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What’s a Subscription Business Model & How Does It Work?

Numerous organizations find subscription business models advantageous as they promote customer success and enhance buyer retention.

Presently, subscription models have become prevalent across nearly every industry. Successful companies such as Netflix, Dollar Shave Club, and Microsoft have been employing the subscription-based revenue model for years with remarkable achievements. The exciting part is that your company can also adopt this approach.

In this post, we will delve into the concept of a subscription business model, its functioning, and the advantages it offers.

subscription model

What is a subscription business model?

 

The subscription business model entails a recurring revenue system where customers pay a periodic fee – weekly, monthly, or yearly – to access your products or services. They have the option to renew their subscription after a defined period. By adopting this model, you can capitalize on your customer relationships to establish a consistent and predictable income flow.

 

Subscription-based revenue models offer advantages to both the company and the customer. From a customer perspective, it provides the convenience of automatic repurchasing of products or services they know they will require in the future. For businesses, it ensures customer retention for future sales, eliminating the need to re-engage them frequently. Additionally, it results in a consistent monthly recurring revenue (MRR), which can sustain the business even during challenging times.

With the appropriate product, brand, and industry alignment, a subscription model can prove to be an incredibly successful and profitable business strategy. As an illustration, you have the potential to create a subscription box business that generates millions in annual revenue with effective marketing strategies.

Let’s learn a little bit more about how this business model works in the next section.

 

How a Subscription Model Works

Within a subscription model, customers are billed periodically for a particular product or service. They have the flexibility to determine the duration and frequency of receiving each offer, and most subscriptions include the choice to renew or terminate at their convenience.

Imagine a subscription as a mutual agreement between you and the customer. The customer commits to paying for a product or service over a specified period, and in turn, the business fulfills its end of the deal as long as the customer continues with the recurring payments. When the contract term ends, the customer has the freedom to either renew or cancel their subscription.

An excellent illustration of a subscription model is your local newspaper. Though you have the option to purchase newspapers individually, many readers prefer subscribing. With a subscription, you receive the newspaper conveniently delivered to your doorstep for a fixed rate, eliminating the need to visit the store for each purchase.

Now, let’s delve into further advantages of subscription models in the following section.

Benefits of a Subscription Business Model

 

1. Subscription models are convenient for customers.

In today’s busy world, convenience holds significant value. When people can have a product they like delivered to their doorstep precisely when they need it, with minimal effort required on their part, they are eager to sign up for it. Subscriptions prove to be a time-saver, sparing customers from the hassle of researching new products and physically visiting stores, resulting in a smoother and more enjoyable customer experience.

2. Customers can discover new products.

 

The advantages of subscriptions extend beyond just time-saving benefits. Not only do subscribers save money by avoiding the need to travel to stores, but they also get the opportunity to explore and try new items they might not have considered otherwise.

A compelling example of this is Snack Crate, a subscription service that offers boxes of snacks from around the world. By subscribing to Snack Crate, you may stumble upon a new favorite snack that you never knew existed before, enriching your culinary experiences.

 

3. Businesses can accurately predict revenue.

Subscription models offer the advantage of greater revenue predictability for your business. With customers making recurring payments, you can precisely anticipate when and how much they will pay. This knowledge becomes invaluable when incorporating budgeting into your business strategy, as it provides an accurate representation of your company’s available resources.

4. Subscriptions can attract more customers.

 

Occasionally, the price of a product or service can be too high for consumers to afford all at once. Implementing weekly, monthly, or annual charges enables you to set a more budget-friendly price point, allowing consumers to comfortably include it in their monthly expenses.

Consider the example of purchasing a car. If you cannot afford the total cost upfront, you may opt for a payment plan, paying in increments over time. This approach makes the car more accessible, despite not having the ability to cover the full cost immediately.

 

5. Subscriptions decrease customer acquisition costs.

 

Subscription business models offer the advantage of conducting business with customers who already know and trust your brand, instead of targeting potential customers who may not be familiar with it. This reduction in the need to engage unfamiliar prospects leads to lower marketing costs and provides an opportunity to emphasize customer referrals. Word-of-mouth marketing, facilitated by satisfied subscribers, proves to be more effective and cost-efficient compared to traditional promotional advertising methods.

6. Businesses build stronger relationships with their customers.

Continuing to work with the same customers offers the advantage of building stronger relationships over time. Consistently providing excellent customer support through your service team fosters trust and familiarity with your brand. These factors become crucial when customers have to make decisions about renewing their subscription.

Having explored the benefits of a subscription business model, let’s now delve into the steps you can take to create one for your company.

 

How to Build a Subscription Model

 

1. Figure out if your business would benefit from offering subscriptions.

 

Before formulating subscription packages for your company, it is crucial to assess whether offering subscriptions aligns with the nature of your products and services. Consider whether your offerings are items that customers require continuous access to. For instance, software products, ongoing services like consulting or content writing, and exclusive media fall into this category.

Alternatively, if your product is a physical item that customers will need to replenish regularly, such as day-to-day products, books, or snacks, it might also qualify for a subscription model. Once you have determined whether your products and services are suitable for a subscription approach, you can proceed to the next step.

 

2. Establish a goal for your subscription-based business.

Defining the appropriate goal is crucial in shaping your process while creating subscription packages and pricing tiers. Your objectives will steer your decision-making: Do you aim to attract high-value clients like enterprise businesses, expand your small-business clientele, boost sales for a particular product, achieve a specific revenue growth target, or enhance customer retention?

By aligning your goals with your pricing structure, you can effectively attract and retain the desired clients. Furthermore, it will influence the precise language and wording used in your website copy to appeal to your target audience.

 

3. Choose a subscription pricing strategy.

 

When developing your subscription model, the nature of your product and your goals will dictate the most suitable pricing strategy. For example, if your aim is to increase user seats, a per-user pricing model might offer a subscription discount to businesses with multiple users.

Next comes the enjoyable phase of creating your subscription packages and tiers. To begin, you can keep it simple by establishing a single package to initiate your subscription-based revenue model. As you collect feedback from customers and gain insights into their preferences, you can gradually introduce diverse packages that cater to different segments.

 

4. Improve the user experience to get more sign-ups.

 

Making the process of signing up for a subscription package easy, straightforward, and simple is crucial. It should be a seamless experience for your customers without any confusion or uncertainty when they visit your website or social channels. To achieve this, ensure that you prominently feature a call-to-action button on the top right-hand corner of your home page and above the fold. This ensures easy access and encourages customers to subscribe without any hassle.

 

When prospects arrive at the pricing page, the language and pricing information for each subscription level should be presented in a way that allows them to make an informed decision about which package to choose. Clarity and transparency in the descriptions will help prospects easily understand the offerings and select the most suitable subscription level for their needs.

 

5. Make the billing process simple and easy.

By offering well-designed subscription packages, providing excellent onboarding experiences, and delivering strong customer service, you increase the likelihood of securing renewals from your customers. To ensure a smooth renewal process, it is imperative to set up a billing system that can easily accept and process recurring payments. This way, you can effortlessly manage and maintain a steady stream of revenue from your loyal subscribers.

Integrate a payment gateway directly on your website or app to streamline the subscription renewal process for your customers. Avoid having them navigate through numerous links just to renew. A renewal presents an opportunity to enhance customer relationships and provide additional value. Consider offering extra perks or exclusive features as a gesture of appreciation to long-time customers, further strengthening their loyalty and satisfaction.

 

The Subscription Business Model: Fostering Growth for Your Business

The mentioned industries are only a glimpse of those reaping the rewards of a subscription-based business model. By applying some creativity and devising a well-structured plan, you may discover that this approach leads to increased customer satisfaction and higher retention rates for your own business, ultimately paving the way for exponential growth.

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