Subscription Model

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SUBSCRIPTION MODEL

Subscription models are specific kinds of business models—tools used to describe how companies generate revenue. Business models describe how products, information, and other important elements flow, and what a company's role is during commerce. In the corporate world, there are many different ways to profit in the marketplace. Some companies sell products and services directly to consumers, some sell to other businesses, and some do both. Other companies simply are intermediaries that enable transactions between other parties, be they businesses or consumers. Because of this, there are a wide variety of different business models, from the simple and straightforward to the intricate. Companies, even those within the same industry, sometimes rely on very different business models. It is also common for a company to rely on a combination of different business models.

Although business models identify the general ways companies turn a profit, by themselves they do not necessarily map out a company's overall strategy. Specialized business models called marketing plans are used for that purpose. Marketing plans identify the specific situation a company finds itself in within a particular marketplace, the differentiating factors that set a company apart from the competition, and the individual marketing tactics used to accomplish strategic objectives.

At the heart of business models are different levels within supply chains or value chains. These chains outline the activities involved in creating value from the supply side of economics, where raw materials are used to manufacture a product, to the demand side when finished products or components are marketed and shipped to re-sellers or end-users. Companies review and analyze different steps in value chains to create optimal and effective business models, which may focus on one or more specific points within a chain.

BUSINESS MODELS AND THE INTERNET

Business models used in the offline corporate world may or may not translate to the Internet and e-commerce. Some, including the subscription model, have translated relatively well. Others that have been successful include mail-order models, advertising models, free-trial models, and direct-marketing models. The opposite also is true; some business models are unique to the Internet and have no real use outside of that environment. Internet-specific models focus heavily on the movement of electronic information and include digital delivery models and freeware models.

Online business models vary in their suitability for different enterprises. By themselves they are not enough to guarantee success in the physical or online worlds. As Jeffrey F. Rayport explains, "Every e-commerce business is either viable or not viable. . .Business models themselves do not offer solutions; rather, how each business is run determines its success. So the success of e-commerce businesses will hinge largely on the art of management even as it is enabled by the science of technology."

SUBSCRIPTION-BASED APPROACHES

Like its counterpart in the offline world, the subscription model applies to companies that charge subscribers a fee, normally to view text or graphical information. This model also has made inroads in the area of digital music sales. Jupiter Communications reported that subscription models would dominate this category by 2005, accounting for $980 million, compared with $531 million in downloads of individual songs. Subscription models also can apply to companies providing services rather than information. Many companies using subscription models also sell products or services offline as well.

Of the main challenges companies face when using a subscription-based approach is marketing to a much smaller niche audience that is willing to pay regular fees, as opposed to a much larger audience that might use services at no charge. In the latter scenario, the company would need to evaluate the potentially significant revenue it could make from online advertising, which also can be very unpredictable, and compare it to the more stable, steady, predictable revenue it could glean from a subscription-based approach. Marketing to a mass audience using a subscription model, while possible, was very difficult for many companies in the early 2000s.

In the category of online information, consumers initially were reluctant to pay subscription fees, even though they gladly paid for subscriptions to magazines and newspapers. Many leading newspapers tried to charge users to view content online, but eventually offered articles at no charge. Those companies that have succeeded by using a subscription-based model have done so by providing consumers with specialized or value-added information for which there is a strong demand. One example in the early 2000s was the451.com. The business community has access to a great deal of free news every day. However, making sense of it all and gleaning truly objective viewpoints can be a challenge. The451.com provided business subscribers with news analysis and commentary regarding the technology, communications, and media industries via several different channels, including the Internet and wireless services.

One company that has been able to successfully employ a subscription-based approach with a very large audience is MyFamily.com Inc. It accomplished this with its Web site Ancestry.com, where consumers with an interest in genealogy could search for information in thousands of free and subscription-only databases, which the company expected to contain more than one billion searchable records by the end of 2000. The site had more than 200,000 paid subscribers by July 2000, a significant increase from 92,000 paid subscribers only a year before.

According to MyFamily.com CEO Greg Ballard, "subscription-based models can not only work on the Internet, but thrive with compelling content." Ancestry.com 's databases were popular because they saved genealogists money and time compared to traditional research methods, which often involve travel or long waiting periods to receive information by mail from foreign countries or government offices. The company drove subscription growth through promotion on popular Web portal sites like Lycos, AOL, and Excite, which led to favorable rankings from several independent raters. For example, Media Metrix ranked MyFamily.com Inc.'s four Web sites, which also included RootsWeb.com, MyFamily.com, and FamilyHistory.com, among the 10 fastest growing.

Providing a unique twist on traditional subscription models was Questia. By subscribing to its research service, college students were able to obtain unlimited access to an online library of scholarly journals and books, rather than having to seek out the print versions in their schools' libraries. In addition to offering text and visual information, students were able to use value-added tools like writing and search tools that helped them to better focus their research efforts. Questia planned to have more than 250,000 digital books in its library by 2004.

Unlike many companies using subscription models, Esoft applied the approach to services instead of information. Traditionally, this company sold Internet connectivity equipment to small and medium-sized businesses in 37 countries. However, in June 2000 it shifted its business model away from more expensive one-time sales to a subscription-based approach that generated more revenue per customer over time through established service contracts. Esoft also provided additional services on a subscription basis, including anti-virus protection and Internet usage reports. At the time of its announcement, eSoft cited information from Forrester Research indicating small and medium-sized enterprises, many of which prefer to outsource information technology services rather than handle them in-house, were forecast to spend $2.2 billion on subscription-based applications by 2002.

For companies in eSoft's situation, switching to a business model that relies heavily on subscriptions can be difficult in the short term. Microsoft was facing this challenge in the early 2000s when it was preparing to offer its popular Microsoft Office software via the Internet on a subscription basis. Companies risk losing higher revenues from products or services they sell off-the-shelf while they build up a large base of subscribers paying lower fees. One possible soultion is to continue using both methods, where people who purchase products on a one-time basis have an incentive to purchase the subscription-based version as well.