No wonder subscription revenue models are so popular.
According to Zuora’s study ‘Subscription companies employing a small amount of usage-based billing (less than 10%)... grow more than twice as fast as those who don't use this model.’ In this post, you'll find out why subscriptions are so lucrative to businesses and what to consider if you opt for this kind of monetisation model for your app.
Recurring payment model - what does this mean for you?
The digital age shifted much of the market power that businesses had into the hands of consumers. The human-first approach, which is a priority here at Despark, made tailored experiences the centrepiece of successful products and services.
Subscription-based monetisation allows you to offer a tailored experience to a variety of audiences. By presenting different price points tied to their respective levels of functionality you appeal to many subgroups of users, instead of to the one group that can afford a fixed one-time payment.
This, in turn, allows you both to attract a variety of customers, and to establish several price equilibriums and quickly note any weak links. When you have a one-time pricing structure, you are saying: ‘This is our price. If you can’t or don’t want to afford it, you can't use our product.’
In contrast, a recurring payment model lets you spot which part of your product is scaring away users. Do they give up on your app because of its price (low conversion rate) or because of functionality issues (high churn rate)? When you offer different price points, you see which price/functionality ratio attracts customers and which one fails to hit your targets.
Speaking of targets, provide your users with lifelong value and you’ll earn a loyal user base. Successful subscription model apps do just that.
By maintaining a regular revenue stream, companies can swiftly adapt to their customers’ needs. Say, you release a one-time payment app with a fixed set of functions. When your users’ demands change, to stay relevant, you’ll have to respond with a newer version or even a new product.
To many, the old version will no longer be necessary, making it an expense, not an asset. The more your clients associate your product with expense, the more they’ll be inclined to look for a cheaper alternative.
Financing app optimisation through a subscription revenue model
A significant advantage of subscription model apps is that they provide sustainable revenue which in turn allows for timely optimisation.
App optimisation is a must if you’d like your product to stay relevant, keep its users and attract new ones. By employing a recurring payment model, you get a constant stream of revenue to support your ongoing optimisation costs. This way you can afford more frequent updates, increasing trust in your product.
In addition, when you introduce different price points, they all come with a particular understanding of what users get for the money they pay. Thus, with such a tiered monetisation system you also introduce a tiered optimisation schedule.
This would have a profound impact on your optimisation-related costs in that you wouldn't need to update at the same rate across all price points. Instead, you find out which subscription groups need updates, while the users paying for lower-tier subscription decide whether the new features warrant upgrading to a new level.
As for user satisfaction, another reason app providers pick a subscription-based model is that Apple and Google, owners of the two leading app stores, also incentivise such a system.
Apple was the first to act on the increasing potential of subscription model apps. A couple of years ago Cupertino made a change to its revenue-sharing system when it started paying app developers 85% of subscription-generated revenue instead of the traditional 70% (after the first year of subscription). This year Google followed suit.
Subscription-based business model - follow the lead
A little over a decade ago watching a movie meant hopping into the car and driving either to the cinema or the video rental shop. It’s the latter that made Netflix a household name in the US.
But unlike many of its competitors, Netflix foresaw the advent of human-centred business models and began home delivering DVDs. Today, the company is still keeping up with the times offering subscription-based online access to a ton of entertaining content in close to 200 countries. In 2017 Netflix reached revenue of $11.692 bln.
Lynda.com is another veteran company, founded in 1995 - two years before Netflix. Surviving the upcoming dotcom boom, in 2002 lynda.com began offering online courses on a variety of topics.
Today the platform hosts close to 7000 courses. In 2015 LinkedIn acquired lynda.com. A year later Microsoft acquired LinkedIn along with the learning platform. Currently, Lynda educates more than ten million people. It offers a one-month free trial subscription, after which monthly plans start at $25.
In 2014 Jesse Pickard launched a brain training app - Elevate. The same year it became Apple’s App of the Year. At that time the application cost $5/month, featured 25 games and during its first six months was downloaded five million times from the App Store.
So far the app has been downloaded more than 15 million times across the App Store and Google Play Store. Nowadays it has 35+ games and comes with a monthly and yearly subscription options as well as a lifetime access membership.
Recurring payment monetisation is not for everyone
It's not our intention to sell you the idea that subscription-based monetisation is a panacea. This model doesn’t work for everybody.
The examples of success mentioned above, along with many others out there, have one thing in common: they’re scalable. These are apps that provide functions which can be eternally expanded - more movies, more courses, more games. But if you offer an app with fixed functionality, users don’t see the value in paying you every month for a product that doesn't grow.
Another thing to keep in mind if you go down the subscription-based route is that this model needs to be in your plans right from the beginning. As in the time when you define your vision.
If you begin with one monetisation model, say, one-off payment, and then try to pivot to a subscription revenue model, you’ll need pretty good PR experts to explain to users why their one-time payment of £29.99 is no longer worthy of updates.
It’s what happened to the popular writing app, Ulysses. Last year the people behind the application decided to switch from a ‘hard’ price to a subscription model and took heavy criticism for their decision.
From a user’s point of view, the grief is understandable, even though the monthly fee was set at only $5, with existing users receiving a lifetime 50% discount.
The company behind Ulysses, however, shared on their blog why they are switching their app monetisation model, pointing out that ‘If you bought Ulysses at its launch in April 2013, you will now have received nine major feature releases. For free.’
If you want to avoid battling with your users over pricing models, you need to consider your ongoing optimisation costs right from the start.