The subscription business model: is it right for your business?

Whether it’s Netflix or Spotify, you can probably think of a couple of subscription business models off the top of your head. Their increased popularity is symptomatic of how great they can be for business, and most importantly, a powerful tool for growth. Therefore, if you’re thinking of converting your customers into subscribers, you’ve come to the right place.

However, subscription models are trickier than just asking your customers to pay a certain amount each month. It takes careful market research, constant innovation, and an extra dose of savviness to know how to retain subscribers. In this guide, we’ll walk you through how the model works, its benefits, its drawbacks, and some tips to make your subscription launch a resounding success.

What is a business subscription model?

In a subscription based business model, customers – read ‘subscribers’ – are charged a recurring fee for access to a product, instead of paying once upfront. Subscribers can usually choose to pay the fee monthly or yearly. This might sound familiar because it’s likely you are a subscriber to at least one service or brand.

The key thing to understand about subscription models is that they are focused on customer retention over customer acquisition. Rather than battling to acquire new customers every single time you launch a new product, with subscribers you’re simply trying to retain them. This is more cost effective and better for nurturing long-lasting customer relationships that give you a steady income stream.

Since customers are repeatedly engaging with your brand through their subscription, you can continually capitalise on that growing customer relationship. For instance, you can easily show them how you’re adding value through updated and new products.

Examples of business subscription models

Business subscription models are very versatile and can work for many different types of products or services. Some of these are purely digital services, which makes it a good option for nascent online businesses. Here are some examples:

• Streaming services: think Netflix, Hulu or Disney+. These are content streaming services that, for a monthly fee, will let you binge on any content you want. These models are very popular and made the buy-one-song-at-a-time and Blockbuster video models go out of business. This is probably the most recognisable type of business subscription model.
• Software subscriptions: rather than paying for a new and improved version of software every time it’s launched, a subscription model gives you consistent access. Giants like Adobe Creative Cloud and Microsoft offer this model, showing it’s a great strategy to retain customers by showcasing how their subscription saves them money.
• Food service subscription: for this type, think of groceries delivery box service HelloFresh. Subscriptions like these add value by providing access to niche products that cater to specific types of diets. The key to these subscription models is that they make the service feel more personalised to the customer.
• Monthly subscription boxes: this type of subscription monetises customer’s thirst for convenience. Every month, subscribers get sent a box with consumer goods like clothing or skincare products or anything else tailored to the customer’s needs. These boxes streamline shopping.

What are the main advantages and disadvantages?

Subscription based business models are not a panacea. They take careful thinking and have some drawbacks that might not make them the best fit for your business. Here are some points to consider.

Advantages of subscription models

• Recurring revenue: since your customers are paying repeatedly each month or year, you can make a pretty reliable prediction of how much you’ll be making in each subscription cycle. This is great for when you’re trying to understand your budget as you’ll have a better idea of what resources you have at your disposal.
• They’re convenient for customers: the less effort there is involved in getting a high-quality product or service delivered, the better. Subscription models are a very convenient way of doing that. Subscriptions save customers from having to find new products and get them in a store or off a screen, which creates an alluring seamless customer experience.
• Stronger and long-term customer relationships: subscribers are returning customers who are constantly engaging with your brand. This earns trust in your brand since subscribers are accustomed to successfully working with you.The more contact, support, and high-quality service they receive from you through their subscription, the more likely it is they’ll become loyal customers.
• Reduces customer acquisition costs: rather than splurging on your marketing budget to attract new customers who don’t know your brand yet and may not be interested, you can focus your energy on your existing customers. This is more cost-effective and allows you to focus more on customer referrals.
• Opportunities for upselling or cross-selling: since subscription models can be tiered, you can easily try to convince subscribers to up their plan. The more customers can move between subscription options flexibly, the more likely it is they’ll want to pay a bit extra for a higher tier if the added features appeal to them.

Disadvantages of subscription models

• Requires ongoing innovation → although in theory it is easier to retain than acquire a new customer, you need to give those existing customers a good reason to stick around. Whether this is by updating your software or implementing customer feedback into your product, you need to constantly find ways to show your subscription is superior to a competitor.
• Could attract low-quality subscribers → if your marketing funnel isn’t sharp enough, you could be attracting customers that just want to use your product for a month and decide to leave right after. For a business subscription model to work, you need to attract subscribers that want to engage with your brand long-term.
• High cancellation rate → customer churn is always something to consider when starting a business. You’ll need to factor in the possibility of customer turnover and what you’ll do to avoid high cancellation rates. For this, calculate your revenue forecast to be lower than your current number of subscribers.

Essential tips for subscription businesses

If you’ve made it this far, it’s probably because you’re convinced that a business subscription model is for you. Here are a couple of tips to ace it:

• Calculate willingness to pay → doing your due diligence and in-depth market research is imperative before you decide how much you want to charge your customers. Make sure you have data to back up what your customers are willing to pay so that you’re not charging them too much or too little.
• Determine your goals early → getting your bearings set in stone before you launch your subscription model is crucial. Ask yourself what you want to achieve. Higher customer retention rates? Faster growth? A more stable revenue stream? Deciding on these will give you guiding metrics to assess the success of your subscription model.
• Make subscribing as easy as possible → no one wants to go through a five-page form to start subscribing to a service. All you want to do is give your name, email, and payment details to get started as soon as possible. If your customer onboarding is smooth , it’ll dissuade potential subscribers from giving up halfway through – or worse – flocking to the competition.
• Develop strong customer relationships → customers who aren’t happy or who aren’t reminded of the value your service provides on a regular basis won’t stick around. Make sure you highlight the perks subscribers get with their plan, offer new and innovative products, and train your customer support team to be top notch.
• Use a tiered subscription model → assuming everyone will buy into a one-size-fits-all subscription model is slightly naive. In an age where customers are expected to have personalised experiences and services, it’s important to factor flexibility into your subscription model. Have different options that offer different levels of access to your products. As an added bonus, have targeted special offers for different customers, like a discounted subscription for students.
• Have a free plan to lure customers in → although subscriptions are more cost-effective than paying a huge sum upfront, some customers could still suffer commitment issues when clicking the subscribe button. By giving them a chance to try out your subscription free for a month, they can have some time to get accustomed and be more willing to subscribe.

Conclusion

Subscription-based models have become more popular for a reason. Not only are they convenient for the customer but they’re also healthy for business. Although they have their drawbacks, if you’re willing to innovate and sharpen your marketing funnel, you’ll be on the right track to launching a successful business model. Done right, you’ll find that subscriptions make it easier to retain customers and supercharge your revenue growth.