In recent years, “subscription” business models have been attracting attention. Subscriptions do not require users to pay each time, but rather over a fixed period of time, such as one year, to encourage users to continue using the service.
However, few people may have a deep understanding of the difference between subscription and other similar terms, or the specific business model. Therefore, in this article, we will provide an overview of subscription, explain the difference from other words, and introduce the advantages and disadvantages of subscription business. We will also explain typical examples of subscription businesses, so please refer to them.
What is a subscription?
Subscription is a business model in which you pay a fee and can continue to use a service for a certain period of time. In the past, in Japan, subscription referred to “reserved reading”, and newspapers were a typical example.
However, recently, due to the coronavirus pandemic and people spending more time at home, subscription businesses such as Netflix and other video distribution services have emerged. Many media outlets have opined that the momentum of subscription model business will continue to accelerate in the future.
What is a subscription service?
A subscription service is a service that allows you to use content by paying a fee for a fixed period, such as monthly or yearly. It is called a “subscription” for short.
By paying a certain amount of money, you can enjoy services such as unlimited video viewing for video distribution services and unlimited listening to music for music distribution services. Recently, subscription services have been increasing for cars, furniture, and food, and it can be said that they have become a common service.
Difference between subscription and other words
Earlier, we explained the meaning of subscription. From here, we will explain the differences between the following words that are similar to subscription.
- rental
- Monthly billing/Flat rate billing
- recurring business
Let’s look at each in turn.
rental
Rental is a business model in which you rent a specific service for a certain period of time and return the service at the end of that period. Typical services include “DVD rental” and “car sharing.”
The difference between a subscription and a rental is that a subscription allows you to use the service as long as you pay the fee, whereas a rental has a set period, and when that period ends, the service itself ends. .
In other words, the difference between a subscription and a rental is whether or not there is a need to return the item.
By the way, from the perspective of rental services, there are certain barriers to updating the service or changing specifications within the rental period.
Monthly billing/Flat rate billing
Monthly billing or flat rate billing literally means paying a fixed amount for a fixed period of time. At first glance, it may seem that there is no difference from a subscription, but the meaning is slightly different. Monthly billing or fixed-rate billing is where you pay a fee for the “purchase” of a specific product or service. However, subscription is a business model that focuses on “demand” and only prepares products and services, and is characterized by prices that fluctuate depending on user needs.
An example of a monthly fee is an advisory contract with a tax accountant or a social and labor consultant. Consulting contracts are also purchases in a broad sense, and consumers receive a certain level of quality after purchasing, regardless of demand. On the other hand, in the case of subscriptions, a typical example is a video distribution service, where services are added or the amount of video content distributed increases depending on demand. In other words, the difference between the two is whether to place more emphasis on purchasing or demand.
recurring business
A recurring business is a business model in which you pay for services or products used over a certain period of time. Typical examples include public utility charges such as water charges and gas charges.
These are similar to subscriptions in that you have to pay on an ongoing basis while using them. However, the difference is that with a subscription, the fee is fixed during the usage period, whereas with a recurring business, the fee fluctuates even during a certain period.
Market size of subscription business
According to a survey by Yano Research Institute, the domestic market size of subscription business was 961.55 billion yen in fiscal 2021. It has been announced that it will reach 1,052,475 million yen in 2022 and 1,242,240 million yen in 2024.
The reason for this is changes in consumption trends. In the “Consumer Life Awareness Survey” conducted by the Consumer Affairs Agency, more than 50% of respondents answered that they “want to live a life without having as many things as possible.” You can see that there is a change in consumption.
reference:
- Yano Research Institute Co., Ltd. “Conducting a survey on the subscription service market (2022)”
Advantages of subscription business
So far, we have provided an overview of the subscription business. From here, I will explain the following three benefits of a subscription business.
- Earnings are likely to continue
- Can have a customer list
- Easy to aim for spread through word of mouth
Let’s look at each in turn.
①: Profit is likely to continue
Subscription businesses have the advantage of being more likely to have recurring revenue. Users themselves use the service on the assumption that they will be charged for a certain period of time, so as long as there are no problems with the service, they will basically be able to continue generating revenue.
The key to consistent revenue is to offer a free trial first. There is a risk of incurring losses during the free trial period, but if users are satisfied during that period, subsequent billing periods may be extended. This is an example of a business model that aims for sunk cost effects, such as “It would be a waste to cancel your membership after joining.”
②: Possess a customer list
Having a customer list is also an advantage. For example, a beauty subscription product may need to be shipped to the buyer’s home. At that time, information such as the buyer’s name, email address, phone number, and address can be obtained.
By having these lists and performing user analysis, you can find out whether your products are more likely to be liked by users of a particular age or region. By improving the product based on the results, you can further increase the purchase rate of the product.
③: Easy to aim for spread through word of mouth
Subscription businesses also have the advantage of making it easier to spread the word of mouth. Depending on the service or product, users who spread the word on SNS etc. will receive benefits such as a one-month free trial or free shipping.
Then, it will spread naturally on SNS etc., increasing the possibility of automatically attracting new users. Of course, this strategy can be applied to other businesses besides subscription businesses, but it can be said that it is especially effective for subscription businesses.
Disadvantages of subscription business
Earlier, I explained the benefits of subscription business. However, it is also true that subscription businesses have two disadvantages as shown below.
- Possibility of immediate cancellation
- Need to pay close attention to cash flow
Let’s look at each in turn.
①: There is a risk of immediate cancellation
As mentioned above, subscription businesses have a high possibility of generating recurring revenue. However, on the other hand, if the product or service is of poor quality or is not targeted appropriately, there is a risk of cancellation soon after registration.
Subscription businesses increase sales by maximizing LTV (lifetime value), so sales cannot be expected in a short period of time. That’s why it’s important to thoroughly create a system that prevents users from canceling, as long-term usage is the key to a successful subscription business.
②: Careful attention must be paid to cash flow.
Depending on the product or service, subscription businesses require close attention to cash flow. For example, for supplements and beauty products, it is common to spend three times the cost per acquisition on advertising to acquire a single user. If the cost per acquisition is 3,000 yen, you will need an advertising cost of 9,000 yen.
In other words, once you acquire one user, you are in the red. That’s why we must avoid situations where we are too conscious of the number of users we acquire, leading to poor cash flow and the inability to provide products and services. It goes without saying, but pay close attention to the cost per acquisition and the number of users acquired when providing services.
Average subscription price range
What is the average subscription cost? According to a survey by Mitsubishi UFJ Research & Consulting, 43.3% of purchases are for 1,000 yen or less, followed by 22.5% for 2,000 yen or less, 10.6% for 3,000 yen or less, and 7.7% for free.
In other words, more than 80% of the total spending amount was less than 3,000 yen, which shows that the average spending amount is not high.
Reference:
Mitsubishi UFJ Research & Consulting “Subscription Service Trends”
Typical example of subscription business
So far, we have explained the advantages and disadvantages of subscription business. Here, we will introduce six representative examples of subscription businesses.
- music distribution service
- Video distribution service
- E-book service
- Food delivery service
- online english conversation
- medical services
Let’s look at each example in turn.
music distribution service
Music distribution services such as Spotify and Apple Music can be said to be the forerunners of subscription services. Spotify took the lead in launching a streaming distribution service, boasting over 400 million monthly active users and over 70 million songs, and the reason for its success is that it has made content available for free. Probably.
Apple Music has increased the number of users by linking it to Apple products such as the iPhone, iPad, and MacBook. This is an example of success due to compatibility with a wide range of devices.
Video distribution service
Video distribution services such as “Netflix,” “Amazon Prime Video,” “Hulu,” and “U-NEXT” have a trial period, and a system has been built to let users know the benefits of the service first. I am. In particular, Netflix is a video distribution service that is very popular all over the world, and it also distributes Netflix’s own content, and is designed to keep users who have registered with Netflix.
E-book service
A representative e-book service is “Kindle Unlimited.” Amazon offers an all-you-can-read service with over 2 million e-books, and the price for 2 or 3 books is the reason for its popularity.
“d Magazine” provided by NTT Docomo is also a typical service. The reason why it is so popular is that you can read magazines of various genres such as weekly magazines, fashion magazines, and sports magazines as much as you want, and you can also read back issues.
The reason for the increase in users is that both services can be easily used with just a smartphone.
Food delivery service
Subscriptions are also expanding to food delivery services. “Oisix” is a mail order and home delivery service for ingredients and food. In addition to fresh vegetables and fruits, we also carry additive-free processed foods and cooking kits.
The reason why the service has become so popular is that not only can you easily purchase safe ingredients and food, but you can also have it delivered to your home at any time, including holidays and at night.
online english conversation
Online English conversation is a service that allows you to take English lessons online using Zoom etc. Typical services include “DMM English Conversation” and “Rare Job.” While the demand for face-to-face services is decreasing due to the coronavirus pandemic, being able to take lessons online can be said to be a very strong advantage.
medical services
Subscription businesses are also gaining momentum in the medical field, such as the online medical treatment app Curai and the online QA service Doctors Me. Doctors Me is a medical service that allows you to consult with doctors, dentists, pharmacists, and nutritionists. There are two plans, and you can consult as much as you like no matter which one you choose. This service is often used by people who are concerned about their health or physical condition.
summary
In this article, we have explained the overview, advantages, disadvantages, and typical businesses of subscriptions. Subscription is a business model that charges users an ongoing fee to use the service for a certain period of time.
In recent years, many companies have been incorporating it into their businesses, as it has a high possibility of continuing revenue and allows them to maintain a customer list. Since this is a business that will continue to accelerate in the future, why not consider starting a subscription business using this article as a reference in order to increase continuous revenue.