Selling products on a subscription basis


Like many people, I use web-based services as part of my daily routine. From CRM and project management to live chat and collaboration tools, much of what I do takes place in a hosted environment. Whether you call them Hosted Services, Application Service Providers, or Software as a Service, the general idea is that someone else provides the infrastructure and manages the backend, and you as the customer just login to a website to get things done. Most commonly, you pay a recurring subscription fee for the service, rather than making a large upfront payment.

While thinking about this business model a few days ago, I started to wonder: If software can be sold based on the value it delivers to the user, why can’t physical products be offered this way too? In other words, if a product costs $500 and you typically keep it for three years, might there be a business model where you could pay $30 a month for it during that span, with the ability to return or exchange it prior to three years if you change your mind? Before I continue, let me point out that I’m not talking about traditional financing or leasing, where you shift the payments over time. Rather, I’m proposing a new model where you pay for the product based on the value it delivers, without a penalty for returning it early.

To be clear, I don’t have any problem with vendor financing. It certainly comes in handy in many situations. But I do believe there are some people who look at installment plans as something you use when you really can’t afford the product in the first place. And this might be a very lucrative group to market to. Let me elaborate a bit more on who I’m talking about. I’m thinking about those customers who want your product and can afford to pay cash for it today, but who fail to make a purchase. Why? Because some other purchase was a higher-priority use of those funds, and they don’t want to be locked into a traditional finance or lease arrangement (or simply don’t like the idea of borrowing money to pay for the item). I’m guessing this applies to business purchases, too. In all these cases, you run the risk of losing the customer’s resource allocation decision — which may come after their initial decision that your product is worthwhile.

If you want to maximize your sales to this group, I think a different approach is needed. Rather than just asking them to pay cash or enter into a long-term lease or finance contract, how about something in between? Maybe they pay 10% of the purchase price each year as a “Membership Fee,” and then pay a “Subscription Fee” for each month they keep the product. These charges would include extended warranty coverage and supplies.

Granted, this sounds a lot like renting, but it’s not the same thing. When you rent, you typically get a used product that probably hasn’t been well cared for. In my plan, you would be getting a new (or like new) product and just pay for it as you go along. Also, renting is designed for short periods of time, but this approach would be optimized for multi-year deals. Of course, there are other issues to work out, like making sure prospective subscribers are credit-worthy, and charging enough to cover the support and administrative costs of the program. But I think these concerns can be addressed without introducing too much complexity. And when a product comes back that’s not quite in perfect shape, it could be sold online at a significant discount.

With all that said, I can think of at least one company doing this already: ZipCar. In their case, they charge a recurring membership fee to join the service, and then you pay an hourly or daily rate whenever you use one of their vehicles. I can’t put a finger on why, but it just feels more valuable and substantial to me than renting a car from the usual car rental companies. Maybe it’s the subscription fee that makes you feel like you belong to an elite club, or the fact that you don’t have to wait in line every time you need a vehicle. In any event, I think there is a significant opportunity to sell certain products on a subscription basis, and reap the rewards that come from added sales to the target group that I described above.