Another One Bites the Dust: Why Subscriptions Are a Startup's Death Sentence
While the on-demand subscription business model has been prevalent for some time now, several companies, most notably Birchbox (which recently laid off 12% of its staff) and ClassPass have recently found that going down that road can lead to disaster. From unlimited monthly blow outs to lunch service for NYC professionals, the on-demand subscription model's initial user acquisition rates are incredible - who wouldn't sign up for unlimited workout classes for one flat rate per month? But, as the saying goes, "if it seems too good to be true, it probably is." The truth is, the on-demand subscription model is not sustainable in the long term, as evidenced in ClassPass' recent pay-per-class pricing announcement. So why are startups so easily lured into pursuing subscription-based models and why should it be avoided? Here are a few of the common misconceptions startups associate with subscription-based business models: 1. It attracts users. Yes, low, flat rate pricing will undoubtedly attract users at a rapid rate, but, these users tend to have no brand loyalty and will quickly ditch any platform when bored. Furthermore, users need to stay on board with a service or brand for four-plus months to break-even and even then, profit margins are very slim. 2. Unlimited offers. Like so many lofty brand promises, this sounds great in theory, but is nigh on impossible in practice. For example, despite ClassPass' claims – it does actually enforce a class limit. Users can only attend a specific class for a maximum of three times per month. This can be tactic to attract users, but once a member finds a class they like and don't have unlimited access, most users will drop off. 3. The appeal of new classes or items. Subscription services pride themselves on offering a huge variety of classes, products or locations, but the appeal tends to wear off after time. After three months of receiving extremely similar lip products in their monthly beauty boxes, customers will undoubtedly lose interest, and companies will find it challenging to maintain a strong user base. Bottom line – subscriptions aren't profitable. Startups modeled on a subscription system face huge user acquisition potential within the first few months of business, but must be prepared to reconcile massive user losses as well. Additionally, for venture-backed businesses, the subscription model presents a huge risk, as the subscription model takes a lot of time to yield a decent profit margin and prove its worth to investors.
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