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beyond subscription models

Strategy

Beyond subscription models: recurring revenue-generating patterns

Published 10 August 2022 in Strategy • 12 min read

With Netflix’s recent loss of subscribers, it may be time to move away from membership and towards alternative models of customer retention.

Over the last decade, subscription-based businesses have grown more than five times faster than the S&P 500. Understandably, this growth has led business leaders to try to fit a subscription model into their business. This is perhaps even more so after the pandemic, with customers having experienced subscription models in new areas (such as Hello Fresh’s meal boxes) and the increased penetration of established subscription models – exemplified by Netflix gaining a record 37 million paid memberships in 2020. However, in the wake of Netflix losing $50 billion in market cap following its first loss of customers in more than a decade, it’s becoming clear that subscriptions are not infallible.

When reading the examples of successful businesses generating recurring revenue without a subscription model, don’t conceptualize them as individual cases. Instead, look past the specifics to understand the pattern the business relies on and determine if that pattern might be adaptable to your arena. Companies like Apple and Microsoft have been hugely successful in locking in customers and creating recurring revenue in other ways which may be more relevant to your business.

The subscription hype

When looking at massively successful businesses, leaders and observers tend to look too closely at the specifics to draw inspiration from the approach these businesses took. Rather than seeing the whole picture, they focus on the tip of the iceberg.

Due to their overwhelming success, subscription models are increasingly considered an end rather than a means. A 2021 McKinsey article perfectly exemplifies this trend: the article focuses entirely on how to force fit a subscription model onto a business, rather than zooming out on what should be the overarching objective; enabling a business to generate recurring revenue.

One of the reasons why subscription models are interesting is because they create gravity – or stickiness – as it requires effort for the customer to switch to another product or brand. But while subscription models are great at consistently billing customers, they only work up to a certain point – after all, it takes just a few minutes to unsubscribe. While some subscription models do boast impressive retention rate in the short term (with Spotify showing an impressive 63% retention rate on premium accounts after 12 months) they exhibit little real stickiness. If a new and more appealing music service was launched tomorrow, there would be nothing tying customers to Spotify, leading the brand to suffer from the same downturn in subscribers as Netflix.

Gravity creators and resource castles

Looking at some of the most successful businesses of the past century, we identified two alternative patterns that enabled the generation of recurring revenue without the use of subscription models. We call these patterns the Gravity Creator and the Resource Castle. The companies we looked at found novel ways to leverage these patterns, and successfully adapted them to their arenas. With the use of the Business Model Canvas below, we can visualize how these two business model patterns differ from one another – and how they generate value for customers.

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