Risk & Business Magazine Lovitt & Touché Fall 2015 - Page 14

Revenue From Recurring Sources The Benefits of a Subscription-Based Business BY: NEIL WADHWA, RISK & BUSINESS MAGAZINE J ohn Warrillow, author of The Automatic Customer, is a guru in building subscriptionbased businesses. Having founded five different companies, including a subscription-based qualitative research firm that was sold to a publicly traded company on the New York Times stock exchange in 2008, he’s been immersed in the subscription-based business world for years—including with his current company, The Value Builder System. While there are certainly no stigmas against subscription-based businesses, there are misconceptions that subscription-based models are only successful for companies that operate in specific industries (e.g. software). Certainly there are industries where subscription is not the current agreedto or standard model, but what John contends is that every business can form some sort of subscription-based revenue, even if it’s just 5% or 10% of the overall revenue that’s coming from these recurring sources. “There are many auxiliary benefits that subscription-based revenue provides, namely that it lets you plan your business more effectively, as you know how much product to buy in the future, you know how many customers you have in the future, you can plan out your human resources and raw materials better, and the model also allows you to get steady cash flow,” says John. “But the primary reason [of a subscription-based model] is that it simply drives up the value of your company. People who subscribe are more likely to buy more frequently from the companies that they’re subscribed to.” As an example of companies that can thrive under subscription-based models—in industries that have otherwise been overlooked as potential suitors for generating revenue under the model—John points to accounting firms. “Accounting firms have a ‘lumpy’ business model where the firms see an overwhelming amount of work once a year during tax-return time,” says John. “But accounting firms can get around this under a model where they handle the back-office, reconcile books, handle payroll, and update bookkeeping software once a month, and do this on a fixed subscription fee—in addition to filing the tax returns.” Through this method, these accounting firms suddenly have subscription revenue and a much steadier workflow while alleviating the “lumpiness” that plagues a typical accounting firm. Flower shops can also follow the subscription-based business model to success—and H.BLOOM, an online flower store, is the case study to follow. The problem with the traditional flower shop business model is two-fold. First, flower shops have to continuously stimulate demand, as flowers are normally bought only when a specific occasion calls for it (e.g. birthdays, anniversaries). Second, flower shops are unaware how much inventory will move on any given day, and because of the short shelf life, normally 50% of flower shop inventory gets thrown out every month. Seeing the problems that flower shops typically encounter, H.BLOOM turned to hotels, spas, and doctors’ offices— businesses that normally have freshcut flowers placed on the reception desk—to sell these companies flowers every two weeks on a subscription basis. Selling flowers under this model has not only given H.BLOOM a consistent source of income while only having to throw out 2% of their inventory each month, but operating under a subscription based model has allowed 14 RISK & BUSINESS MAGAZINETM FALL 2015