What is a subscription business model?

Written By
Ravi K Nair
Technical Content Strategist
Last updated at March 05, 2022
What is a subscription business model?

Gone are the days of customers buying products one at a time. Nowadays, subscription business models are dominating the industry. This strategy is so popular because it is a powerhouse for growth. This is especially true when done correctly.


What is a subscription business model?


The subscription-based business model is a pricing strategy for products or services that charges customers a recurring fee. These fees can be monthly, yearly, or otherwise, but they are typically used to access a product or service.


Subscription revenue model


Customers are a company's lifeblood. The more they see the value you provide for them, the more likely they'll pay an ongoing subscription. This is a boon to any business because it enables continuous income, not just from one-time customers but from loyal ones with a sense of ownership in the company.


Once you've acquired a customer, don't let them go! Subscriptions are a great way to increase your revenue and strengthen customer relationships. The longer a customer stays subscribed to your product, the more valuable they become to you. This is because revenues grow each time a subscription renews.


How Subscription Business Model Works?


Customers are charged regularly for a product or service in a subscription model. This is often done through an automatic billing system that charges customers monthly. In this model, customers can cancel at any time, and they will not be charged again until the next billing cycle.


Advantages of a Subscription Business Model:


A subscription business model is best suited for the small business owner who wants to offer their products and services as a subscription. It provides many benefits, including:


1. More control over your revenue. You can choose when to make payments, which means you can decide when to pay your bills.
2. Easier cash flow management. You don't have to worry about upfront expenses and can increase your revenue.
3. More predictable cash flow.

4. Subscriptions attract more customers


The state of subscription business models in 2021


With customer acquisition costs (CAC) up more than 50% and willingness to pay for software declining steadily for the past five years, now is the best time to capitalize on your customer relationships. In addition, subscription models have become incredibly popular in recent years. So don't be left behind!


A recent study says that 46% of customers are paying for an online streaming service, and 15% subscribed to an e-commerce service in the past year.


Companies such as GoPro and Adobe have found this business model one of the most reliable ways to add value for customers in the long term. Moreover, it helps these companies position themselves for success. They understand that pricing their products allows them to provide more value to customers in a long time.


Some Popular Examples of Subscription-based Businesses Model


When it comes to understanding the subscription model, what works in one industry might not work in another. But looking at successful subscription companies across various sectors can be a significant first step.


Streaming services Subscription Business Model


The subscription business model is a vital part of any company's business plans. Netflix and Spotify are prime examples of how successful this type of business can be. Customers will pay a monthly fee for these services, and in return, they get unlimited content streaming.


They do this with value-based pricing, which is great for conversion rates and offers a novel experience. Spotify's freemium model is a perfect example of how to boost acquisition.


Monthly subscription boxes


It turns out that customers love convenience, so subscription box services like Stitch Fix and Dollar Shave Club use subscription pricing to monetize it. They streamline the process of shopping for goods like clothing and hygiene products. For example, when people are told what they're going to receive in advance, they are much more likely to buy a new shirt or shaving blade than if you gave them the option to browse.


These days, retailers have to work hard to build strong customer relationships. To do this, they use data and personalization. Then, they put all of these things together to create an excellent experience for customers. Customers are willing to pay more for this experience because it ensures convenience.


Food services Subscription Model


Do you know how subscription boxes are popping up everywhere? Meal-kit services are another example of a business that uses this model. They're also similar to subscription boxes, but they offer niche products like selections catered to different types of diets.


If you want to boost ARPU, a great idea is by expanding your customer base. For example, Blue Apron and Hello Fresh have seen success in marketing to vegan, paleo, and gluten-free customers who are willing to pay more for their subscriptions. This is a prime example of expansion revenue.


How to build Subscription Businesses Model?


Building a successful business model is not always easy. But with the right tools and strategy, it can happen. With our knowledge of the subscription economy, we've compiled five tried-and-true methods that you can use to start your own successful subscription business.


1. Define your goals


It's essential to have clear goals for your subscription-based business. This can help you build the best pricing strategy possible. For example, long-term strategic thinking is crucial when your recurring revenue is tied directly to monthly or annual fees. After all, too high of a price point can lead to churn. So what do you want to accomplish through a subscription? More revenue? Faster growth? Defining these goals early on will help ensure success in the long run.


To create an effective pricing strategy, you must first set goals. These goals will help you determine how to structure your tiered pricing and what features you should include in each tier. In addition, matching the elements in each level with the needs of different target customers helps you craft a better pricing strategy overall.


2. A better experience to get more customers


To grow your revenue, you need customers. To get customers:


  • Make it easy for them to sign up for your service.
  • When they sign up, make sure they have a great experience.
  • Make it as easy as possible for them to get started with your product by providing excellent navigation and intuitive features.


With these steps, you'll see more acquisition numbers in the long term and an increase in average willingness to pay.


The idea is to make signing up for your service available in every channel you're using. This way, your company can continue growing steadily and offset the percentage of customers who leave because of churn.


3. Streamline the payment process


Be sure to have a reliable subscription billing system. This is important for your revenue. If you can't rely on your billing software, your customers will leave and never return.


This ties into the idea that you need to show customers the value of your service all the way. For example, if a customer is trying to make a payment, they must realize the value of your product or service.


4. Build good customer relationships


The actual value of my product or service must be clear from the very beginning. For my customers to continue to subscribe, they need to appreciate my product or service every step of the way, especially when they're actively trying to pay.


The customer's voice is central to any business. To stay in line with expectations, companies must have detailed information about their people's wants and willingness to pay. This will require good customer experiences and reliable data on preferences and desire to spend. The more you know about the customer, the better your pricing strategy.


5. Plan for future growth


To ensure your business is sustainable, it's essential to find a good subscription model. Steady income from subscriptions and predictable costs can help you grow and scale your business. You know that your growing customer base won't overwhelm your infrastructure when you have this knowledge.


The proven model tracks and measures your MRR, ARR, and churn rates. Tracking these metrics can give you the insights you need to make adjustments for the long-term success of your company. Your company can grow faster and become more agile with a successful business model. And because you're providing a great customer experience, as well as for your team, everyone is happy!


Perfect subscription pricing models


Before you start building your successful subscription-based business model, it's essential to understand the fundamental strategies. We'll dig into this a little deeper and take a look at how to manage your subscription-based business once it's up and running.


Use freemium to acquire customers


Freemium is a vital acquisition tool. It's not meant to be your main focus, but it's a great way to gain new customers. This model works for many companies, like Slack and Dropbox, and helps offset Customer Acquisition Costs in the long term.


For products with freemium plans, the net dollar retention is much higher. Since freemium allows customers to experience the value you provide, it's easier to upsell them on add-ons and premium pricing.


Change pricing often as you refine your product.


You may want to rethink your subscription pricing strategy. With this adaptive pricing model, you can quickly test and re-evaluate your price on an ongoing basis. Researching the customer market will allow you to change your prices when conditions are right and set your company up for success.


It's always important to check in with your pricing. However, don't just aimlessly update it every six months or whenever you feel like it. Instead, create a process for re-evaluating your pricing every two to four months. That way, you'll be able to make sure that you're not just thinking about what's best for your business but also about what's best for your customers.


Always give customers a choice.


Pricing is a huge deal for subscription businesses. Your customers need to choose the price tier that works best for them and their individual needs. This will make you appeal to more buyers and drive a lot of customer acquisition in general.


It's essential to know your audience with the purchase price of a product or service. Companies with structured pricing tiers have a higher average revenue per user than those without. This means that you appeal to several different customers, from those who want to pay more for specific features that align their needs best to those who are more price-sensitive.


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