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9 min read

Financial implications of the subscription Model

Understand how the digitization of the economy surreptitiously affects us all, even if only slightly.

 


 

Platform businesses based on digital subscription models are an excellent example of the progressive outcome of digitization because of their high level of digital maturity. Their business culture not only shapes our consumption habits to a high degree but also subtly molds our attitude towards financial topics. In recent years, the Subscription Industry has provided a space for professional dialogue about the effects of digitization and paved the way for both technology and the economy to evolve into a new realm for financial decision-makers.

 

The outlook of the subscription industry

Subscription models are revolutionizing traditional industries with the ever-growing market share that modern businesses generate by packaging products and services tailored to consumer needs. In a post-pandemic world, the digital commerce and subscription markets have an even more significant share in both the business world and our personal lives.  

From lifestyle subscriptions such as Netflix and Spotify to professional ones like Adobe creative cloud & Microsoft 365 – consumers subscribe to services on a digital platform and enjoy a service without any administrative burden or waiting time. Such a form of a business transaction has significant benefits for businesses and consumers, and its continuous development changes the basic rules of the markets on a global scale. Associated with this are changes in the financial planning of companies and the behavior of consumers. How do this shape market culture and behavior in the long-term about financing, consumption, and cash flow over the medium?

A digital subscription business usually has little in common with traditional analog subscriptions. The development of digital subscriptions occurs through digital customer engagement and monetization adapted to digital market conditions. How does this shape the way we handle our money?

 

From the viewpoint of the consumer

Successful digital business ideas can entice subscribers when services are made convenient: they must be accessible, easy to manage, and ultimately more efficient than traditional services. The convenience and the lack of hefty purchasing prices make a subscription offering more attractive. 

 

An example of this is the opportunity consumers now have to subscribe to a car instead of buying one. If you subscribe to an automobile, you do not have ownership responsibilities and do not have to care about wear, repairs, maintenance, taxes, and insurance. Instead, subscribers, all their obligations are fulfilled by paying the monthly fee. Even if the overall financial burden may remain the same, how subscribers receive benefits and distribute their money transforms. Monthly salaries and outgoing subscription payments in a cycle – The sense of stability supported by this system feels very natural to most subscribers. Moving on from time-consuming investments or paying steep interest rates on loans, being able to predict monthly expenses, better budgeting, and freshness of services make subscription deals all the more alluring. It is ultimately an installment payment without debt and obligations, other than the small and steady recurring cost.

 

From the viewpoint of businesses

A modern subscription business has fully digitized and automated processes including customer journey, self-service flows, generating and sending invoices, debiting money, accounting, and more. The maintenance of the systems and understanding the customers remain the main focus of the management. In a subscription model, the two essential digital survival techniques- attracting as many new users as possible and retaining all existing ones are at the core of the long-term sustenance of the company.

Elaborate on this – a publisher replacing traditional print media with a new, fully digital subscription-based access model. Where does the intriguing benefit of a subscription become apparent? In the beginning, it is often primarily about setting up a technical system and less about pre-financing large capital goods as there are significantly fewer operational tasks like printing, warehousing, delivery, and administration. Already existing subscriber networks can be a source of immediate revenue to cover the low running costs in the first stage.

The example company outlined here could thus operate profitably at a very early stage and would have to service relatively small amounts of debt. In particular, founders and investors attract the prospect of a business without a huge investment and operating costs, with a steady income from the beginning and the appealing scalability of subscription platforms. 

In addition, the consistency of revenue contributes to increased planning certainty when it comes to future forecasting: given the right retention strategies, subscribers are usually bound long-term, and predicting revenue is rather comfortable. In any case, this is much more reliable than if one had to speculate one-off product sales for the future.

 

Conclusion

Erik Weibel, Managing Director of the Swiss branch of keylight, says, "the financial side of subscription businesses offers benefits for both providers and consumers, and the services offered can be very well established on the market." Weibel advises companies on the technical implementation of their subscription architecture.

"Subscription contracts create a balance between revenue and outgoings, both on the provider and consumer side so that they are less likely to experience or mitigate peaks of unusual high-cost finance. This balance feels comfortable for both parties and reduces risk. In addition to the aspect of security, the consumer quickly starts to feel comfortable. As soon as the subscribers have become accustomed to the new form of buyer/supplier relationship, a return to old product market conditions often seems less than attractive," says Weibel.

Consumers are likely to get used to the convenience and security of subscriptions and prefer subscription offerings over compulsory ownership of products with high maintenance costs. They will increasingly find it unreasonable to deal with long-term financing strategies such as debt or the strict renunciation of consumption, especially when many subscription services are made easy.

The shift to the subscription model brings about new challenges for corporates. Business strategists fear a high potential for disruption in the context of market change and, therefore, are advising companies to ensure that they do not miss the right time for their conversion. For established business models, the shift is particularly challenging due to the profound changes in the organization. 

Erik Weibel says, "It is important to develop an attractive and financially viable offer that can excite subscribers and keep them going – this is usually a similarly creative process to a startup, even for established companies. After this hurdle is overcome, new and customer-centered business culture also needs the efficient use of customer data for optimizing ongoing operations." He further went on to add, "If customer-centricity is the focus in digital markets, then it makes sense to have the processes and architecture in place to be able to know customers even better and to adapt to their preferences as quickly as possible.”

This is the directive essence for the subscription model: businesses must be able to adapt to changing markets and spoiled customers. For all the convenience available to consumers, suppliers must work hard to stay at the top of the game in the digital world. Ultimately, an agile digital and uncompromising customer-centric business most likely can cope with the demands of volatile digital markets to capitalize on the financial benefits of the subscription model.