The New Masters Academy offers online art classed for $29 per month. Once a teacher records a lecture, it can be viewed endlessly online at little cost to the company. The students get a low cost art education – the teachers get paid well for great content. But the real winner is the founder, an art student who was frustrated at the cost of an art education. He gets the recurring revenue stream. Once a person signs up, they will likely stay for years – earning the founder $360 per student per year. At 1,000 students, thats $360,000 per year.
Is this the new model of business?
Lynda.com founder just sold her business for untold millions. Her site offered training video classes for subscription. Just before she sold her business, Lynda.com generated more than $150 million in revenue in 2014. All from subscribers. But the real shocker was that LinkedIn purchased the education company. The price? … $1.5 billion.
Lynda.com stated by offering computer training classes at their location and slowly kept adding classes. Then they started to offer classed on CD, then DVD. The company grew little by little. Then they moved to a subscription model. No more shipping DVDs. The result, the company’s revenue exploded.
The whole idea behind the subscription the model is that, technology is making it easy to reach customers all over the world. But who wants to ship all over the world. Very few people are making money shipping products, selling on eBay. Yet Bark Box, a company that will ship your pooch a box of goodies each month, is doing very well.
In his book, the Automatic Customer, author John Warrillow, looks at the subscription model in depth. This includes his failed, and finally successful conversion of his own business to the subscription model.
The basic idea is that a business can get more revenue from a customer if that customer pays a little each month. Part of the attraction to subscription is the auto-renewal. This lowers sales as the turn-over or churn rate is lower with subscriptions.
In the UK, “Turn Over” is a good thing. It mean how many times a store sells out of an item and needs to order and restock. But the author is from the U.S. And in “American English,” turn over is a bad thing. It either means having employees quit, and the need to rehire. Or it means loosing customers and having to replace them.
The subscription model lowers turn over (the bad kind) as customers are automatically re-billed each month. The goal is to get them to start using the service, then provide enough value so they don’t cancel their subscription.
This business trend is so strong, that many consumers are seeing their credit card bills filled with recurring payments. Subscription fatigue is a new term to describe the feeling that consumers are having when they see all these recurring charges each month. This means that subscription business need to provide enough value each month or risk being canceled. Subscription business compete with other subscriptions to stay relevant – so the consumer does not stop the recurring payment.
As more business see this model as profitable, you can expect the number of companies moving to that model to expand.
Nexflix, and most video services are subscription. It’s online technology that’s making this possible. Online, credit card processors, offer programmers details to add recurring payments to website shopping carts. So products become subscriptions. You can get a box of chocolates each month from a number of companies. Or flowers, music …
Even Amazon is in the subscription business with it’s Prime membership. For £79 per year, a subscriber gets a number of benefits. And you can even subscribe to get toilet paper and other consumable items each month. Why drag bulky diapers home from the store each week. Amazon will ship them automatically to your home.
One of the odd benefits Amazon realized, is that once a person subscribes to Prime, they want to use it. Prime gives subscribers free 2nd day shipping on orders. Once someone subscribes to Prime, they order MORE from Amazon. Seems like Amazon would want to give this away for free – but that would defeat the purpose. When someone has to PAY for Prime, they’re compelled to use the service. In other words, when people pay for Prime, they want to use it to feel that it’s worth it. And the only way to do that is to place more orders with Amazon.
We’ll see if the trend continues, but it looks like the subscription model is here to stay. Yet many local food stores have yet to use the model. Nor have most oil-change or auto related businesses.