This is a guide to understanding digital subscription models and their value proposition for your business. Our previous post about popular business models in eCommerce was a huge success, so we decided to go in deep with digital subscription models.

It is becoming imperative to many businesses to develop effective strategies to hook and keep customers. In recent years the well-known subscription model has emerged as a clear alternative sales strategy for digital businesses – albeit with some interesting variations. Understanding, assessing and adapting these new digital subscription models should be a priority for all eCommerce businesses.

Before you choose a digital subscription model

Ensuring a successful business proposition requires 1) Establishing that value is being created for the potential customer, and 2) Understanding your supply chain and optimizing it accordingly based on the cost you can sell your products or services for. Once these two things are established, it will be much easier to pinpoint which of the following digital subscription models will add the most value to your business.

The classic value proposition for subscriptions

The value proposition of a subscription for the customer is a combination of convenience and long-term savings. Ebooks are a great example. If a subscriber reads three or four books a month via an ebook platform subscription service, they have convenient access to content and are getting good value for money.  From a purely financial perspective, the volume of usage clearly outweighs the cost. But if a subscriber is reading only one book a month, they are likely overpaying for the service. To avoid the latter, it is pivotal for every managerial team to create a business that is adding value relative to the use of its product or services.

Three types of digital subscription models

1. All-Access Subscription (often called Streaming) – Spotify, a great example of the all-access model, provides more content than anyone could ever use. It is important to note that in this example we look at three structurally different value chains, pay-per-use, fixed split, and the Netflix model. However, the customer offering of a fixed, flat-rate monthly subscription remains the same for all three. With pay-per-use subscriptions, the business pays the content producer per view.  With content costing varying amounts, it is important for the business to offer a variety of options to soften any potential financial blow.  To prevent customers from only clicking chart-topping options, tactical marketing campaigns can help direct interest to less costly content. This cost structure is good if you expect your customers to think they can consume more than they really can. At this point it is all about your ability to balance Average Cost Per User (ACPU). With fixed split (Spotify) all-access subscriptions, the customer is charged the same monthly fee as pay-per-use, but the business pays the content producer differently. They are paid a percentage of the subscriber’s monthly fee, which again is paid to the producers relative to what content is being consumed. The leftover portion is profit for the business. If you expect heavy usage by your customers this model could be a way of shielding you from high ACPU. Your key challenge here is negotiating revenue split that is viable for your e-business. Lastly, the Netflix version uses a combination of purchasing licenses for big blockbusters, and pay-per-use for lesser known titles. Netflix pays hefty upfront prices for select films and series they assume thousands of users will watch, and assume the B-movie section won’t be too popular. This strategy requires large investments in inventory, but can provide low variable costs if you have high usage.
2. Club Subscription – Loyalty programs are an easy, low cost way to incentivize customers to prefer a brand or marketplace over others. For instance, the customer pays a low fee for services, discounts or perks. Amazon Prime is a popular program that charges a yearly fee for free shipping on millions of items, plus guaranteed 2-day delivery. Customers are loyal to Amazon because they are guaranteed a quick, reliable service every time. Few eCommerce businesses can compete with what Prime offers, and must rely on buyers not seeking what they desire at Amazon. Another form of club subscription is when retailers offer a free, exclusive membership with perks that accrue with each purchase. Sephora’s Beauty Insider program is an example of a robust club subscription with many incentives for users. Every time a member makes a beauty purchase, they accrue the same amount of points as dollars spent, which translates into free product rewards. As part of the package, members are also offered beauty tutorials, discount days, free samples, purchase tracking and VIP status opportunities. Club programs like this work exceptionally well to beat competitors with minimal effort. Even if the product is slightly cheaper next door, most members won’t risk going elsewhere and missing out on perks like freebees.
3. Bundle Subscription – Bundling is the ultimate way of providing seemingly good value to the customer with minimal additional cost on the business end. Pros like cable TV providers or Microsoft offer a couple of key items of value in their bundle, then add in cheap extras to make the package look more attractive, like lifestyle channels or photo-editing software. And although the bundle has some less valuable offerings from a business perspective (individual under performers in the market), those items appeal to some buyers enough for them to opt for the entire package. A mixed bag of possibility, the power of bundling should not be overlooked.

In E-business, where many online business are selling the same products, subscriptions provide a way to offer unique content your competitors do not have.

In E-business, where many online business are selling the same products, subscriptions provide a way to offer unique content your competitors do not have. Every company with an eCommerce platform would be wise to take a look at how to implement the subscription model as a strategy for success. Digital subscriptions are not just the future for content providers, but all eCommerce businesses that offer products or services. And as with the Netflix model, there is room for creativity in terms of which model works best for your business. Some companies may find that they don’t fit into just one subscription model box.

Meeting expectations of the modern online customer through digital subscriptions is one of the many ways Pubfront and our white label ebook platform puts businesses ahead of the rest. Whether it’s an all-access, club or mixed subscription that your company needs, we can find the right model that delivers the most value.