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News Article

Subscription Business Models Take the Economy by Storm

By Alessa Flores | Fri, 09/11/2020 - 13:34

Walmart, Mexico's largest retail chain, will bring to Mexico an affiliate service called Walmart Plus. According to a note from Milenio, this membership was already launched in the US a week ago and offered, at a cost of US$12.95 per month or US$98 annually, more benefits to its prime users, such as fast deliveries, discounts and access to 160,000 products online, in addition to the options found at physical stores. Today, other stores such as Sam's Club and Costco already operate under a membership scheme. This business model, however, has grown in popularity over time and has permeated other sectors beyond retail with companies like Amazon, Netflix, Spotify and HBO. 

The subscription model consists of periodically selling products, services or content to a client portfolio in exchange for a similarly periodic fee. According to The Power MBA, this scheme brings great benefits to the company. The first and most important advantage is that it allows businesses to more accurately calculate monthly income projections. By having recurring and stable income, the company's balance sheet performs better, according to an article by Gestion Empresarial Rentable. Businesses no longer depend on seasonal demand, which allows for better cost planning in advertising, promotion, pricing and collection.

Another great advantage is an increased Customer Lifetime Value, which is the added value that customers receive from their membership. Customer loyalty and satisfaction can be increased by having a form of enhanced "interaction" between the company and the customer over time. Clients receive extra benefits monthly or periodically, which they would not receive without membership, explains The Power MBA. In this way, margins per customer increase. At the same time, by operating a membership scheme companies ensure that their customers pay periodically, regardless of whether they use the service or not. 

In a highly competitive market, subscription can also reduce customer abandonment rates, increasing income per consumer and creating natural entry barriers, explains the Association of Manufacturers and Distributors (AECOC). As of today, the No. 1 platform with the largest number of global subscribers is Netflix with 182 million people, reveals GQ magazine. Amazon, in its 4Q19 report, revealed that Amazon Prime's service exceeded 150 million members worldwide.

Despite COVID-19 having a strong impact on the economy, there are sectors that instead of experiencing a blow registered an increase in sales. Such is the case of Walmart, which in its 2Q20 report, said its e-commerce business shot up 97 percent over the same period last year. The company’s strategy of launching a membership scheme, according to Forbes Mexico, will be a major advantage to compete against Amazon in e-commerce, which has become a strong competitor in times of confinement. 

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Alessa Flores Alessa Flores Senior Journalist and Industry Analyst