How Subscription Companies Grow Revenue and Reduce Expenses

The subscription model - paying for the use of a product or service on a regular basis, rather than purchasing an item outright - has been around for hundreds of years. Over the last decade, the subscription economy has come to dominate the digital space especially, with even stalwarts like Adobe, Microsoft, and Oracle coming to see the benefit of taking a small fee regularly over time versus getting paid more all at once. The business model, though, requires merchants to find ways to increase the revenues coming in, while finding expense reductions, to take true advantage of the economies of scale that fuel ultimate profitability.

What Subscription Models Rely on Revenue Growth and Expense Reduction

Most subscription programs are not wildly profitable in the early going: the trade-off subscription merchants make, versus traditional sellers, is that they see a smaller payment upfront in return for the opportunity to continue to charge over time. Imagine a company that sells a piece of software for $100, or as a $10 per month subscription: for the first nine months, the subscription has generated less than the all-at-once sale, but in month ten the two line up, and everything thereafter is a net win for the subscription seller. By its very nature, then, the subscription model is a long-term play, that needs to continue for a while to demonstrate its value.

Importantly, it is also a capital-intensive strategy at the outset: products and services must be developed, built, and sold before revenue starts to come through the door, and by selecting the subscription model the merchant acknowledges that each buyer’s payments will be smaller at the outset. As customers pass their payback period (the point at which what they have spent eclipses what it cost the merchant to sign them in the first place), it’s vital for the subscription merchant both to retain them, and, subsequently, to increase their payments as far as possible, and to be as lean and efficient in delivery as they can become: this is where the delayed profits are magnified, powering the merchant to repay the initial invested capital, and to build reserves to potentially introduce a new product line.

How to Increase Revenues from Subscription Customers

The first step is to work out how to increase the payments made by each subscription customer. Key revenue growth opportunities include:

• Adding upsells: an upsell is deriving more revenue from what is effectively the same product. Adding, for instance, an “Advanced” license to the choices, with additional features and capabilities, would provide an opportunity to upsell customers from a “standard” license.

• Adding cross-sells: a cross-sell is deriving more revenue from a related, but separate, product. For instance, a monthly clothing box subscription might offer a make-up addon, or expand from only outerwear to propose a lingerie option. 

• Deliver new versions: once customers become accustomed to your product, they might be fairly easily persuaded to pay more to get the latest and greatest version of it. A streaming games company might add a brand new launcher environment that reduces the time to get a new title running, and charge a premium for it versus their older version.

• Offer new, and more, support options: Customers might well be willing to pay for quicker, more direct access to support, especially for B2B offerings like business software. Merchants should be careful with this option though, as support is notoriously difficult to scale profitably, given its significant reliance on human interaction (though a particularly well-designed AI support system offers some interesting possibilities for better support scaling).

How to Reduce Expenses to Serve Subscription Customers

While adding new income from existing customers is always a positive, there are also very real possibilities to reduce the cost to serve, thus improving the margins the business can recognize. Some key expense reduction opportunities include:

• Charging for services: in the early going, getting customers setup might be something the merchant does for free - but as the subscription product grows in popularity, merchants can opt to charge an ‘activation fee’ or similar, which can be budgeted toward paying for fixed costs

• Decelerating upgrade cycles: by reducing the frequency of updates to subscription services, merchants can keep their development team sizes under control, even as the number of subscribers increases, reducing the cost to serve each

• Optimizing payment costs: early in the lifecycle of a subscription product, merchants may choose to use full-service payment service providers, which offer a wide range of services and predictable, flat fee structures. As the business grows, merchants can choose to expand their set of payment partners, reducing the cost of processing in significant ways, with savings flowing straight to the bottom line

Increasing Revenues and Reducing Expenses by Automating Payments

One area that works for both sides of the ledger is payment optimization: with the right stable of PSP partners, merchants can both

• increase revenues by improving their ability to close deals: for instance, processing deals in the customer’s country or using high-risk processors for higher-risk offerings; and
• reduce expenses by arbitraging rate cards: for instance, using particular PSPs who provide better rates on debit card transactions, or offering bank-to-bank payment methods where available instead of more costly credit card options

In order to achieve this, merchants should consider using a token vault, such as Basis Theory, which allows them to maintain control of their customer information securely, while protecting all data both in motion and at rest, and empowers them to submit transactions to substantially any PSP they choose to work with.