Subscription business models are everywhere nowadays—from streaming sites to home dinner boxes, to cosmetics products. Even car companies have begun to adopt subscription models, offering customers next-level convenience while also locking in recurring revenue for their business.
Consider the following statistics:
- Statista estimates the global digital subscription economy will be worth $1.5TN by 2025.
- In 2020, the average consumer paid for 12 subscriptions, with Millennials paying for an average of 17 subscriptions.
- Video and music streaming services are the most popular types of subscriptions.
What is ‘the subscription economy’?
The term ‘the subscription economy’ refers to the increasing popularity of subscription business models, described as “a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for your products or services.”
Adopting a subscription model enables businesses to create long-term customer relationships that provide a steady stream of recurring revenue. Plus, small monthly subscription payments are easier for customers to afford than big-ticket one-off purchases. The “set it and forget it” nature of signing up for a subscription is a convenient way to access valuable services, while some services—such as a car rental subscription service—provide consumers with more choice than they would usually have.
Despite their recent popularity, subscription business models aren’t anything new—milkman and magazine subscription services have been around since the 1800s. However, in recent years, businesses of all shapes and sizes (from Netflix to Dollar Shave Club) have embraced subscription models to great effect.
Types of subscription models
While subscription models all share the same basic premise, the way in which these models work vary from industry to industry. Let’s examine the differences between three different types of subscription models: SaaS, E-commerce, and media/entertainment.
SaaS (software as a service) companies tend to adopt a subscription model as a standard. They generally provide multiple tiers of services to suit their customers’ varying needs and budgets. Customers can pay for what they need and scale their subscriptions as their needs grow.
E-Commerce companies use an approach commonly referred to as the ‘subscription box model’, regularly sending customers boxes of their products. For example, customers might sign up to receive a box with a home dinner kit, or one filled with cosmetics products.
Media/entertainment companies were among the first to adopt subscription models en masse, with Netflix demonstrating just how effective the model could be. Other companies have quickly followed suit—according to The Drum, the total number of global streaming subscribers surpassed 1.3BN in 2021.
How you can increase your cash collections
While subscription models offer benefits to both customers and businesses alike, there’s a downside—there are plenty of opportunities for missed payments. If customers close their bank account, become overdrawn, or run out of credit, their payments will automatically stop.
Companies must ensure they have a strategy to increase cash collections when expected payments stop coming in. By following the five steps listed below, they can do just that.
- Sending pre-collections reminders
Companies should contact customers before their accounts fall into arrears, sending gentle nudges (aka reminders) about their upcoming payments. They should notify customers of how much they owe and when it’s due, giving them time to ensure their payment details are correct and that they have enough money to cover the payment.
- Digitise collections processes
Digital-first collections processes are more effective, cheaper, and easier to send out than traditional dunning methods, such as sending snail mail. McKinsey reports that customers prefer to be contacted on digital-first channels, increasing the chance that they will read the message and take action.
From the company’s perspective, they can easily analyse how digital messages perform—seeing who’s opened the message, clicked through to a repayment landing page, and so on. This helps them identify, and prioritise, the most effective dunning strategies.
- Test different dunning messaging
Some consumers prefer short and direct messages to the point, while others will respond best to messages that adopt a friendlier tone. Test out different messaging strategies among your customer base to see which are most effective. If possible, use AI (such as the multi-armed bandit algorithm) to automatically prioritise sending messages that perform best.
- Segment customers
Once you know how customers behave, you can then segment them accordingly—placing them into groups with similar customers before serving personalised messaging going forward. For example, you might send emails with a direct tone to one segment after 5pm on weekdays, and friendly text messages over the weekend to another segment.
- Monitor your payment insights to adjust your collections strategy
Keep a close watch over your payment insights before adjusting your collections strategy accordingly. If you see that customers have opened your messages, but very few have clicked through onto your repayment landing page, you know you need to change your dunning messaging. Or, if they’ve clicked through onto the landing page but haven’t submitted payment, then you might want to rethink your landing page copy or design.
Prioritise collections to shore up your subscriptions business
By focusing on collections, subscriptions businesses can eradicate missed payments and build a more stable business all-round. However, this doesn’t mean they need to hire a team of collections agents. Collections management software provides subscription businesses with an all-in-one portal where they can devise dunning strategies, send out messages en masse in just one click, analyse customers’ behaviour, and segment them accordingly.
In other words, it acts as a single source of truth for their entire collections operations.