What & How: A Subscription-Based Business Model

Subscription business models are beneficial for many organizations because they encourage customer success and improve buyer retention.

Nowadays, subscription models are used in nearly every industry. Growing companies like Netflix, Dollar Shave Club, and Microsoft have been using a subscription-based revenue model for years with much success. The good news? Your company can, too.

In this post, let’s discuss what a subscription business model is, how it works, and the benefits of using this model.

What is a subscription business model?

A subscription business model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for your products or services. Customers can renew their subscription after a certain period of time. This model allows you to leverage your customer relationships to create a steady stream of income.

Subscription-based revenue models benefit both the company and the customer. As a customer, you have the convenience of automatically repurchasing a product or service that you know you’re going to need in the future. As a business, you retain customers for future sales rather than needing to re-engage them on a more frequent basis. You secure monthly recurring revenue (MRR), which can keep your business afloat throughout the worst times.

For the right product, brand, and industry, a subscription model can be a very effective and lucrative approach to running your business.

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

How a Subscription Model Works

In a subscription model, customers are charged on a recurring basis for a product or service. They choose how long and how often they want to receive each offer, and most subscriptions provide the option to renew or cancel at any time.

Think of a subscription as a contract between you and the customer. The customer agrees to pay for a product or service for a period of time and the business fulfills that offer so long as the customer completes their recurring payments. When the contract is up, the customer has the option to renew or cancel their subscription.

The diagram below illustrates what this looks like.

A great example is your local newspaper. While you can buy newspapers individually, most who read them have a subscription. That way, you get a newspaper delivered to your front door for a fixed rate, rather than having to go to the store to purchase one.
Let’s explore more benefits of subscription models in the next section.

Benefits of a Subscription Business Model

• Subscription models are convenient for customers.
• Customers can discover new products.
• Businesses can accurately predict revenue.
• Subscriptions can attract more customers.
• Subscriptions decrease customer acquisition costs.
• Businesses build stronger relationships with their customers.

1. Subscription models are convenient for customers.

People are busy. And, if they can get a product (that they like) delivered when they need it, with little to no effort on their part — sign them up. Subscriptions save people from having to research new products and shop for them in stores, creating a more seamless customer experience.

2. Customers can discover new products.

Not only do people save money from not having to travel to the store, but they also get to try new items that they may not have purchased on their own.
Take Snack Crate, for example, where you can purchase boxes of snacks from around the world. With this subscription, you might discover a new favorite snack that you never knew existed.

3. Businesses can accurately predict revenue.

Subscription models make it much easier to predict how much revenue your business will receive each month. Since your customers are paying repeatedly, you know when they’re going to make a payment and how much it will be for. When you’re factoring budget into your business strategy, this will help you have an accurate representation of your company’s resources.

4. Subscriptions can attract more customers.

Sometimes, the price tag on a product or service can be cost-prohibitive for a consumer. Charging weekly, monthly, or annually allows you to set the price at a more affordable point, and lets consumers budget it into their monthly bills.

Think about buying a car. If you don’t purchase it outright, you’ll likely be put on a payment plan where you’ll pay incrementally over time. This allows you to afford the cost of the car, even though you can’t afford the total cost of it right away.

5. Subscriptions decrease customer acquisition costs.

Rather than engaging potential customers who don’t know or trust your brand, subscription business models allow you to do business with people who already do. This cuts down on marketing costs and allows you to focus more on customer referrals. This word-of-mouth marketing is typically more effective and less expensive than promotional advertising.

6. Businesses build stronger relationships with their customers.

Another benefit of working with the same customers is that you develop stronger relationships with them over time. When your service team is always there providing excellent customer support, customers learn to trust your employees and they become accustomed to working with your brand. This plays an important role when customers have to decide whether or not they’ll renew their subscription.
Now that you know the benefits of a subscription business model, let’s take a look at the steps you can take to build one for your company.

If you need to learn more about Subscription-based Business Model and have an analysis of whether your business can be be adapted to this model or not, do not hesitate to contact us.

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