What is a Subscription Business Model?

A subscription business model lets customers pay for goods or services repeatedly, which is a steady source of income.

Among these are:

• 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.

Businesses can build long-term ties with customers through subscription models. These models also help businesses make steady income and give customers more value by offering discounts, loyalty programs, and unique content.

Synonyms

• Subscription-Based Business Model: A business model that relies on customers paying for access to products, services, or content regularly.
• 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 involving customers paying for product or service access at a specific interval.

How business models based on subscriptions work

When you sell something on a subscription basis, the customer agrees to pay a set amount each month to receive the product or service.

Companies that use the subscription model have rules that buyers must agree to before they can sign up. These rules include payment plans and how to cancel.

Customers usually have some say over their payment plan. They can choose how often (monthly or yearly) and when (automatic or human) they want to pay.

The company then keeps customers interested by giving them discounts, loyalty programs, unique material, and other perks.

Customers will be charged the same amount every month (or year) until they quit or change their plan.

Different ways to run a subscription business

There are different ways for companies to offer subscriptions for goods or services in the subscription economy.

• Per-Product Subscriptions: Customers pay a set amount upfront or regularly to access a single product with these plans. For example, Adobe Creative Cloud’s single-app subscription plans work this way. Some companies, like Netflix and Spotify, offer customers the chance to pay different amounts for different access levels.
• Unlimited Subscriptions: People who sign up for an unlimited subscription can use unlimited goods or services. For example, Amazon Prime members can get free shipping and streaming services.
• Usage-Based Subscriptions: With usage-based pricing, users are charged based on how much they use the product or service. For example, Dropbox’s pay-as-you-go option is an example of this. Customers can pay a retainer fee to digital companies, marketing firms, and other professional services to use their services. This is called a service retainer subscription.
• Success-Based Subscriptions: With this subscription strategy, customers only pay for a product or service if it works. When service companies want new customers, they often use success-based pricing.

Different goods, services, and features can be bundled together in a custom subscription package from some businesses.

Why using a subscription business model is a good idea

Businesses and users can both benefit from services that are based on subscriptions.

For companies, it means they can plan because they know how much money they will make. It usually has lower prices for customers than getting goods or services one at a time.

Let’s look at the main advantages of using a subscription business plan.

Easy for customers to use

The customer experience is what makes a subscription-based business work. Customers can focus on how their service helps them when they don’t have to worry about price changes or the lack of information about buying many things.

It’s easier for customers when they can handle all of their subscriptions from one place, get access to unique content and features, and even sometimes put off payments.

Accurate predictions of revenue

Revenue data is essential for any business. Businesses can correctly plan for and respond to monthly or yearly revenue changes when they use a subscription model.

This helps them make smarter choices, like setting more competitive prices, putting money into new goods or services, and learning how many customers leave each month.

Brings in Customers

People often choose subscription-based services because they save money, are easy to use, and give them more freedom.

It is simple to cancel them, and the fixed prices make it easy to plan your spending.

Businesses can benefit from this by giving deals or discounts that people buying only one thing would not be able to get otherwise.

Subscription companies also make it easy for customers to try new goods or services before committing to a more extended payment plan.

Lowers the cost of getting new customers

The total cost of getting a new customer is called the customer acquisition cost (CAC).

When businesses offer subscription-based services, they can often lower their CAC by giving users free or short-term trials, discounts, and other benefits to sign up for the service.

Businesses can use these plans to get more customers, get to know them better, and make each customer more valuable.

It helps keep customers longer

When you build trust with your customers, they will be loyal.

Businesses can use subscription-based services for customer relationship management (CRM) to keep track of customers’ habits and likes, give them specific discounts or deals, and make the whole experience better for them.

As a result, more customers stay with the business, and long-term sales go up.

Better Predictions

Businesses that depend on subscriptions are much better at predicting their income.

Companies can make more accurate predictions and plans for them when they have steady sources of income.

This lets them change their plan as needed, avoid possible financial problems, and get a good idea of how well they’re doing.

Problems with business models based on subscriptions

There are many good things about the subscription business strategy, but there are also some problems and risks that companies should be aware of.

People may not see why they should pay for contracts

Customers may not stay with a business if they don’t think the product or service is worth the money.

To stop this, businesses should focus on giving customers a great experience they will enjoy and want to use for a long time.

A fast customer success team that can help people with any problems they may have is another thing that businesses should spend money on.

Customers can end their subscriptions at any time

There is a high chance that customers will leave subscription companies.

To fix this, businesses should focus on getting to know their customers, giving them good products or services, and pushing loyalty programs that give them reasons to use them.

Software that is hard to use may be thrown out completely

Customers may give up on a software company’s product and go to another one if it is hard to use.

Anyone who buys software from a company that makes hard-to-use programs should have a straightforward training process for new users and helpful customer service reps who can answer any questions.

Rates of customer loss can be hard to predict

It can be hard to guess attrition rates or the number of customers who quit their subscriptions.

Companies should track why customers quit and how long their subscriptions last to learn more about customer churn.

Then, this information can be used to change prices or product offerings that might help keep customers from leaving.

There may be more wants for customer service than resources

As a subscription business grows, it may need more help with customer service than it has to offer.

To avoid this, companies should spend money on automation and artificial intelligence (AI) technologies to help them handle customer questions with less human work.

Putting together a business model for subscriptions

A business must take a few essential steps when making its subscription plan.

Make plans.

To start a good subscription business, you need a few things:

• Talking to clients to find out what they want
• Making a product or service that meets those needs
• Figure out if a subscription plan is the best way to go.
• Setting prices and billing in a way that works for both the company and the customers

Companies need to have clear goals before setting prices or choosing the best type of subscription plan. This will help them make better decisions.

A company might want to focus on increasing its customers’ lifetime value (LTV), lowering the rate at which customers leave, or entering new foreign markets.

These goals must align with the subscription model’s benefits, like making money repeatedly or keeping customers returning.

If a business is doing well with a different model, those with a stake in it should carefully consider whether a subscription model is the best fit.

How to Set Prices

The pricing plan should be made to make the most money possible while giving customers value and a reason to stay subscribed.

Companies should consider not only the subscription’s yearly or monthly fees but also any extra benefits that might cost extra.

For financial tools, for example, a business that sells them might charge extra for access to more advanced features like tax filing.

Companies should consider giving discounts or loyalty programs that reward customers for continuing to use the subscription service. This will make the pricing strategy even more appealing.

Welcome to the customer

Customer onboarding is essential for setting standards and getting people involved with a product, especially for services (like SEO) that take a while to show results and products that are hard to use initially.

There should be onboarding letters, tutorials and guides, webinars or online courses, and a customer support team that can answer any questions as part of a well-structured onboarding process.

Getting paid

The way the bills are calculated should be straightforward to understand.

Each plan should have the same monthly fee, and buyers who pay for the whole year at once should get a discount.

Most of the time, credit cards or ACHs are used to pay for payments.

Businesses should offer various payment options to better serve people in different countries.

You can also use third-party billing solutions to automatically receive payments, keep track of them, send invoices, and handle refunds.

Use technologies for managing subscriptions.

Companies should buy tools that make billing, onboarding new customers, and customer service more accessible so that they can be done automatically.

CRM software is essential for keeping in touch with customers, keeping track of data about them, and figuring out how often they will leave.

Automation of customer service can also be helped by AI-based support tools that quickly answer common questions and direct customers to the proper channels.

For bills to go more smoothly, companies need subscription management software that automatically handles upgrades, add-ons, and renewals.

CPQ software is an excellent way for companies with complicated price models to speed up and automate pricing. It can also help customers get the most recent deals and offers.

Businesses can save time and money, keep customers longer, and lose fewer customers by using these tools.