The subscription economy describes the trend towards renting instead of owning. More and more customers are giving up the value of ownership to subscribe instead. The continuous use of services is preferred to the one-off purchase of a product. Companies are also increasingly switching to a subscription model.
Buying is out, subscribing or renting is in - and not just in the software industry. The subscription economy has long since encompassed topics such as high-priced electric bicycles, trendy digital cameras and stylish office furniture. Not to mention all the streaming services for films, series and documentaries.
Subscription Economy - the history of its origins
However, the concept is not new, as book publishers were already trying to determine their print runs with long-term contracts and advance sales in the 17th century. In the mid-1990s, however, subscription models really took off.
At that time, the telecommunications industry launched the first offers with intelligent tariffs on the market. Suddenly it was possible for customers to pay a certain amount each month for a certain number of free units instead of having to pay individually for every minute called and text message sent.
The subscription economy provides companies with more insight into customer behavior as well as more predictable revenue streams. While the subscription market in the USA has grown by 100 percent in the last five years alone, German players have so far been hesitant to venture into this new territory.
A look at the latest figures from Juniper Research shows just how big the subscription economy already is. They estimate that the subscription economy will grow to around 275 billion dollars in the coming year. Physical goods account for 45% of the subscription market. Subscription models are already one of the top three payment methods for retailers that rely on subscription models.
What does subscription billing actually mean?
The term subscription billing is relatively common in the industry and revolves around the topic of subscription billing. More precisely, it refers to the billing method itself, which you as a retailer use to invoice your customers for your service or product. This is often done automatically at a specific time according to a fixed schedule.
Subscription models have been an effective method of retaining customers in the long term for some time now. In addition to well-known classics such as Spotify or Netflix, more and more companies from various industries are establishing themselves on the market and enjoying the subscription model.
The spectrum ranges from traditional publishing houses, software and car sharing to food retail, such as the Hello Fresh business model. But young start-ups are also taking advantage of the model's growing popularity among consumers worldwide.
The highlight here is that instead of buying the product, customers use the services individually and according to their needs. The special thing about this is the flexibility. Consumers' desire to be able to use more borrowed products instead of accumulating physical goods is constantly increasing.
SaaS (Software-as-a-Service) is also a hot keyword in this context. Since the triumph of the cloud, more and more software providers have been distributing their products remotely and as a subscription (well-known examples include Microsoft Office 365 and Adobe Creative Cloud).
Advantages for companies
- Flexibility and adaptability: Products and services can easily be converted into subscription models.
- Financial benefits: Regular income and reduced new customer acquisition costs.
- SaaS advantages: Simplified software usage through subscription instead of purchase. In addition to cost savings on licenses and hardware, companies benefit from on-demand software usage, regular updates and comprehensive support services included in the subscription.
Advantages for customers
- Greater choice and flexibility: subscriptions offer a wide range of options and simple cancellation options.
- Cost efficiency: Lower expenditure and protection against bad purchases.
- Continuous improvements: Regular updates and new features for subscription models.
((Companies benefit in particular from the ability to subscribe to SaaS offerings on demand and install them on their own devices instead of having to provide costly software licenses and the necessary hardware.
Further advantages: Software updates are automatically included in the valid subscription, and there are support services to take care of the problem).
Our expert's opinion on the subscription economy
In an interview with Gründerszene on April 10, 2019, our expert Ingo Hentschel (Member of the Executive Board and Head of Key Account & Sales at nexnet) explains why there is so much potential in the subscription economy and why subscription models work in virtually every industry.
Ingo, the subscription economy is being celebrated as a major trend business model. Can you explain in detail what exactly is behind it?
"The hype is linked to the desire of many companies to bind their customers in a long-term relationship. Sounds nasty, but it's simply the well-known subscription principle. Convincing new customers is always difficult - subscriptions are a good solution as it is relatively easy to retain customers. This model is already very familiar in the B2C sector, for example with streaming portals. Now it is gradually arriving in the B2B market too."
Why are subscription-based business concepts so lucrative across all sectors?
"The subscription economy is a game changer because there are no limits to the creativity of product managers. However, there must be intelligence behind the offer so that added value is actually created for the customer. Streaming portals, for example, discovered early on that customers prefer to pay a monthly basic fee for an extensive range of films and series instead of buying the respective DVD. This principle works in almost every industry - hence the enormous potential attributed to the subscription economy."
Can you explain why German companies still have so much catching up to do when it comes to the subscription economy compared to the USA?
"While the USA has recognized the potential of subscriptions and the turnover of subscription providers has risen to 2.6 billion US dollars, we are still focusing too much on the old economy. Therefore, in many cases the credo applies: 'You don't change a functioning business that easily! Yet only subscription models offer the flexibility that companies need to meet the new demands of their customers. However, some traditional industries - such as the automotive sector - are keeping a watchful eye on the new possibilities. Just think of BMW and Mercedes, which are already successfully relying on a subscription-based business model with their car-sharing services."
The road to a functioning subscription model is a rocky one. What exactly do subscription-based business models demand of companies?
"It's true - subscription-based business models are not as simple as they may sound. There is a lot to consider when designing them. The most important thing is that there must be obvious added value for the customer! If I, as a user, enter into a continuing obligation, there must be a clear advantage for me. For this business model to pay off, smooth processes must also be ensured in the background.
When it comes to IT, there are certainly some adjustments that need to be made, aren't there?
"In any case. The IT effort is extremely high. It is often underestimated and is therefore a 'show stopper' when implementing subscription-based business models. The models have to be tracked completely differently in terms of processes and place completely new demands on customer relationship management. The new processes also have to be delineated completely differently in terms of accounts receivable. In many cases, financial accounting systems are not even prepared for all these new requirements."
Keyword finances: The subscription economy is also about subscription billing. How should companies deal with this?
"Billing is about much more than just producing invoices. The mediation component is particularly important here, where different service data streams have to be brought together, for example consumption-based goods on the one hand and hardware provided on the other. In addition, staff should also consider the different country requirements: 'Where do I invoice VAT? What has to go where on the invoice? How do I deliver the invoice? " Financial accounting departments have to deal with all of these questions. And that's no easy task."
How exactly does nexnet support companies in their move into the subscription economy?
"We offer modular solutions that are tailored to the respective needs. We provide support in the areas of master data management and CRM as well as in the provision of payment methods. After all, how the customer wants to pay is an important factor. Another important point: as in-house accounting is often not designed to meet the special requirements of the subscription economy, we offer our customers synergetic accounts receivable management including payment clearing, so that the customer ends up with exactly the solution that is tailored to their individual needs."
Good reasons to become part of the subscription economy
There is hardly an industry that is not currently trying to offer its goods and services on a subscription basis. Subscription models are also becoming increasingly popular in Germany. It is therefore worthwhile for both small and large companies to take a look at this topic - because the business model offers a number of advantages.
Companies that do not yet rely on a flexible subscription service should take a close look at the model.
- Firstly, to keep up with the times. Many customers are almost put off by rigid annual subscriptions or expensive buy-it-now offers.
- Secondly, a subscription business also has a major economic advantage: companies that have established a stable subscription business model can use forecasts to plan sales more accurately for the coming year.
Subscription Economy benefits - from planning to marketing
You can convert almost anything into subscriptions, regardless of whether you sell products or services. Subscription models can take many different forms - from software-as-a-service to meal subscriptions.
But of course there are differences in the details. With a monthly care package with a wine selection, the customer also owns the wine. With SaaS or sharing models, the situation is different: customers rent the service for the duration of the contract. Depending on how the model is structured, customers have different expectations and companies have different obligations.
Another advantage: entrepreneurs generate guaranteed income at a specific time and in a specific amount. This allows business models to grow and new investments to be advanced.
The costs of acquiring new customers fall, while you can forecast your revenue better. Traditional companies in particular should not shy away from this step: a subscription model represents an enormous opportunity to tap into new markets and establish yourself there. Subscription models provide start-ups in particular with the necessary planning security. Instead of speculating on how many people will buy the product in a month, your company can count on regular monthly revenue.
If you market it cleverly, you can even upsell it: Ten euros per month is much easier for customers to spend than 120 euros in one go, and not just because ten euros looks like less. The pain of making smaller payments over a longer period of time is significantly less than with a large sum all at once.
The endowment effect or ownership effect also plays a role here, whereby people value things more when they are in their possession. Discounts and trial months in particular increase the attractiveness of subscription models. Customers can test the service first and be convinced by it before signing up for a subscription at the regular price. A psychological trick: when users test the product, it is already registered in their minds as a possession. The effect of loss aversion motivates them to subscribe in order not to lose the perceived "possession".
Once a customer has taken out a subscription, they initially remain loyal to the company. This saves money and time when acquiring customers and prevents them from switching to the competition.
Long-term customer relationships also make it possible to collect valuable customer data. Thanks to fixed membership numbers, entrepreneurs have much better cost control than with spontaneous purchases and can therefore plan much better and budget more effectively.
Why customers prefer to subscribe rather than buy
In the meantime, people have become accustomed to no longer owning certain things, but only being able to use them. And if you can listen to music by subscription, what's wrong with driving a car with a comparable model?
What may sound absurd to many at first is already a reality. And it is particularly plausible for the young target group that has grown up with subscription models. More and more car manufacturers are currently experimenting with subscription models that allow users to rent vehicles for a fixed monthly fee.
In the USA, for example, there is the "Porsche Passport" program: for a monthly fee of between 2,000 and 3,000 US dollars, users can use the app to grab a car - and, depending on the tariff, even change the model every day. If you are going to a vacation home for the weekend, you can book the Cayenne with plenty of storage space - for the short trip to the lake after work, the 911 in the Carrera Cabriolet version is used. There are already similar programs from Porsche, Mercedes, BMW, Volvo and other manufacturers in Germany.
When comparing a subscription and a purchase, you can draw up a long list of pros and cons. Reselling a subscription is more difficult if the purchased product is not already tied to the user via an account. Prices can also rise for products that are used for longer. Nevertheless, the subscription economy is more popular than ever.
Streaming services are overtaking DVD and Blu-ray purchases and even Microsoft Office is now available as a subscription model. Because the advantages for customers outweigh the disadvantages.
The video streaming example alone shows this: For a low price per month, you usually get a seemingly endless selection of films, series and video content, whereas with Blu-ray there is only one movie. In terms of choice, the subscription beats almost any purchase offer.
The subscription also offers flexibility: if you don't like the product or simply no longer use it, you can simply cancel it - so you only pay for the product for as long as you use it.
Insecure buyers in particular are more likely to opt for a subscription. If you don't use it for that long, you only pay a fraction of the price you would have paid when you bought it. This makes it easier to cope financially with a bad purchase. Entering the subscription economy also opens up opportunities for innovation.
Anyone who bought an Adobe CS6 license for over 1,000 euros, for example, is still using the same Photoshop version without any new features. But with a Creative Cloud subscription, customers get the latest features every year thanks to regular updates.
The recurring payment for the models motivates the companies to provide regular updates and services in order to avoid unsubscribing - a guarantee that does not exist with a one-off purchase.
In summary, this means that it is often cheaper for consumers to purchase products or services by subscription rather than actually buying them. At the same time, they benefit from a much larger selection and are super flexible.
Challenges in subscription billing
Does that also mean a lot of effort and billing chaos?
- Complex IT and accounting processes: A challenge to implement, but can be made efficient through automation.
- Billing complexity: As the complexity of subscription options increases, so does the complexity of billing. At the same time, this complexity offers the opportunity to develop customized subscription models and thus strengthen customer loyalty.
- Recurring billing: Provides a regular and reliable source of income, but requires effective management.
- Management of direct debits and payment methods: While it is a challenge to integrate different payment options, it increases flexibility and customer satisfaction.
- Requires suitable software solutions.
- Overview of customer data and finances: A central challenge that can be used as an advantage through integrated CRM systems and data analysis.
Unfortunately, the implementation of subscription billing models is not as easy as a simple purchase. This is because the key processes, especially in IT and accounting, require an enormous amount of effort.
The more complex the subscription options become, the more complex and confusing billing becomes.
Recurring billing ensures that your company creates invoices at regular intervals, sends them to customers and monitors payments. In this way, you can also offer additional add-ons and various payment options - which you can bill easily.
If you are a young, up-and-coming or established company and want to use a subscription service, you definitely need a suitable product and the right software to effectively manage issues such as monthly direct debits, payment methods and monitoring.
Because without the right tool, entering the world of the subscription economy becomes complicated. There are many regulations that need to be observed. And with a large amount of customer data, products and invoices, it's easy to lose track.
But how do you reconcile customer data, payment due dates, incoming contributions, payment reminders, monthly withdrawals, different payment methods and more?
Subscription billing with the nexnet platform is a reliable helper in the billing and data chaos. The all-in-one solution for efficient billing processes and customer-oriented subscription models.
The nexnet platform offers companies a comprehensive solution in the area of subscription billing with the following advantages:
Advantages of the nexnet billing platform
- Experience and expertise: Many years of experience in subscription billing and accounts receivable management.
- SAP-based SaaS product: State-of-the-art, reliable software solution developed on the basis of SAP.
- GDPR compliance: Secure handling of customer data in accordance with the strict data protection guidelines of the European Union.
- Supports different billing models: Flexibility in application for different business models.
- Integrated CRM: Efficient customer relationship management directly in the platform.
- Automated invoicing: Simplification and acceleration of the invoicing process.
- Testable monthly financial statements in the desired format: Customizable financial reporting that meets the needs of the company.
- Integration of more than 25 international payment service providers: diverse and flexible payment options for customers worldwide.
- Server location Germany: High standards in terms of data security and compliance.
These comprehensive features make the nexnet platform an ideal solution for companies looking for a reliable and versatile billing solution for their subscription models.
The nexnet billing platform is based on 20 years of market experience in the field of subscription billing and accounts receivable management. This tool is just right for you if you are a company, whether you are a start-up, a medium-sized company or a large enterprise, using one or more subscription models.
It doesn't matter which billing models you use, because nexnet's Subscription Management is suitable for both simple and more complex use cases (e.g. subscription models that also offer discounts and/or other bonuses).
With our solution, you can easily manage your contracts, products and add-ons and automate the payment process and invoicing. We offer a wide range of payment methods - from traditional bank transfer to PayPal. Quick price adjustments are also easily possible. In addition, the platform always shows you all data at a glance in your own customer environment.
The nexnet billing platform also uses SAP BRIM as a basis and strictly adheres to the General Data Protection Regulation (GDPR). So you don't need to worry about your data, because everything is operated via our own data center in Germany. Manage your subscriptions and contracts flexibly using the integrated CRM and benefit from various features such as integrated accounts receivable management.
Companies looking for a customized solution for their subscription management are also in the right place with nexnet. In addition to subscription billing, the enterprise solution also offers topics such as accounts receivable management and receivables management.
So it turns out that the subscription model is not new, but has evolved rapidly in recent years. The subscription economy may be a bit of "old wine in new bottles", but "cool shit" still applies, with countless benefits for customers and companies.
Are you interested? Or do you still have questions? Then simply get in touch with us.
