide feedback or help make decisions around the change when possible. Treat your customers as a community, and give them time to adjust.
Risk No. 2: Surprising credit card decline rates
It’s a big advantage to have the majority of your customers’ payments lined up each month. But did you know that up to 10 percent of payments get declined on the first attempt?
That figure varies by industry, and about half of those payments typically go through on the second attempt. However, it means you could be leaving 5 percent of sales on the table every single month, not to mention that having a card declined leads to a poor customer experience. If users encounter any problems providing their payment, they’re likely to blame your site — fairly or not — and leave your brand for good.
Solution: There are several ways you can combat this challenge. The most straightforward solution is to offer alternative payment methods in the event of a declined card. Partnering with PayPal, Venmo, or other digital wallets will open up the most avenues for your customers to complete their transaction and get on with their day.
If you’re still nearing that 10 percent threshold of declined payments, another solution is to work with a company like FlexPay. FlexPay uses AI to salvage declined transactions by optimizing payment timing and processing. You receive your payment, and customers can have faith that their payments are being processed correctly.
Risk No. 3: The need to consistently keep offerings fresh
Unless your business is one of those old-school cable companies, your customers likely won’t be satisfied paying the same price for the exact same product month after month. Subscription service experts like Dollar Shave Club and BarkBox know that the best way to retain those customers for months and even years is to constantly refresh what’s included with the subscription.
Solution: For subscription box services, this can be as simple as switching out one product for another. For example, Dollar Shave Club offers customers several product options to include in their boxes based on their hygiene needs.
Another way to provide subscribers more value for the same price is to think outside the box. Beefing up your content strategy is a great way to achieve this without devoting costly resources to product development. Create FAQs, blog posts, or video content related to your subscription. For example, BarkBox might put together a canine-friendly cookbook. Making digital content available exclusively to your subscribers is a great way to provide new value while keeping your core offerings the same.
Subscription services are rising in popularity and can add value to a variety of industries. If this model is a good fit for your business, don’t let these pitfalls deter you from pursuing a subscription-based offering.