Professor of Management Practice
Companies such as Netflix and Streamz have recently started changing their revenue model by adding a ‘light version’ to their normal offering. Customers pay a lower monthly subscription, but they receive advertisements while using the streaming service. Professor of Entrepreneurship Yannick Dillen explains the reasoning behind this business model – and how it can work for your company too.
Why are these companies changing their revenue model?
Several reasons can be at the basis of this decision. First of all, they aim to reach the customer segment that does not take out a subscription because they previously considered the product or service to be too expensive. By adding a different revenue model, you can grow your customer base. Next to that, the combination of the lower subscription fee and the advertising income still gives these companies a decent revenue per customer, probably very close to what they earn from a customer opting for the normal subscription. And thirdly, they may realise the subscription revenue model might have become too popular.
Professor of Entrepreneurship Yannick Dillen explains the downsides of a pure subscription-based business model – and potential alternative revenue models for start-ups and SMEs
Why is the fact that the subscription model has become so popular a reason for companies to adjust their revenue model?
Customers have a psychological maximum that they are willing to spend on subscription fees. In a B2C environment, many organisations such as music streaming companies, telecom businesses or fitness clubs are using this model. From a customer perspective, having many fixed monthly payments can amount to a heavy financial burden. So, as a result, they start pruning their number of subscriptions and shift to other ways of payment such as the ‘pay-per-use’ model. Here, you only pay for what you use or receive. This might make customers feel better about their spending, as they are not bound to a fixed monthly payment if they are not using the product or service for a while.
What can start-ups or SMEs learn from this business model shift away from a pure subscription-based business?
Firstly, entrepreneurs must realise that this phenomenon also plays in a B2B context. The leaders and managers of companies too, have a certain psychological maximum of subscriptions that they are willing to pay every month. Especially, if they feel that they are not using the product or service that often. The ‘pay-per-use’ model is likely the next best alternative to the subscription model, so it might be interesting for companies offering a subscription service to rethink their model.
Secondly, start-ups or SMEs that are looking for their ideal revenue model may also consider a combination of revenue streams. It can be very interesting for example to try and find one revenue stream from the sale of the initial product and find a second stream in recurring sales for specific components of this product. This is called the ‘razor and blade’ business model, where items are sold at a low price in order to increase sales of a complementary product or service. It’s all about finding the right mix for your customer.