Subscription Services: The Perfect Business Model?

From Birchbox to MeUndies, subscription businesses may be the business model du jour, but John Warrillow is convinced it's both here to stay and pure genius.

The author and entrepreneur mesmerized the entrepreneurs at this year’s GrowCo conference in Nashville, Tennessee as he gave them a peek at his current passion and forthcoming book, The Automatic Customer: Creating a Subscription Business in Any Industry, due out in February 2015. The book describes nine different business models based on subscriptions and shows how any business can tremendously enhance its value by adopting one.

"It’s the perfect business model because it provides the greatest value to both the entrepreneur and the customer," said Warrillow.

As an example, he contrasted a traditional flower shop with H. Bloom, the subscription flower delivery service that began in New York in 2010 and is now in 10 cities around the country. While the traditional florist has to deal with all the headaches and vagaries of a store-based retailer selling a highly perishable product to customers who may or may not show up, H. Bloom’s founders, Bryan Burkhart and Sonu Panda, realized they could do a lot better by selling subscriptions to customers who bought flowers on a regular basis--businesses, for example. The average sale at the flower shop would be $29. The average sale at H. Bloom is more than $4,000.

That’s just one benefit of moving to a subscription-based business model, Warrillow said. Another is the smoothing out of demand. There aren't any surprises when people are getting the same order on a regular basis, for instance.

Yet another is the model’s ability to reduce the impact of recessions. He gave the example of a company that goes from installing elevators--a business that stops when construction stops--to servicing elevators, which continues no matter what else is going on in the economy.

But perhaps the greatest advantage is the effect a subscription model has on a company’s valuation. Warrillow has observed that effect through his own business,Sellabilityscore.com, which allows business owners to determine the sellability of their companies and to learn what can be done to enhance their attractiveness to buyers. A key factor is recurring revenues. The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be. Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.

Warrillow talked in some detail about three of the nine subscription models. Here's a synopsis:

The Price of Membership

For the membership model, he used the example of the famed Kathy Blake Dance Studios inAmherst, New Hampshire, which developed a membership business for dance studio owners. By signing up, they received regular updates and advice on how to build their businesses.

Getting Ahead

Then there was the front-of-the-line subscription model--for example, the Peach Pass in Georgia, which allows subscribers to use fast lanes, thereby avoiding traffic and, in effect, skipping to the front of the line.

Constant Supervision

The consumable subscription model builds on what Warrillow called “never-again” moments, as when the baby is crying in the middle of the night because of a wet diaper and the half-awake parent reaches for the box of Pampers, only to discover that there aren’t any left. “Never again,” he mumbles. The best example, he said, is the Dollar Shave Club, which guarantees subscribers that they’ll never run out of high-quality fresh razor blades again. He then played its famous YouTube video, which brought the house down.

“The subscription model has relevance to everyone in this room,” he concluded.