What are subscription sales?

Subscription Sales: Businesses can keep customers interested and make money over a more extended period by getting them to buy from them repeatedly through subscription sales. The subscription business plan doesn’t sell one-time goods or services; instead, it charges customers regularly, usually once a month or once a year.

Some ways to sell subscriptions are:

• One-time fee
• You pay as you go
• No cost
• Based on seat or use
• There are no limits on the use of
• Long-term use
• Types of subscriptions
• Any or all of the above

Recurring income makes subscription sales unique and the subscription economy as a whole. Because of technological advances, customers can often save more money by paying a monthly fee to access something instead of buying, owning, and managing it outright.

Synonyms

• Subscription-based sales
• Subscription-based business model
• Subscription revenue model

How and why businesses use subscription models

There is no such thing as a “perfect” business plan. More “passive” income streams are made possible by being able to lose a customer once and count on them to keep buying from you for months or years afterward.

When a business has a steady income they can count on, a few things happen:

• More time and money to spend. Once a business has a certain number of new customers, it can slow down a bit. Having a strong base of subscribers lets them put ongoing effort into creating new products and features, going into new markets, and testing different price strategies.
• More correct weather reports. Models that use revenue are more accurate when there is more consistency in income from one month to the next. When data is consistent and gives a more accurate picture of how things will go in the future, algorithms are better at predicting sales and demand trends.
• I am making better choices. With the right analytics, business leaders can choose the best product and sell for it. They can also use data to send more personalized messages with deals and discounts that are just right for you.
• New ideas come up faster. These things work together to make the business more flexible and organized. When executives and leaders of a company have the correct information and the tools they need to act, they can quickly change direction, enter new markets, and grow much faster than other types of businesses.

That’s why investors love businesses that offer subscriptions. As of 2023, the average SaaS income multiple is 7.8x. This is less than the highs of 18x to 19x seen in 2021.

Most businesses are worth between 1 and 3 times their annual revenue, and very few are worth more than 3.5 times their annual revenue.

Just as important, customers would instead subscribe than buy something directly. It’s easier to pay once a month to access a platform than to buy a license, especially since software is always getting better and everything is stored in the cloud.

Businesses that use subscription-based sales

Not all businesses can use the subscription model. It only makes sense to bill customers on a regular basis if the business provides a service that the customer can’t get elsewhere.

For instance, many direct-to-consumer goods don’t do as well as subscription services. Customers usually only need physical goods once.

Some niche e-commerce items do well with monthly sales, but timing is tricky. Regarding physical goods like subscription boxes, it’s much harder to accurately reflect what subscribers want and need.

SaaS

Regarding subscription sales, SaaS is pretty much the poster child. This type of business plan works best for software platforms because:

• They are very hard to understand from a technical point of view.
• Once a piece of software is made, it can be updated and made more prominent.
• Building and maintaining the platform is valuable for the customer, but they couldn’t do it themselves.
• It would cost a lot of money even if they could do it.
• The cloud lets you get to the platform and its information from anywhere.

Most apps people use today, like DealHub, wouldn’t make money without subscription sales, for better or worse. They go together.

Services for Streaming

A streaming service is like SaaS in that it’s a tool made of software that stores, retrieves, and shows data. People can listen to or watch millions or billions of songs and movies when they open Spotify or Netflix.

You can think of streaming services as video platforms that work like SaaS. Users can access a vast library of content without buying each piece separately.

Kits for meals

Meal kits are an example of a physical good that can work in the subscription economy since people will always need them. People will always need food.

But they still face the same problems that other companies that make consumer goods do when they try to get into subscription sales. Because one-time sales models are so standard in this industry, customers are always looking at other choices. Companies that make goods have trouble because they can’t lower their prices like software companies can.

Most meal kits send between three and five meals a week. Customers lose instant value from the subscription if they have a birthday party during the week and then want to take out two more nights. The subscription isn’t cheaper than regular food; it’s easier to use.

It’s impossible to figure out how much it costs to not use a software tool or streaming service for one day. It keeps customers longer than a meal kit company must work hard at.

Care for Yourself

Women who love trying new things love getting personal care boxes regularly. The business plan works because these products (shampoo, conditioners, face lotions, perfumes, etc.) can be used repeatedly and cost a lot when bought separately.

Meal kit subscription sales are different from this type of product membership because it’s not based on a product that goes bad. Plus, the seller can lower the price of each item because channel sales partners want to use it to sell more of their goods.

Companies in this field must work hard every month to ensure they have the right mix of products. If they give or take too little, the customer won’t trust them enough to stay a client.

Problems with the Subscription Sales Revenue Model

Subscription businesses are more accessible to grow, last longer, and usually appeal to investors more. They don’t have everything, though.

Putting strings on something makes it harder to get people to agree. Because companies need to keep customers, they must offer services and rewards that don’t bring in new money.

Here are some of the hardest things about selling subscriptions:

• Risk of leaving. It’s riskier for this kind of business to lose customers than for others.
• How important it is to automate. To stop people from leaving without permission, payment must be automatic, which is 20% to 40% of all subscription business churn.
• Finding the best prices isn’t an exact science. It takes years of testing and tweaking to find the best balance between subscription prices and how much people think they are getting for their money.
• A lot of people have had enough. The typical person has 12 paid memberships. When there are too many to track, people get “subscription fatigue” and may cancel their subscriptions.
• Scaling technology takes a lot of time and money. As their subscriber base grows, subscription companies struggle to keep up with and expand their technology and infrastructure.
• Customers want more customization. It’s hard to make the customer experience more personal on a large scale. Subscriptions are automatic, but each person’s customer experience should be different.
• Buyers want to see more value right away. When people buy subscription services, they don’t buy impulsively or to meet immediate wants. Instead, they buy because they see long-term value.
• Income is only stable if demand stays the same. Even though membership services can bring in a steady income, changes in demand can still stop revenue growth.

The best ways to make more money through subscription sales

Each business has its way of making money, but here are some tried-and-true ways to boost membership sales:

Selling more

Upselling is the best way to get higher-value sales without making it more expensive. Both the company and the customers benefit from the deal; the customers get more value, and the company makes more money.

Upselling can happen to a new customer while they are still buying something, or it can happen after the sale, when the customer is already a happy customer. When customers have the chance, the goal is to get them to sign up for more expensive subscription deals.

Selling together

Another great way to make more money with contract sales is to cross-sell. It means selling a related item or service that goes well with the first buy.

An example is a CRM software company that sells a subscription package for its product. For business customers, it can also offer custom installation and onboarding services.

Regarding SaaS companies, many also offer microservices, which are different services that can be added for an extra cost. If you look at Amazon, it sells its AWS and Apollo platforms to companies worldwide. But its primary platform is its online shop.

Price Optimization

Price optimization is a simple idea: a subscription business should make more money when the price of its product accurately reflects its value proposition and buyers agree that the product is worth the price.

A good pricing plan is based on a few main things:

• The target market
• How much the target market is ready to pay for the subscription
• How much money the product can make at that price
• The business environment

There is a lot of room for revenue growth when the price buyers are ready to pay doesn’t match the price that makes money for the business. If you think the customer is worth more than the current price, you might want to raise it. This could lead to bigger deals and possibly even new customers. If it’s cheaper, they should use the chance to make a more valuable product that lasts longer.

Bundling products

Putting goods together in a bundle makes it easier for companies to upsell and cross-sell during sales. When customers buy different goods or services together often, product grouping works best.

In subscription sales, product bundles could include separate goods, extra subscription services, or a mix of the two. A streaming service might have a site for movies and TV shows. It costs $15 for each separately but only $20 for all three when bought together.

Upselling is easier when you bundle goods together because you can get buyers who might not have thought about using more than one service. An excellent way to keep people who would have paid anyway is to offer a discount. They won’t want to leave as much if they get a great deal and value.

Billing That Works

Many people who cancel their subscriptions (20–40%) do not choose to do so. And pricing is directly linked to most forced churn.

The customer either can’t get into their account or stops making payments when their payment doesn’t go through, or the billing system fails.

To stop this from happening, subscription businesses need to buy an automatic billing system that takes care of payments, alerts, customer data, and renewals.

Metrics for Subscription Sales

Recurring monthly income (MRR)

The most basic way to measure the success of a subscription service is by its monthly recurring income (MRR). It’s linked to a lot of other subscription data in some way. The ones that aren’t still have a direct effect on it.

All you have to do to find your current MRR is add up all the monthly payments from happy customers. This will usually be shown immediately on your sales dashboard.

MRR gives companies a quick look at their current income. Once you’ve been watching MRR for a while, it can also help you compare years and look at trends.

Annual Recurring Income (ARR)

Annual regular revenue (ARR) is like MRR but looks at the whole year. It’s easy to figure out: multiply MRR by 12. When looking at global trends, making budgets, setting long-term goals, and planning marketing and sales strategies, it’s a better measure than MRR.

It’s not as helpful in figuring out how well a marketing or sales plan works. Since MRR looks at this month’s and last month’s contract sales, it can show how a change affected things immediately.

Number of Customers Kept

The customer retention rate of a business is the percentage of present customers who stay subscribed for a certain amount of time. A company with 1,000 clients that keeps 800 over a year has an 80% customer retention rate.

Businesses check their return rates every month, three months, and once a year. They will first look at changes in the retention rate every month or three months before putting in place any new tactics. A year’s worth of numbers will help them understand long-term averages.

Rate of Churn

The rate at which customers leave is equal to the rate at which customers stay. The churn rate for a business is 20% if it keeps 80% of its customers.

A business’s churn rate can show essential issues with its membership sales. High churn rates could mean the product or service doesn’t fit the market well, isn’t very good, or has terrible customer service.

Cost to Get a New Customer (CAC)

CAC stands for “cost to acquire a new customer.” To figure it out, add up all marketing and sales costs and split by the number of new customers.

CAC can help subscription businesses figure out how much money they will make in the short run from their marketing and sales efforts. If they can lower their CAC while keeping the same number of customers or getting more, they can make money from each contract sale faster.

The value of a customer over their lifetime

By itself, CAC only tells companies how much it costs to get a new customer. When they need more information, they find out the CLV of each customer.

CLV is a way to determine how much money a customer usually brings in over their contract. When buyers compare CLV to CAC, they can see if it’s worth it to spend in that type of customer.

This number, called the LTV: CAC ratio, shows how long it takes to get back the money you spent on selling. Several 3:1 or higher means the business makes at least three times what it spends on getting new customers. This means that the business is financially stable.

Rate of Growth in Subscribers

How many new subscribers did you get over a specific period? That’s the membership growth rate. Companies keep an eye on this number to see how well their marketing and sales efforts, pricing strategies, and how they position their products are doing.

It’s not an excellent match for revenue. A company might get more subscribers by getting less essential customers, which would slow its growth more than planned. Companies should figure out their sales growth rate and compare it to the other number to get a complete picture.

Score of how happy the customer is

One of the most common and easy ways to find out how happy your customers are is to use the CSAT poll. People are asked to rate their satisfaction with a product or service on a scale of 1 to 5.

To get the CSAT score, businesses add up all the 4 and 5 customer scores and divide that by the total number of people who answered. So, if 70% of people who are asked rate the product a 4 or 5, that’s the CSAT score.

Customers are more likely to extend their subscriptions if the CSAT score is high (75% to 85% is ideal). If it’s too low, a lot of people could lose money.

The average amount of money made per user

A measure called average revenue per user (ARPU) is like CLV. It’s the average amount of money a customer makes during their contract.

It helps with budgeting, lead scoring, and setting prices for products because it tells you how much a customer is supposed to be worth. To focus on customers with higher ARPU, businesses may change how they score leads or who they sell to.

Active signups

To be a registered subscriber, a customer must be making regular payments. They track them to see how much money they make and how many customers leave.

Remember that different businesses have different ideas of what a current subscriber is. Some people only consider a subscriber active if they use the site or product several times. Some companies keep customers until they quit.

Technology that helps subscription sales grow

Technology is the main reason why subscription sales are possible today. Without it, you wouldn’t be able to keep track of customer information, automate billing and payments, or even fully understand the numbers we talked about above.

To give you an idea of how some of the most important contract sales tech works, here they are:

Set up, price, and quote (CPQ)

CPQ software is a must-have for companies that offer complicated subscription goods. It makes choosing a product or price easier by giving customers quotes and automatically grouping and setting up subscriptions.

It also makes the whole sales process more accessible, which speeds up deals and increases conversion rates. If it works with a business’s website, potential buyers can use it to see right away how much their subscription level and needs would cost.

Taking care of subscriptions

Every step of the subscription sales process is taken care of by a subscription management tool. It works with CPQ software to help businesses make new subscription plans, change pricing, and track customer information.

It also handles ongoing contact with customers, such as sending billing notices, payment reminders, and automatic processing. It’s also easy for businesses to start selling subscriptions online because it works with most top e-commerce sites.

Management of Contracts

Tools for managing contracts help subscription businesses keep track of customer agreements and other papers that go with them. They automate legal tasks like making documents, getting signatures, and more to save time and money.

You can also see when customers sign contracts or change their subscription plans on these sites. That’s necessary for both following the rules and knowing how customers’ actions affect income predictions.

Data on sales

Platforms for sales statistics give you information about the whole sales process. They monitor success metrics like CAC, CLV, and ARPU to help businesses make the most of their pricing and marketing plans.

They also use predictive analytics to guess how long customers will stay with a company, which helps them plan for growth and pay for upcoming costs. That helps them put their money and time where it will do the most good.

Platforms for billing

Subscription businesses need to have a way to get paid by customers. Billing software usually manages subscriptions, but some businesses would rather have a different system.

A billing tool manages one-time and recurring payments, keeps track of payment information for customers, automates billing cycles, and sends invoices whenever they are needed. Most of them let businesses quickly sell their goods worldwide because they accept many payment methods and currencies.