Subscription Business Model

What’s the Subscription Business Model?

It is a model that focuses on getting customers to sign up for regular payment options for access to the product or service the business provides. Users are charged either weekly/monthly or yearly for the services. It guarantees a business of recurring revenue while granting customers the convenience of automatic regular payments and the use of the services/products at a lower cost.

Consumers are quick to cancel services that don’t deliver a superior experience – for example, because of poor quality, dissatisfaction with the assortment, or a lack of perceived value — Mckinsey.

The model is an indication of a change in market trends, where customers prefer access to ownership. Video streaming services, car, airline, and gaming subscriptions are clear indications of this change.

2 Types of Subscription Business Models

Access: premium content for dedicated subscribers

Subscription Video on Demand (SVOD), Written Content, Software As A Service (SaaS)

Repeat Services: A New (Restocked) Products Every Month

Physical Goods, Meal Kits, Coffee Boxes, Parcels of Accessories, Clothing

How Does A Subscription Model Work?

Subscribers are charged either weekly/monthly or yearly for access to a service/product. Users also have the freedom to cancel/renew the subscriptions at the end of the billing period. Subscription-based companies depend on their perceived value on the part of their customers to survive, this perceived value may come in terms of the convenience they offer their subscribers, the low cost of subscription as opposed to an upfront payment or other competitors, and added perks that only subscribers may get.

Through subscriptions, businesses are guaranteed a steady revenue inflow because subscribers pay regularly, and, as a result, they have better revenue predictability.

How Do Subscription Models Make Money?

It makes money by charging users a pre-defined sum regularly and since subscriptions work like contracts, users are charged based on how often they have selected during registration. However, subscription charges on repeat services depend on several factors, like how many products will be delivered, how often deliveries will be repeated, location, preferences, etc.

Why Subscription Model Sustainable?

In linear-revenue businesses, customers buy something once and then, they are not involved again. However in business-to-business subscriptions, there is a constant cycle of buying and selling through recurrent billing and use of the services, and they all remain connected to each other. Subscription services provide businesses with steady, recurring revenue streams. Over time, they can enhance the products/services that they offer to meet the changing needs of their customers.

Pros of Subscription Business Models

Better Demand Forecasting

Subscription companies know how many subscribers they have, they can accurately forecast how much inventory they need monthly for their subscription boxes or replenishment services.

More Insight Into Customer Behavior

Customers often return to their favorite online stores and subscription services regularly, allowing businesses to accumulate data across multiple channels – such as reviews and quizzes – that help them better understand customers and what they want.

Robust Cross-Selling/Upselling Opportunities

When customers commit to a subscription, you can offer them additional items to purchase. Customers appreciate the opportunity to purchase something new in addition to something familiar. Subscription services give you the unique ability and customer trust to suggest both new and old products to existing customers, thus increasing sales.

Lower Customer Retention Costs

Customer retention is more profitable for a business than one-time sales. Every time a new customer buys something, you still have to attempt to see that same customer more goods using email marketing, social outreach, and retargeting ads. When a customer buys into a subscription plan, you don’t need to worry about attracting that customer again with another sales campaign.

Cons of Subscription Business Models

High Customer Acquisition Costs

Signing up for a subscription service is a serious commitment that consumers will think long and hard about before making. Acquiring customers can be difficult and expensive, so you need to ensure that your pricing strategy takes this into account. If you’re thinking about launching a subscription service, keep in mind that acquiring customers through free trials, affiliate marketing, and sponsored posts may affect your profitability.

High Competition

The subscription market is growing quickly, and new entrants are facing challenges with target audiences. To stand out, you need to offer something really unique to your brand.

Operational Complexity

It requires high SKU complexity and a packing process that can take up a lot of time. If you have issues in the supply chains – such as lengthy shipping routes or high return rates, this could negatively impact an entire cycle of subscriptions and require substitutions that don’t suit your customer’s preferences.

Subscription Fatigue

While every subscription might seem exciting at first after a while, boredom and fatigue are sure to set in. To avoid high churn rates and create a steady, recurring revenue stream for your business, you need to make sure your customers never lose interest in your offerings.

Popular Subscription Business Models

SaaS

Software as a service is one of the most popular business models in the cloud. It is a software delivery model where software is centrally hosted on the cloud and access is paid for via a subscription-based license. Many businesses love SaaS because they can access everything they need without worrying about business continuity, like Adobe/Dropbox/Salesforce.

Subscription Boxes

It is a product/service that is delivered regularly, usually with an annual/monthly charge. It can be tailored to almost any interest, from beauty supplies to hobby equipment to meal kits or collectible items.

Publications & Newsletters

Great examples are Mailerlite and Stratechery.

Media Subscriptions: Video & Music Streaming Services

OTT stands for Over-The-Top, it essentially refers to TV and movies delivered via the internet to your TV set or mobile device instead of traditional means like cable.

Traditional Industries Moving Into Subscriptions

BMW, Benz Collection, Book by Cadillac, and Porsche Passport are among many companies that have added a subscription model to their business.

How to Move to a Subscription Business Model?

Novel Stage

To move from the traditional business model to the subscription model, your tech stack should include technology that can automate billing & invoicing, as well as customize the customer experience for managing recurring orders.

Experimental Stage

You need to handle checkout, scheduling, and proration. Start thinking about how you’ll use pricing experiments to streamline your checkout experience. This tech stack will enable you in discount management, add-on management, and payment terms for your pricing experiments. In addition to calendar billing, it’s helpful to start considering multiple currencies, and a variety of payment options (credit card, direct debit, cash, wallets, etc.)

Scale Stage

You have full control over your pricing structures and configurations. You can test them at will and have a set quote-to-cash workflow that allows for seamless deals with Quotes, Custom Pricing, and Advance Invoicing. As you scale, your tools should keep pace with your growth so that you don’t fall into inefficiencies in the workflow. It is essential to see the role of each business function relative to the revenue infrastructure.

Leverage Stage

At this stage, you’ve gained a certain degree of proficiency in terms of subscription capabilities. You’re seamlessly integrating tools and features across the revenue infrastructure. Sales, marketing, and finance are all aligned to sell subscription products and services.

Why Use A Subscription Business Model?

The Sharing Economy is helping to shift consumer trends toward focusing more on the outcome of a purchase than on the ownership of something. For example, Uber or Lyft.

The expenses listed on a company’s income statement can be divided into 2 categories: Recurring costs (cost of goods sold, salaries, R&D) & Growth costs (sales & marketing). If a company can maintain high revenue margins over its recurring costs while it spends on growth initiatives, its cash flow should improve in the long term.

Subscriptions provide huge benefits for subscription businesses because any revenue generated by an existing customer is recurring revenue and not new revenue, as is the case of non-subscription businesses. A subscription business starts every year with guaranteed recurring revenue, planning becomes easier and valuations go up.

A subscription business relies on repeat customers who, through a combination of great customer service and unique experiences, stay invested in a brand, rather than just buying something once and forgetting the brand.

With the popularity of digital subscription services like Netflix and Prime, it may seem odd to think of physical products as subscriptions. However, physical products can generate subscriptions when a service is offered alongside them.

5 Steps of the Subscription Revenue Cycle

Acquire Customers

When a subscription company wants to grow, it will first want to attract new subscribers by using the same methods that traditional companies use, such as inbound marketing, paid ads, and search. However, subscription companies tend to take longer to generate enough revenue to cover acquisition costs than traditional companies. You can improve customer retention and reduce customer acquisition costs by offering a freemium option. It allows customers to try your product before payment, reducing your customer acquisition expenses. Once they are familiar with your product, they are more likely to consider upgrading to a paid plan in the future.

Deliver Consistent, High-Quality Service

Make constant contact with your subscribers, and track your metrics to find where subscribers are getting stuck and most likely to churn. Create a detailed buyer persona of each type of subscriber by their budget, the features they value most, how much they are willing to pay, and what it costs you to acquire them as a customer. Then, create a product that meets their needs.

Look for Opportunities to Upsell or Cross-Sell

Subscription companies can increase their revenue by encouraging customers to upgrade their plans (UPSELL) or add additional features/services (CROSS-SELL). Consider offering discounts when customers upgrade their plan/crate a tiered pricing structure to give customers more value for the same price. Tiered pricing makes it easier for customers to understand what they’re paying for and make it easier for you to guide your customer’s expansion plans.

Work to Retain Users & Reduce Churn

Attracting new customers is not the best way to grow, by putting more time into retaining existing customers, you can increase your bottom line much faster. You need to pay close attention to your subscribers, which can be complicated. If you want to create a bulletproof retention process and settle on one churn strategy, you’ll have to make some sacrifices along the way.

Rinse and Repeat

This is the tipping point. Once more and more happy subscribers stick around, you’ll bring in steady revenue every month without re-acquiring customers every month. Small improvements in your subscription revenue can accumulate into large profits over time because of compounding.

Essentials to Run a Successful Subscription Business

Product-Market Fit

It is when a company identifies its target market and services that the target market with a product that meets the market’s needs in a way that works for both parties. The company also makes sure its product can grow with its customers’ requirements over time.

Pricing Strategy

You’ll be only successful when your customers value your business enough to pay for what you have to offer. Price is an important factor in deciding whether or not a customer perceives the value of your business.

Exceptional Customer Service

The need for customer service is a no-brainer for subscription companies. It can help you gain a deeper understanding of your customers’ needs and form long-term relationships with them. Customer service allows companies to add a human touch to their branding, collect data about usage patterns, and educate customers on product features.

Revenue Tech Stack

It includes creating a complete revenue tech stack and optimizing each step in the RevOps (Revenue Operations) workflow. You must understand the various inefficiencies that can hinder a company’s ability to acquire new customers, convert them into subscribers, retain them, and increase the lifetime value of each customer.

Things to Consider When Planning a Subscription-Based Offering?

Decide Your Difference

There’s an increasing trend for subscription-based businesses, so you’ll need to find an area where there’s a gap in the marketplace and offer something different from what’s currently available. If your product doesn’t help customers solve a unique problem or take some action, it will be hard to convince them that your business is worth patronizing.

Choose The Frequency

You can arrange your subscription service to fit your business’ timetable, and you can offer subscribers more than one type of frequency. You can also offer 90-day subscriptions for those who want regular delivery of surprise boxes. Just make sure the frequency suits you and your customers.

Have a Recurring Payment System

It is a secure way to process credit card payments, which means not losing out on a sale due to late processing or wrong bank details. It’s best to use a recurring payment solution that allows you to set up their next payment date automatically after receiving their initial payment.

A Plan that How to Fulfill Subscriptions Effectively

Working with an e-commerce fulfillment partner is a good idea if your business is creating and shipping out multiple types of boxes, as the process can be overwhelming without the right WMS to keep track of what’s going on. It helps you design a fulfillment solution without sinking you into logistics headaches.

How To Get Subscription Pricing Right?

Offer More Than One Plan

Options are good for your business. Offering several plans lets you appeal to a variety of customers – from those on a smaller budget to large enterprise clients.

Avoid Hidden Costs

Make your terms clear for each plan and add a link to your pricing page on the sign-up form. Not only will this help build trust with your customer base, but it will also save your customer service from being contacted repeatedly because of differences in prices.

Offer A Free Trial or A Freemium Option

Free trials and freemium products are a great way to get potential customers to try out your service or product – and even convert them into paying customers. With free trials, you can give people 2 weeks to try out the product, then lead to an advanced plan.

Measure Everything

Keep an eye on customer growth and churn rate, you can use those metrics to track how many customers you’re attracting with subscriptions, and how many are opting out of the service. With a management platform, you can easily track these metrics.

Six Important Metrics Should Tracked

Monthly Recurring Revenue (MRR)

It’s the predictable amount of revenue your company generates from subscriptions in a particular month. It includes the recurring items in subscriptions, such as coupons, discounts, recurring add-ons, etc., but excludes one-time charges, like setup fees, non-recurring add-ons, any non-recurring ad hoc charges, and the amount charged towards taxes.

Annual Recurring Revenue (ARR)

It includes two aspects of a SaaS company’s income – expansion revenue, which is gained from new sales and upgrades. And churn revenue, which is lost due to downgrades or cancellations.

Average Revenue Per User (ARPU)

It refers to the money a company brings in for each person who pays for its services, calculated by adding up all the monthly subscriptions (MRR) customers pay to the company and then dividing by the number of people who pay. This can tell you how much each customer is contributing to your stream.

Customer Lifetime Value (CLV)

It is a figure representing how much money you would make from a customer before the churns. It’s the average revenue generated by customers over the time they remain customers. CLV helps to figure out how much to spend on user acquisition, and it also helps them to determine how to best retain customers, by helping them understand customer behavior.

Customer Acquisition Cost (CAC)

It is calculated by summing the amount of the money spent on marketing and sales during a period and dividing that amount by the number of new customers acquired during that period.

Churn Rate

It’s a measure of customer retention, expressed as the percentage of customers who stop paying you. Churn is measured in 3 ways: Customer Churn Rate, Gross Revenue Churn Rate, and net revenue churn rate.

9 Keys to Build Successful Subscription Models

Pricing in Support of Business Goals

Pricing is critical to the success of your business, static monthly pricing isn’t always the best approach. If you have a larger user base of engaged customers, try segmenting your users by offering tiered pricing.

Acquiring Customers Across Any Channel

Businesses need to speed up their customer acquisition strategy and fine-tune their commerce solutions. They need to have an Amazon-like user flow and multi-channel support since mobile phone usage is growing rapidly in commercial activities.

Billing with Accurate & Intuitive Invoices

Bill right, be right. Good billing systems are vital to the success of any subscription-based or service biz.

Collect Fast Cash & Easy Settlements

Automation is the key to efficient cash collection, which is vital for subscription-based businesses to maximize collections and minimize write-offs while collecting cash quickly. Using different payment methods in different markets, to cater to different paying habits.

Nurturing & Developing Deeper Customer Relationship

Customer service is the KEY. Your business will grow if you give users easy-to-use tools so that they can manage their subscriptions themselves. Include 24/7 support and take different approaches to marketing and customer services to fend off churn.

Accounting for Revenue & Closing Books Faster

Subscriptions have an enormous impact on downstream financials. By using an accounting-close automation solution, you can keep your business in compliance and make the process easier.

Measuring to Get Visibility Into the Right Consumer Metrics

Subscription businesses are always changing, businesses have to use tools like metrics from bookings through revenue recognition, so that they can see how their customers are benefiting. This can give them insight into customer value and the financial health of their subscription business.

Iterating & Rapidly Deploying New Pricing

To increase market share, it’s key to continually adjust prices and packages. This allows you to capture more customers in growing markets. If your competitors enter the market, you can differentiate your product by lowering your prices.

Scaling with Mission-Critical Infrastructure

You’ll need enterprise-grade software and infrastructure if you want rapid growth. The 24/7 support and business continuity offered by reliable infrastructure is essential for b2c companies that want to scale rapidly. The key is to avoid expensive and complicated ERP installations and build out a cloud stack of software that works best for your business.

The 4 Innovative Subscription Business Models

Personal Styling

There’s little time to get involved with in-store shopping, eCommerce has taken over. Stitch Fix addresses these challenges by combining online shopping efficiency with personal styling.

Shaving Gear

Dollar Shave Club delivers razor blades to its customers’ door for only a dollar a month. The company also offers cross-sell products, like shaving cream moisturizer and other accessories. Content is KING. As well as pricing products & services according to their value, you should encourage customer loyalty by providing an excellent customer experience.

Kid’s Toys

Travel Clubs and Experiencing Private Jet

Other Subscription Examples

Cars: rent instead of buying one

Airlines: they offer cheaper travel to frequent flyers

In-Home Fitness, Gaming, Health & Wellness, Education & Professional Development, Home Maintenance, Entertainment, Fashion & Clothing