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Subscription business model

The subscription business model is a business model that has long been used by magazines and record clubs, but the application of this model is spreading. Rather than sell products directly, more and more companies are selling monthly or yearly access to a product or service. This, in effect, converts a one-time sale of a product into a recurring sale of a service.

In addition to magazines, book clubs, and record clubs, many other industries are using the subscription model. They include phone companies, newspapers, cable providers, cell phone companies, internet providers, pay-TV channels, software providers, business solutions providers, and financial services firms.

Impact on the vendor

Businesses benefit because they are assured a constant revenue stream. This greatly reduces uncertainty and the riskiness of the enterprise. Also, in many cases (such as integrated software solutions), the subscription pricing structure is designed so that the revenue stream from the recurring subscriptions is considerably greater than the revenue from simple one-time purchases. In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any specific issue. This reduces customer acquisition costs, and allows personalized marketing or database marketing.

Subscription business models also have their drawbacks. The business must commit to a large infrastructure to manage and track subscriptions.

Impact on the customer

Consumers can also benefit. If they were going to purchase the product regularly any way, they will benefit from the convenience. They only have to make one purchase decision, then sit back and wait for the product to arrive. It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. There are also many people that use regular subscriptions to fulfil a need for belonging. Subscriptions can do this by presenting themselves as clubs. The subscribers are “members”. They, and others of similar interest belong to a group (example: Computer Science Book Club). Subscription pricing can blunt the sting of paying for expensive items. By spreading the cost over a period of time, the purchase seems more affordable.

However there are also drawbacks to subscription models. Often, as in the case of software, the customer may wish to pay a one time fee for the security of knowing that no further payment is necessary. Also subscription models increase the possibility of vendor lock-in, and consumers may find repeated payments to be onerous. Finally, subscription models often require or allow the business to gather substantial amounts of information from the customer (such as magazine mailing lists) and this raises issues of privacy.

The razor and blades business model (also called the bait and hook model), is an attempt to approximate the subscription model.

Impact on the environment

Because customers may receive items which they don't actually need, this can have a negative impact on the environment, depending on the products, requiring greater volumes of production, greater energy and natural resource consumption, and subsequently greater disposal costs.

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