What’s the downside to magic? Consider the amazing Annual Recurring Revenue (ARR) trick. Subscription-based business models with inexhaustible resources - like media or software - use the predictability of ARR to pull many financial rabbits out of hats. Yet all is not what it seems.
Subscription models can create divergent incentives between the service and its customers. This makes it very difficult for subscription models to find the perfect balance between zero utilisation and too much utilisation.
Underutilisation - with customers not taking advantage of the subscription - is problematic and can cause cancellation and churn. The subscriber feels annoyed that they are not getting enough value from the subscription and will inevitably cancel. This churn hurts the brand and reduces the brand’s Net Promoter Score (percentage of customers who promote the brand minus the percent who detract it).
Overutilisation means that profits disappear or the service is harmed for other subscribers who will eventually cause churn. Think of a gym with too many members - it’s pretty hard to swim laps with 50 swimmers in each lane.
If churn and damage to the brand is the downside to magical subscription business models, then a case can be made that a transactional model is what will generate the most success for real.
Four reasons transactional can beat subscription models:
- Transactional models are usually more efficient and offer lower risk to the customer, and this can generate a faster gain in market share.
- Transactional models will retain customers more effectively. Customers will pay for the services they use (no more, no less), thus their loyalty to the brand will be stronger.
- Transactional models greatly reduce detractors of your brand, as far fewer people will pay for something they aren’t using.
- If your service actually works well, its repeat usage will surge (lifetime value), people will tell their friends (virality), and your cost of customer acquisition (CAC) will plummet. Soon your transactional revenue business will have beautiful, predictable, recurring revenue just like a subscription service. Except there’s one key difference: you’re much less likely to be disrupted on price and un-subscribers won’t hurt your brand by complaining about not getting enough value.
Transactional models optimise the business for the long term because all aspects of the organisation are aligned to deliver customer satisfaction and grow. Good examples of this shift include the unbundling of television content from cable providers and pay-per-mile car insurance. Even the software as a service (SaaS) world is experiencing it.
In Doctor On Demand’s case, we decided to offer both our “cash-pay” consumers (whose insurance doesn’t cover our service) as well as our health insurance and employer clients the same deal: $40 per medical visit and $95 per hour for psychology visits - period. If you (or your members/employees) don’t use it, you don’t pay. It’s totally risk free. Thanks to this disruptive business model - along with excellent doctors and a product that just plain works - we’ve been able to grow market share quickly and still end up with nice, recurring revenue that is sustainable for the long term.