How did a four-year-old e-commerce start-up achieve a billion dollar valuation? The key is Dollar Shave Club's subscription model. For as little as $1 per month (or as much as $9), customers get a subscription to receive razors every month. It is a simple purchase with clear messaging that is entertaining and perfectly tailored to the company's audience.
The monthly subscription gives Dollar Shave Club ongoing opportunities to build and develop relationships with its customers, which it has done with flying colors. Each mailed package comes with a "Bathroom Minutes" magazine with light-hearted articles about life and shaving tips. The company built its recurring transaction streams around its spot-on knowledge of its customers and a low-cost subscription model that fills a real need in the market: cheap razors without the inconvenience of shopping for them.
Not all subscription-based companies will see valuations like the Dollar Shave Club, but the recurring transaction aspect of subscription-based models is a huge boon to almost any type of business. While this pricing structure has been mostly limited to software, SaaS, and B2C companies until now, it already has begun expanding into hardware and service-based businesses.
Some benefits of this model for businesses include:
The ability to predict revenue through a recurring transaction stream
Easier to manage inventory
Simple pricing structures
Higher valuation to potential acquirers
The benefits for customers are similarly compelling:
With automatic replenishment, customers never run out, and don't need to go shop for something
A flat rate helps customers stay within their budget
Bundling opportunities can present added value
Is your business ready for subscription pricing? While this approach presents significant benefits, there are also some challenges that should be addressed up front. The quantity of customer data is multiplied due to monthly rather than annual subscriptions, channel delivery systems may become more complex to manage, and the operations of delivery (from quoting to ordering, fulfillment, and invoicing) can become increasingly laborious. Successfully managing a business based on recurring transactions will rely on an efficient and effective renewals process.