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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 telephone companies, newspapers, cable television providers, cell phone companies, internet providers, pay-TV channels, software providers, business solutions providers, and financial services firms. Also a discount pass is a form of subscription. There are passes for public transport, swimming pools, zoos, etc., with or without automatic periodic renewal.
The razor and blades business model (also called the bait and hook model) is an attempt to approximate the subscription model.
Membership fees to some types of organisations, such as trade unions, are also known as subscriptions.
Effect 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. A serious drawback of the system is that the business must commit to a large infrastructure to manage and track subscriptions.
Effect on the customer
Consumers may find subscription convenient if they think they buy something regularly anyway. It takes them just one decision to wait for the product or service. It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. Subscriptions that presents themselves as clubs answer the need for belonging. The subscribers are called "members" and people 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.
Advantages and disadvantages for software customers
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.
Christopher Lochhead, Chief Marketing Officer of Mercury Interactive (as cited in the CNET News.com article listed in the "References" section) dissents. A subscription model may be beneficial for the software buyer if it forces the supplier to improve its product. According to this idea, a psychological phenomenon may occur when a customer renews a subscription, that may not occur during a one-time transaction: if the buyer is not satisfied with the service, he/she can simply leave the subscription to expire and find another seller. This is in contrast to many one-time transactions, when customers are forced to make significant commitments through high software prices. Some feel that historically, the "one-time-purchase" model does not give sellers incentive to maintain relationships with their customers (after all, why should they care once they've received their money?). Some who favour a subscription model for software do so because it may change this situation.
Effect on the environment
Because customers may not need all the items received, this can lead to wastage and an adverse effect on the environment, depending on the products. Greater volumes of production, greater energy and natural resource consumption, and subsequently greater disposal costs are incurred.
See also
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References
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