146. The Pros and Cons of Different Recurring Revenue Models
Welcome back to another episode with Paul Chambers. In the last episode, we discussed how to take care of our customers using recurring revenue models. Today, we’re going to discuss the pros and cons of several different recurring revenue models, along with tips and tricks for each model.
Today there are thousands of different subscription boxes we can subscribe to, such as Ipsy and Birchbox for beauty products, Naturebox and Urthbox for super yummy natural snacks, Bulubox for workout products, the Beard Club, and the Candy Club. There are a lot of opportunities with subscription boxes. People love to watch unboxings on YouTube or Instagram. They’re great for holidays and events. There are boxes for travel, for kids, for lifestyle, or for your horse or dog that you get on a monthly basis. Paul said, “If there’s a niche out there, there’s an opportunity to build a subscription box.”
There can be many pros to subscription boxes. One of these is the recurring revenue it provides every month, which can take a lot of stress off an entrepreneur’s shoulders. It also limits unnecessary expenses because we only have to order enough products to fulfill our subscriptions. Our customers can also have a lot of fun with the discovery and delight side of subscription boxes by introducing people to new products and working with a lot of different brands to put new items in the box. When Paul was working on the Gentleman’s box, they worked with Manscaped and Dollar Shave Club.
A con of subscription boxes is they tend to have a faster turnover. After six or seven months, people can get what Paul calls box burnout and stop subscribing.
The Right Software
Picking the right software to run a subscription box business can be tricky. It’s important to know what we’re trying to accomplish. Cratejoy can be a one software option because it is fast and easy to build a subscription box. They also have a marketplace, so they already have an audience for us to sell to. However, it can have its challenges with products and flexibility.
Shopify is another platform that allows us to sell subscriptions through their widget where we can add on plugins and easily build on top of that. But it doesn’t have an audience like Cratejoy, so we’d have to go market on mysubscriptionaddiction.com or other places like that.
There are OrderGroove and Zuora that take it to the next level. OrderGroove is making big waves; they have some cool AI features and they are getting tightly integrated with Shopify. Zuora is an enterprise software company that is good for larger companies like Nike.
When Paul launched the Gentleman’s Box, Cratejoy didn’t exist yet, so they used WooCommerce which is a little more flexible, but they had to play with it a bit to get their subscription box management the way they wanted it.
Discovery and Delight
Subscription boxes tend to go two ways: discovery and delight or replenishable. Discovery and delight boxes send new products that customers can find joy in. They aren’t necessarily products that need to be replaced on a regular basis.
Paul said these kinds of boxes tend to work well on a quarterly basis rather than a monthly one. On a monthly basis, people often unsubscribe after about six or seven months, but they’ll stay longer on a quarterly basis.
A replenishable service or product is something people continue to need. It’s a great subscription model because customers must buy these every month or so anyway, so making it a subscription box that shows up right at their door makes it very easy for them. These are products like razors, which Dollar Shave Club does, or toothbrushes, which Quip does. However, this type of subscription isn’t limited to boxes. SaaS products often work great in this category because customers need access to that service every month.
Early on in the days of Gentleman’s Box, Paul and the founding team were thinking about raising capital, so they met with some investors. One of those people was Jack Abraham, a successful entrepreneur, and investor. He told them, “I love what you’re doing. This is so cool, but it needs some sort of replenishable product inside.”
The team told him to thank you but they were happy with what they had. Abraham went on to co-found Hims, which is now one of the leading hair growth subscriptions, doing exactly what Gentleman’s Box should have been doing, Paul said.
If we are doing a subscription box and there’s an opportunity to put a replenishable product in it, we should take it because it will increase the longevity of our customers.
The pros of SaaS are longevity and opportunity. “If you can build a good solution that people love and need, they’re . . . less likely to leave you at some point in time. They’ll stay on as long as they’re using that solution,” Paul said. SaaS gives us that audience and the opportunity to build and expand our audience.
SaaS also has lots of opportunities. Paul said, “There [are] tens of thousands of SaaS companies out there, but tons of opportunity still to create solutions that people are looking for.”
We can look at a company like Canva, which is very popular and successful. They could have looked at Adobe’s subscription for Photoshop and thought, there’s no way we could compete with them. But they didn’t give up and tried to find a way to make it easier. “My philosophy is to leave no stone unturned. Look at what your biggest pain points are and challenges in your day and if something doesn’t already exist for that, then that’s a great opportunity to build,” Paul said.
The challenge with SaaS is we must frequently evolve it. We can’t just create the software, put it out in the world, and sit back as the money starts rolling in. Paul had this problem with Quotegine. They did just that and thought they were done, but then people started getting bugs, breaking the system, and requesting new features and integrations. Paul and his team hadn’t anticipated that.
“You can’t have that mentality of building a SaaS solution that you’re not going to need to continue to invest in,” Paul said. Having a technical co-founder, especially in the beginning, can help because paying developers can be expensive.
The key to membership is consistently providing value. Paul described how the Subscription Trade Association is constantly putting out new content, and they’re constantly deciding what they’re going to give away for free. “We err on the side of giving more away than we probably even should, because . . . we want to grow the community,” Paul said. “We want to help people as much as possible, and if they find this helpful, then they’ll engage and subscribe and become members.”
Being a member and being a subscriber can overlap. For example, Paul and I are both members of Amazon Prime, but we also subscribe to Amazon Prime. “A good membership,” Paul said, “is something you’ll pay for on a monthly basis and never question that charge or not even know when that charges your credit card.”
Paul and I couldn’t remember when Amazon charges us or even how much the membership is now. This is a great example of customers never questioning the value of that membership.
Amazon isn’t perfect, however. Personally, I don’t feel like part of a community when I say I’m a member of Amazon Prime. I pay for it — and I will continue to pay for it — but I get a service from it, not a community. Amazon is missing the opportunity to build that community. For example, with their streaming service, they could create a way to watch TV and movies with other members online as Disney+ and Netflix have done.
Community is a crucial part of membership. Without it, our audience may just feel like subscribers. We should be doing everything we can to foster our membership communities.
The next recurring revenue stream is what I call the access model, but it could also be referred to as streaming. This model is where customers pay to access something. Streaming services like Netflix and Hulu fit into this, but it can also include something like Adobe Stock Images where customers pay to have access to millions of images.
A concern that small businesses have with this model is they’re too small to create something like Adobe’s image library. They don’t have the resources or the finances to build out that library.
The access model is a two-sided marketplace: there are creators putting content out there and people accessing content from the creators. It would be hard for a small business to create all that content themselves. If I want to start a stock photography site, instead of going out and taking thousands of pictures myself, I could let my audience provide pictures. It may still be a challenge to find photographers, provide them with value, and get them to feed my library, but it is easier than trying to do it all myself.
On the streaming side of access, we may think all the big companies (YouTube, Netflix, Hulu or Disney+, Amazon Prime, Peacock, Paramount Plus, etc.) have it covered, but Paul believes there’s still a lot of opportunities out there. If the top 10 YouTube creators right now started their own streaming service, people would download that app immediately, and they would have a good chance at competing with the big companies.
Thank you so much Paul for sharing your stories and insights with us today. Here are some of my key takeaways from this episode:
1. There are tons of opportunities with subscription boxes. Consider creating a box with a replenishable product to increase the longevity of customers.
2. The SaaS model is a great way to have lifetime (or at least very long-term) customers. However, we need to ensure we are constantly providing value by evolving and upgrading the software.
3. To think of a SaaS solution, find the pain points in your industry and see if there is existing software that could help fix that. Is there a way you could add a tectonic shift to an existing SaaS product, as Google Docs did by adding remote collaboration to a market that Microsoft Word used to dominate?
4. The membership model should be about providing value and creating a community where your target audience can feel they belong.
5. When building an access library, we can use our audience to help us provide content as long as we are also providing them value.
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