How To Start A Subscription Business

The Captain and Tennille (as one colleague and I are called) recently attended the Fortune Leadership Summit in Orlando. There was one tune that particularly resonated with me that was played by John Warrillow, author of The Automatic Customer: Creating a Subscription Model in Any Industry. John and I discussed models of teaching others and he specifically shared ideas at the Summit for gaining recurring customers. John says that the biggest reason to create recurring revenue is the impact it has on the value of your business. That’s a tune I could hum all day.

Below, John shares a 7-step guide to building a recurring revenue model in any industry. 

Recurring revenue - the main benefit of the subscription business model - will help improve the value of your business, provide a steady cash flow, and make your business a lot more predictable. But how do you create a subscription if you're not a software company or media giant? My goal with this article is to give you an action plan for creating a subscription business in any industry.

Step 1: Plot the Ideal Purchase Cycle

The first step in creating a subscription business is to imagine the perfect customer for your company. Grab a white board and sketch out what the ideal customer would buy over a three to five-year period. Imagine what big-ticket items they would buy along with what services and consumables they would purchase regularly.

Keep in mind the ideal customer is not always the same as the biggest customer. Some of your biggest customers may buy your most complex product or insist on using margin-grinding RFPs. Focus on the ideal relationship where your hypothetical customer buys your highest-margin, easiest-to-deliver products and services.

For example, the ideal customer for a swimming pool business may buy a pool opening and closing service in the spring and fall, and a tub of chlorine every month in the summer.

Step 2: Inventory the Reasons Customers Contact Your Company

Next, make a list of all the reasons customers contact your company over a three to five-year period. Do they call because they need additional service? Have a product question? Need a part?

Visualize how you would address each query in an ideal way. My definition for "ideal" is the scenario that would lead the customer to recommend your company to a friend. Would customers want a person to talk to live or a website where they could self-serve? Would they need expert advice, or would fast and efficient suffice?

In our example, a swimming pool owner may have questions about the ideal level of chlorine in a swimming pool. Putting yourself in the shoes of your customer, the ideal way for you to put the customer's mind at ease might be to send a technician to your customer's house to measure their water chemicals.

Step 3: Rough Out Your Subscription Model

In Step 3, you are going to create a first draft of your subscription offering. Don't worry about perfecting it; just try to come up with a concept by bundling the ideal purchase cycle of your customer and marrying it with the ideal customer support.

For example, the swimming pool company mentioned in steps 1 and 2 above may offer a year-round service package that includes a pool opening and closing service in the spring and fall, combined with a biweekly visit from a maintenance person to clear the swimming pool of leaves, check the filters and balance the chemicals, in return for one monthly subscription fee.

Step 4: Round Off the Edges

Next, you'll want to fine-tune your subscription offering so that it appeals to the maximum number of your customers. This may mean removing some elements of the service that would appeal only to your most loyal customers.

Consider creating two or three levels of your subscription, which could be offered in a bronze-silver-gold pricing format.

In our example, perhaps the bronze package for the swimming pool maintenance company would have a monthly onsite visit from a maintenance representative just to check the chemicals, whereas the gold package might include a weekly visit, filter check and leaf removal service. 

Step 5: Price It

Next, you'll want to price out your subscription offerings. Start by calculating the price your ideal customer would be charged if they purchased everything in your subscription a la carte. Now you'll want to provide a discount from this price in return for their locked-in loyalty.

Keep in mind that by offering a subscription, you will be dramatically reducing your costs to re-market to the same customers again and again. Calculate what you spend on marketing to your existing customers and consider passing some of those savings on to your subscribers in the way of a reduced price on the services and products they are purchasing in your subscription.

For example, if the swimming pool company had subscribers instead of customers, they may not need to advertise their fall pool close-down sale or put their chlorine on sale in the spring to get customers in the door.

Step 6: Test It With Your C Customers

Next, you need to start testing your subscription on a few customers. Instead of talking to your best customers, start proposing your subscription to your C customers. Many of your A customers will buy your subscription because they are already buying from you in the ideal pattern, so they will see your subscription model as an easy way to save money; but, the real benefit will be in converting your B and C customers to subscribers.

Keep fine-tuning your offering until most of your C customers become subscribers. 

Step 7: Turn Off the Old Model

Once you have a winner with your C customers, it's time to approach your A and B customers. To maximize your uptake, consider turning off the option to buy your services a la carte. Your B and C customers should like your subscription offering because it professionalizes your offering for something they have already expressed a need to purchase. Giving them an ultimatum shows you are serious about walking away from the transactional business model in favor of the subscription model, which benefits both you and your customers.

Thank you, John, for playing this special tune for our blog subscribers and we hope to get you back for an encore!

John Warrillow is the author of The Automatic Customer: Creating a Subscription Model in Any Industry.

Photo credit: Flickr User Guillaume Baviere, CC license