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The Best Business Model?

Growing up, when people thought someone had latched on to a great opportunity, they’d say something like “You’ve got a real gold mine there!” Today, they should say something like “You’ve got a great subscription service there!” Business founders should definitely consider whether they can create a subscription based business model.

Not that there aren’t some profitable gold miners, but what beats the modern subscription-based company? I’m not thinking publishing – we’re not talking magazines and newspapers. We’re talking cable and satellite TV, mobile phones, web services, and various odds and ends we call by different names (lights, sewer, water, et cetera) that have a revenue model based on continuing monthly payments – subscriptions.

Really, now, what could be better than having millions of customers automatically forking over a hundred bucks or so to you, every month, whether or not they were happy with your product and your service? Particularly if your operations were easily scalable? What’s the incremental cost to a phone company of one more subscriber? How much money drops directly to the bottom line?

Some of the most roundly disliked companies in America are thriving subscription companies. Folks like cable and satellite TV and mobile phone services regularly appear on lists of “America’s Ten Most Hated Companies”. Now that’s partly a statistical aberration. After all, these companies have so many customers that a small proportion of unhappy folks could cast a lot of votes.

But it is also a testimonial for a business luxury called “high switching costs”. It is expensive, or difficult or inconvenient, to switch out of one subscription service into another – at least for some services. And the range of choice is not large. The local cable giant or one of two alternative services, and so forth.

I don’t want to minimize the operational and build-out challenges facing such firms, nor the fact many of these face regulators. No one gets a free ride in this economy. But focusing strictly on the revenue side, what could be better?

Netflix was founded on the premise that subscriptions are better than transactions for the buyer and the seller. After getting stuck with forty bucks in late fees, founder Reed Hastings asked himself “Is there a better way?” My point here is that folks don’t understand what is distinctive about Netflix. Not that it’s a dot com; that it replaced a transaction-based business model with a subscription model.

Netflix actually started as a traditional rental service, with the difference being it was on the Internet. It used what we call a transactions-based revenue model. You ordered a film, you paid the rental on it. The breakthrough for Netflix was reimagining itself as a subscription service.

Next to advertising and affiliate revenue models, the subscription service is a natural for web-based businesses. One of these models starts with a free basic service, funded through advertising. The challenge is converting the user to a better, subscription-based service. Spotify comes to mind, but you already know your own favorite example – because don’t you already subscribe to something?

So when budding entrepreneurs tell me their story, I find myself asking: Could this idea be turned into a subscription service? One with low marginal costs per customer and the high moat offered by high switching costs? Any number of products and services that are generally sold on a transaction-by-transaction basis could also be offered on subscription. It’s not right for every business, but it’s worth thinking about.

The post The Best Business Model? appeared first on David Anthony Gulley.


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