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Without recurring revenue, businesses constantly seek new sources of income (e.g., clients, contracts, or products) and are challenged to keep customers engaged and invested. And for investors, the lack of consistency and predictability appears risky.
This is where the subscription business model comes in—it is a way for businesses to offer products or services on a recurring basis, allowing them to generate predictable revenue.
What is a Subscription Business Model?
A subscription business model is a recurring revenue stream that allows customers to pay for access to products or services on an ongoing basis.
This can include:
- Monthly Streaming Subscriptions: Video services like Netflix and Amazon Prime, music streaming platforms like Apple Music and Spotify, and online gaming services like Xbox Live and PlayStation Plus.
- Subscription Products Boxes: Services such as Birchbox, Ipsy, and NatureBox that ship physical items to customers at regular intervals for a monthly fee.
- Software-as-a-Service Packages: Programs like Adobe Creative Cloud and Microsoft Office 365 that provide access to services and resources for a subscription fee.
Subscription models offer businesses the opportunity to build long-term relationships with customers, as well as provide a way for them to make predictable revenue and create more value for their customers through discounts, loyalty programs, and exclusive content.
- Subscription-Based Business Model – A business model that relies on customers paying for access to products, services, or content on a recurring basis.
- Recurring Revenue Model – A business model that relies on customers making repeat payments in exchange for access to products or services.
- Subscription Revenue Model – A recurring revenue model that involves customers paying for access to products or services at a specific interval.
How Subscription Business Models Work
Selling something on a subscription basis means that customers must sign up and make regular payments in exchange for access to the product or service.
Companies using the subscription-based model include terms and conditions (e.g, payment plans and cancellation policies) in the agreement that customers must agree to before signing up.
The customer usually has some control over their payment plan, meaning they can decide how often (monthly or yearly) and when (automatic or manual) they would like to pay.
The business then offers incentives such as discounts, loyalty programs, exclusive content, and other features to keep customers engaged.
Each month (or year), customers are billed at the same recurring rate until they decide to cancel or modify their plan.
Types of Subscription Business Models
In the subscription economy, businesses can offer subscriptions for products or services in several ways.
- Per Product Subscriptions: Customers pay a fixed price upfront or at regular intervals to access a specific product, such as Adobe Creative Cloud’s single-app subscription plans.
- Tiered Subscriptions: Companies like Spotify and Netflix use tiered pricing to offer customers the option to pay for different levels of access at different prices.
- Unlimited Subscriptions: Offer customers unlimited access to a set number of products or services, such as Amazon Prime, which gives customers access to free shipping and streaming services.
- Usage-Based Subscriptions: Usage-based pricing involves charging customers based on how much they use the product or service, such as Dropbox’s pay-as-you-go option.
- Service Retainer Subscriptions: Digital agencies, marketing firms, and other professional services offer customers the opportunity to pay a retainer fee in exchange for access to their services.
- Success-Based Subscriptions: This type of subscription model offers customers the chance to pay for access to a product or service only when it is successful. Service providers often use success-based pricing to draw in new customers without any strings attached.
Some companies also offer customized subscription packages that combine different products, services, and features into a single bundle.
Benefits of Using a Subscription Business Model
Subscription-based services offer advantages for both businesses and customers.
For businesses, it means they have a predictable revenue stream and can plan accordingly. For customers, it often offers lower prices than buying items or services individually.
Let’s examine the key benefits of a subscription business model strategy.
Convenient for Customers
The customer experience is at the heart of every successful subscription-based business. When customers don’t need to worry about price fluctuations or the lack of transparency that comes with many product purchases, they can focus on how their subscription benefits them.
The ability to manage subscriptions from one place, access exclusive content and features, or even pause their payments in certain situations makes the customer experience more convenient.
Accurate Revenue Predictions
Revenue intelligence plays a critical role in any business. With a subscription model, businesses can accurately predict and adjust for financial fluctuations month-to-month or year-to-year.
This allows them to make smarter decisions, such as setting more competitive prices, investing in new products or services, and understanding customer churn rates.
Customers are often drawn to subscription-based services because of the savings, convenience, and flexibility.
They’re easy to cancel, and the lack of price fluctuation makes budgeting for them a breeze.
Businesses can use this to their advantage by offering special deals or discounts that would otherwise be out of reach for one-off purchases.
Additionally, subscription companies provide an easy way for customers to try new products or services before committing to a larger payment plan.
Decreases Customer Acquisition Costs
Customer acquisition cost (CAC) is the total cost of acquiring a customer.
Subscription-based services often allow companies to reduce their CAC by offering short-term or free trials, discounts, and other incentives that encourage users to sign up for the service.
These types of strategies can help businesses attract more customers, build relationships with them over time, and increase the value of each customer.
Increases Customer Retention
When customer relationships are built on trust, loyalty is the result.
Through customer relationship management (CRM), businesses can use subscription-based services to track customer behavior and preferences, offer personalized discounts or deals, and create a better customer experience.
The result is a higher customer retention rate and an increase in long-term revenue.
When it comes to revenue forecasting, subscription-based businesses have a huge advantage.
With predictable revenue streams, companies can create more accurate projections for the future and plan accordingly.
This allows them to adjust their strategy as needed and avoid potential financial issues and accurately measure their success.
Challenges of Subscription Business Models
Although there are many advantages to adopting the subscription business model, there are also challenges and potential pitfalls that businesses should be aware of.
1. Customers may not see the value in their subscriptions
Retention rates can suffer when customers don’t view the product or service as being worth their money.
To combat this, companies should focus on providing a high-quality experience that customers value and can see themselves using for a long time.
Businesses should also invest in a responsive customer success team that can help people with any issues they may have.
2. Customers may cancel their subscriptions unexpectedly
For subscription businesses, the risk of customer churn can be high.
To address this, companies should focus on building customer relationships, providing a valuable product or service, and promoting loyalty programs that provide incentives for continued use.
3. Hard-to-use software may be abandoned altogether
When a software company’s product is challenging to use, customers may give up and go elsewhere.
If a software company sells a product that is difficult to get the hang of, it should have a clear onboarding process for new users, as well as helpful customer support agents who are available to answer any questions.
4. Customer attrition rates can be unpredictable
Attrition rates, or the rate at which customers cancel their subscriptions, can be hard to anticipate.
Companies should track metrics such as cancellation reasons and subscription lengths to better understand customer churn.
This data can then be used to adjust pricing structures or product offerings that may help reduce attrition.
5. Customer service needs may outpace resources
When a subscription business proliferates, customer service needs can exceed the company’s available resources.
To prevent this, businesses should invest in automation and artificial intelligence (AI) technologies that can help reduce the amount of manual labor needed to keep up with customer inquiries.
Building a Subscription Business Model
When a company creates its subscription model, there are a few key steps they need to take.
There are a few prerequisites for starting a successful subscription business:
- Talking with customers to understand their needs
- Developing a service or product that meets those needs
- Determine whether or not a subscription model is the best approach
- Creating a pricing and billing structure that works for both customers and the business
Before building a pricing strategy or deciding which type of subscription model will work best, companies need to set clear goals to help inform their decisions.
For instance, a company may want to focus on increasing customers’ lifetime value (LTV), lowering customer churn rates, or expanding into international markets.
These goals must align with the benefits of the subscription model, such as recurring revenue or customer loyalty.
If a company successfully uses a different model, its stakeholders should carefully assess if a subscription model is the right fit.
The pricing strategy should be designed to maximize profitability while still providing value and incentivizing customers to stay subscribed.
Companies should consider not only the monthly or annual subscription fees but also any additional features that may be offered for an additional fee.
For example, a company that sells accounting tools might offer access to advanced features like tax filing for an additional one-time fee.
To make the pricing strategy even more appealing, companies should consider offering discounts or loyalty programs that reward customers for continued use of the subscription service.
Especially in the case of services—like SEO—that take a long time to show results and products that are difficult to use at first, customer onboarding is essential for setting expectations and actively engaging customers in the product.
A well-structured onboarding process should include onboarding emails, tutorials and guides, webinars or online courses, and access to a customer support team that can answer any questions.
The billing structure should be straightforward and transparent.
Companies should have one monthly subscription fee for each plan and offer a discount for customers who pay for a year upfront.
Usually, customers pay for their subscriptions with a credit card or through ACH.
Companies should have different payment methods available to better serve customers in different countries.
There are also third-party billing solutions that can automate the process of collecting and tracking payments, sending invoices, and processing refunds.
Implement Subscription Management Technologies
To automate the billing, customer onboarding, and customer service processes, companies should invest in various technologies that streamline the processes.
CRM software is a key tool for nurturing customer relationships, tracking customer data, and predicting churn rates.
AI-based support tools can also help automate the customer service process by answering common questions and routing customers to the proper channels more quickly.
For companies with complex pricing models, CPQ software is a valuable tool for streamlining and automating the pricing process. It can also help ensure that customers receive the most up-to-date offers and discounts.
By implementing these technologies, companies can save time and money, reduce customer churn rates, and increase customer loyalty.
People Also Ask
What is an example of a subscription model?
A subscription model is a business model in which customers pay on an ongoing basis for access to products or services.
An example of this type of model includes monthly subscription boxes like Birchbox and meal kit delivery services like Hello Fresh.
Why is the subscription business model sustainable?
There are several reasons why the subscription business model is more sustainable than other models:
1. Customers have a better experience overall as they receive a consistent and predictable product or service.
2. Businesses can predict revenue more quickly, since customers are billed monthly or annually.
3. With more transparent pricing and few (if any) fluctuations, customers can easily budget for their subscription service.
4. Customer data gathered from subscription models enables businesses to anticipate customer needs and better tailor their product or service.
5. Companies can drive customer loyalty and retention by offering exclusive discounts or benefits to existing subscribers.
6. Especially in the SaaS vertical, subscription models are the most scalable option for businesses, as they make it easier to expand into new markets and take on new customers.
Is a subscription business model profitable?
The subscription business model is one of the most scalable and profitable models available.
By reducing customer churn and prolonging the customer lifecycle, this model provides businesses with secure and predictable revenue streams.
Additionally, subscription models allow for higher customer engagement rates, leading to increased revenue over time as customers are more likely to purchase additional products or services from a provider they have an existing relationship with.