Why Subscription-Based Business Models Don’t Work

This article is an excerpt from the Shortform book guide to "How Brands Grow" by Byron Sharp. Shortform has the world's best summaries and analyses of books you should be reading.

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Are you considering a subscription-based business model for your company? Are you looking for new ways to increase revenue from existing customers?

For many companies such as Netflix, subscription-based business models are the only way to gain profits because they’re “subscriber-only” services. However, that doesn’t mean subscription-based business models are meant for every business.

Learn why Byron Sharp, the author of How Brands Grow, believes that subscription-based business models don’t work for a lot of businesses.

Are Subscription-Based Business Models Worth It?

Subscription services have boomed in popularity in recent years, and at first glance, it appears to be a viable way for brands to increase their profits by targeting existing customers. Subscriptions that require a monthly fee by their very nature allow the company to set their customers’ purchase schedules.

However, it’s possible that subscription-based business models aren’t worth it for businesses to invest in. All-you-can-eat-style subscriptions are more valuable to customers who would have made purchases anyway—with a subscription, a brand’s heaviest buyers often end up paying significantly less than they would have a la carte.

For example, Taco Bell has rolled out a subscription service: one free taco a day for $10 a month. Since Taco Bell sells individual tacos for around $2, this means that for the cost of five regularly-priced tacos, customers can get up to thirty via the subscription. In this case, subscribers who would have already eaten more than five tacos in a month are getting value for purchases they once happily made at a higher price, cutting into Taco Bell’s profits for no clear gain. Similarly, Amazon Prime Video subscribers who watch a lot of TV and movies may have been willing to pay for more expensive individual rentals or purchases of that same content.

The two examples above differ from services such as Netflix because their subscriptions act as an add-on bonus for their company. However, when Netflix has a popular original show on its service, people will have no other way to watch the show unless they pay a minimum of $9.99 a month to Netflix.

It’s also possible that consumers who already planned on buying frequently are the majority of those who choose to enroll in subscription services, while consumers who know they wouldn’t use the subscription enough to save money choose not to participate. If this happens, brands suffer losses not only from subscribers who are getting extra value for no clear gain to the brand, but also from potential new customers who turn away because of the intimidating commitment of a subscription.

Loyalty Programs

While not all loyalty programs require a paid subscription, they fall prey to the same downsides as subscription-based business models. Sharp explains that like subscriptions, it’s wasteful to spend money marketing to existing buyers because they’re the most likely to make purchases without marketing intervention. We can see this principle at work by examining why loyalty programs fail to increase profits.

Loyalty programs attempt to incentivize existing customers to purchase from a brand more often by rewarding buyers with points or free products with every purchase. However, when comparing loyalty program members to non-members, the data shows that loyalty programs don’t influence members to buy any more frequently. Members are just getting value for the purchases they would have made anyway, without the loyalty program. Thus, the loyalty program is wasteful and unnecessary. 

Why don’t loyalty programs or subscription-based business models influence people to buy more frequently? Sharp claims that for the most part, people only buy things when they need them. No marketing can influence existing customers to buy more than they want or need. On the other hand, when you market to new customers, you can increase your profits without futilely attempting to persuade anyone to buy more frequently. Instead, you simply wait until consumers need to make a purchase and influence them to choose your brand instead of your competitor’s.

Why Subscription-Based Business Models Don’t Work

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Like what you just read? Read the rest of the world's best book summary and analysis of Byron Sharp's "How Brands Grow" at Shortform .

Here's what you'll find in our full How Brands Grow summary :

  • Why everything you know about marketing is wrong
  • An unpacking of the unsubstantiated marketing myths that business schools teach
  • The psychology behind consumers’ purchasing decisions

Katie Doll

Somehow, Katie was able to pull off her childhood dream of creating a career around books after graduating with a degree in English and a concentration in Creative Writing. Her preferred genre of books has changed drastically over the years, from fantasy/dystopian young-adult to moving novels and non-fiction books on the human experience. Katie especially enjoys reading and writing about all things television, good and bad.

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