Subscriptions are now important revenue streams

Finding recurring revenue streams is one of the most difficult parts of building a startup these days. Without that, it’s hard to keep the lights on and attract investment. Startups increasingly have to look at what they can offer as a service for ongoing payments. The option companies go with isn’t always obvious, either.

One of the questions startups have to grapple with these days is how much ownership matters in their niche of the market. It might matter less than expected at first glance. Apple’s iPhone Upgrade Program might have looked like an unattractive option for consumers not too long ago, but the company found a way to hook users into what is effectively a subscription model.

The offer can be looked at as a rent-to-buy program. People pay for an iPhone and AppleCare+ over the course of 24 months. After 12 months, though, users are given the option to upgrade to the latest phone, at which point the 24-month clock starts over again. People who want to keep the phone they have forever can simply keep the phone for the full two years of payments. Users who are enticed to upgrade to the newest hardware wind up renting an iPhone for a year for half the cost of buying it.

Renting out hardware is not a normal practice yet for most consumer electronics, but even hardware startups need to think about the services they offer for their products. Internet of Things devices, wearables, health care technology and other fast-growing sectors rely on subscription services even though they are not necessarily considered subscription businesses.

AngelList currently has 1,098 companies listed under “Subscription Businesses Startups” and 6,631 listed as “Hardware Startups.” Subscription-based companies are still thought of as those that offer digital services or periodic consumables (such as Blue Apron’s ready-to-cook meals or razors from Dollar Shave Club). Business models are converging, though, as software companies move into hardware and vice versa.

While the subscription model is becoming the norm, not all markets are equally receptive to it and the model has its own risks. As popular as streaming video is right now, that popularity isn’t enough to save all service providers. The Wall Street Journal reported that some streaming video services have cancellation rates higher than 50 percent as users subscribe for a brief period of time to watch specific content like the new season of a favorite TV show.

The takeaway in this example, though, seems to be that established companies can weather most storms. Netflix is not phased by these trends. The company added 8.3 million users in the fourth quarter, exceeding expectations.

Netflix now pours millions of dollars into original content production and providing as seamless an experience as possible for users. Fast streaming speeds are part of that experience.

Ultimately, that experience is what matters. The fact that Netflix works so well for so many people is a significant factor for its success. Likewise, consider subscription models taking off on the other side of the Pacific.

Chinese subscribers of local video services are now more likely to be using more than one service. Other subscription services for things like music and bicycle rentals are also becoming more popular in China. (Source: eMarketer)

Bike-share companies like Mobike now offer a subscription option to ensure consumers keep returning to use their services instead of a competitor’s. Mobike’s scale makes it an appealing option. In just about any major Chinese city, people often don’t have far to walk before seeing a Mobike bicycle ready to be unlocked with a quick scan of the QR code.

It wasn’t long ago that subscription models were considered anathema to the Chinese market, but even consumers there are slowly becoming more accustomed to it. It may be a while still before Apple is bold enough to offer the iPhone Upgrade Program there, but it’s no longer so difficult to imagine.

The real challenge is reaching the scale necessary for subscriptions to be sustainable. Even as companies like Xiaomi churn out device after device, locking people a single ecosystem by turning them into paying subscribers is challenging. The rewards of success in this endeavor are high, though, so more experimentation in this area is to be expected.

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