Today we are going to take a closer look at the two most common strategies on the market – subscription vs. purchase. From one side we have a one-time payment model where people own a product after purchase. From the other, there is the subscription for which the users have to pay monthly or annually. So what would be better for your business? When people buy a product and possess it for a lifetime or when they regularly transfer you the money in order to use it?
To decide on a business model first you have to consider what are you introducing to the market. Make sure you didn’t overprice the product because that can be a problem in both cases. Ask yourself, is your product related to material resources and how often would you use it. Usually products that need continues servicing and updates should be sell in the subscription model. It is simply because the model is made for cloud-based or Saas products. Whereas, the one-time sale model is better when you sell a physical product for instance a T-shirt. A subscription is a good option when we listen to music on Spotify because we don’t pay for the whole music library. Similarly, when we use Photoshop for $19.99/month is less than paying $400 at once in a one-time payment model. It’s difficult to state the superiority of one over the other but after making a comparison you should be able to choose the right model for your type of business.
What attracts customers to the one-time payment business is the affordability and flexibility of it. Most often those businesses offer something which supposed to be used once for a while not regularly. That’s why they decided on such a model. This way people buy their services only when they need to use it without the additional monthly costs. The subscription model works basically like renting. You rent your product for which people has to pay monthly or annually at a certain price. Your service is licensed. However. there is no long-term commitment as people can withdraw from the subscription whenever they want to. Now let’s make a comparison.
The subscription model has the advantage of a steady profit. Choosing the model you may expect that the cash will keep coming into your business due to the automatic billing. It solves the problem of gaps in billing cycles and seems to be a safer option. Licensing usually requires a low entry cost to try out the product that’s why people are more willing to spend it. What else? Customers can adjust the pricing to pay monthly, every 4 or 6 months or annually. And even if they won’t be using it as often as they thought, they paid for it so you don’t have to worry. When it comes to the one-time sale model, it may be cheaper to pay once and no more. But keep in mind that the entry cost may not be within the reach of many potential customers. That means the model is highly dependent on new buyers thus when there is a lack of them you may experience gaps in payments.
Without recurring payments, the one-time payment model is just unpredictable. You never know when the new customers will show up and save your company. Moreover, without recurring revenue, it will take a lot of time and effort for your business to achieve stability. With the subscription, as long as your product is good you can reach that pretty quickly. And this is what the investors look for. The founders of a business with the licensing model can also forecast their future income patterns more accurately. Judging by the number of current customers and their subscription periods instead of relying on sales predictions. Choosing the subscription you can easily encourage your customers to upgrade their current plan by offering various discounts or premium upgrades. Lastly, the steady income provides money to pay the developer team for making the product evolve.
Casper is a company that sells bed-in-a-box. They have three patented types of mattresses that fit into a box and can delivered via UPS. The customers can try out the mattress in 100 days and return it if they want to. Casper decided on selling products directly to customers, in less than two years became a $100 million company and they did it without the subscription model.
On the other hand, there is Peloton, a company that created an exercise bike. The idea is that you buy such a bike for about $2000 but you pay a $179/month subscription for streaming of the workout. The bike has a screen on which the training is displayed. So you can feel the motivation just like in a group cycling training. This way you have a private indoor cycling studio in your home. How is that possible that people actually started to buy those? Peloton focused on a relationship with a customer and the content. They never wanted to be a competitor to the other sport bikes. They wanted to serve people the exact same experience as they were in a gym.
Although the subscription model is so common on the market and works for a wide range of businesses, it’s not an ideal solution for all. Let’s not forget that building subscription functionality into your app requires a team of specialized software engineers. However, it doesn’t mean it’s so expensive you can make it happen. The transition from one model to another may sound reckless but there are companies which succeeded doing it. An example can be Adobe which from selling boxed software transformed into a cloud subscription model gaining $1.31 billion in revenue in the first quarter.
Ending, both hardware and software sales are challenging that’s why the founders want to create a recurring revenue business model. There’s no need to charge extra for the product which doesn’t change. But usually when it comes to Saas products they are updated regularly. In this case subscription model is a must-have.
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