Whether it’s Spotify, Netflix or a weekly meal kit, it’s likely you already pay for a few subscriptions.
And it’s not just you — in Europe, the subscriptions market has never been bigger, with Europeans dishing out 5% of their spending on subscriptions. The global subscription box market reached a value of $18.8bn in 2020, presenting a golden opportunity for startups to cash in.
"Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue,” says Arundhati Balachandran, senior director of customer success at subscription software company Chargebee. “Subscriptions ensure a predictable stream of revenue per user for businesses.”
How can startups get in on the action? We asked the experts how subscriptions can help businesses expand into new markets and increase revenue.
Subscriptions give you room to grow
Balachandran says a massive benefit of subscriptions is that they create a constant stream of capital, allowing startups to focus on improving their product or service. She says this gives startups extra room to innovate and retain valuable customers.
“Recurring revenue helps developers work towards incrementally improving their apps, and other offerings,” she says. “This provides developers with a great deal of cushion and clarity to plan marketing efforts and feature upgrades.”
It’s much more of a trusting relationship than the one-off you used to have when you would get what’s in the box and nothing else
Alexandre Louisy is cofounder and chief executive of invoice management platform Upflow, a B2B startup that helps businesses collect — and chase — payments by integrating with other tools, like Chargebee. A subscription model from the start, the company raised $15m in June.
Louisy says subscriptions help his company create a different type of relationship with his customers — one that isn’t just about money, but is based on trust that the product will continually improve.
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“We don’t even think about it, but every time we download an update for an app or there’s a new feature coming in, you usually don’t have to pay for that, it’s baked into the subscription model,” he says. “It’s much more of a trusting relationship than the one-off you used to have when you would get what’s in the box and nothing else.”
Don’t be afraid to start from day one
If your startup is already offering a service, subscriptions are likely the most relevant business model from day one, says Xavier Zeitoun, cofounder and chief executive at restaurant booking startup Zenchef, one of Chargebee’s clients. So start as you mean to go on.
“We initially started to solve the problem for restaurants that were depending on third-party platforms that take commissions on bookings,” he says. “So we decided to create a company with a subscription model from the beginning to really solve this problem.”
Although Zenchef started with subscriptions, it migrated almost 9,000 accounts from a different platform to Chargebee. According to the company, 60% of unpaid accounts were recovered.
It sounds very silly but before we did all of our subscriptions in Excel. There were a lot of errors made
But Balachandran says it’s still possible to change your business model if you didn’t start with a subscription. For startups looking to dip their toe, she suggests working with a platform such as Chargebee to ease the transition, because it can automate subscription, billing, invoicing and payments.
For Han Kleppe, founder of Dutch software startup Leadinfo, working with Chargebee helped turn chaos into something more manageable.
“It sounds very silly but before we did all of our subscriptions in Excel,” he says. “There were a lot of errors made. If you send out a couple of thousand invoices each month, there will be mistakes.”
Subscriptions can get complicated — software helps keep things simple
Louisy says a common issue is that other founders think subscription models are simple and not being prepared for complexity down the line.
“It seems like they’re simple because you’re selling subscriptions, so your users are going to pay X every single month and it’s always going to be the same invoice,” he says. “The reality is that it can get extremely tricky, because of course it’s not always the same subscription; there are fees on top of it, a user may start in the middle of the month, they may want to upgrade or downgrade.”
We needed a tool that could manage this complexity and very important volume of customers, invoices and payments
To manage the different variables in Zenchef’s subscription model, Zeitoun says software like Chargebee has been invaluable in that it connects directly to his payments provider, so invoices are sent to the accounting department automatically, saving time.
“We have more than 6,000 subscriptions to manage with a mix of monthly, quarterly and annual subscriptions,” he says. “So we needed a tool that could manage this complexity and very important volume of customers, invoices and payments.”
Get ahead of the curve
While there’s some scepticism about how well subscription models will do post-pandemic, Balachandran says she’s seen some really innovative subscription models coming up — from virtual health checkups to shaving products and pet food — and there’s only going to be more.
“There’s no doubt that subscriptions are the future,” says Louisy. “When you think you would probably buy a CD in the past to listen to some music and you would probably pay $20 for that. Now you’re paying a subscription to Spotify.”
Zeitoun thinks this change is generational, as people’s view on property ownership is changing.
“I think it’s very generational so it will maybe take a few more years, but as Generations Y and Z become the majority of the population, I think it will become the standard to buy anything with a subscription,” he says. “Even companies that sell physical things like cars will go to subscriptions because that’s what people need. They need flexibility.”
The subscription revenue model has proven to be successful in adapting to changing market dynamics. Although, executing it seamlessly from acquisition to accounting while scaling is not as easy as flipping a switch. But it could be with Chargebee.
Fast growing European companies like Spendesk, Hopin and Livestorm use Chargebee to manage their subscription revenue from across the globe. Learn more about how Chargebee can help your subscription business scale beyond borders here.