What is a subscription business model?
Today, we see more and more companies offering subscription products and services. In addition, customers are rethinking one-time purchases, so subscriptions that can cancel anytime seem more low-risk.
On the other hand, companies enjoy relationships with this business model because it produces recurring revenue.
All in all, it’s a win-win situation!
But how does it work exactly?
In a subscription business model, a customer receives a service or product and is charged for it regularly. Robbie Kellman Baxter describes this as part of the “membership economy,” where customers get “access” to a piece of content, product, or service rather than ownership.
While a famous example of this is Netflix, where subscribers get access to thousands of movies and shows in exchange for a recurring monthly payment, the subscription business model is spreading across other industries and business structures as well.
This business model is no longer only used by large companies but also adopted by many freelancers thanks to its flexibility and benefits.
Most businesses following this model offer subscription plans billed monthly or annually. Depending on the number of options, the customer chooses which subscription plan they want to avail of, and they could enjoy the product or service until the contract ends or when they decide to cancel or unsubscribe.
With subscriptions, you offer low costs for your customer while you make recurring revenue.
What are the benefits of a subscription business model?
There are many reasons why companies and service providers offer subscriptions to their customers.
1. It builds a long-term vendor-client relationship.
A subscription business model promotes customer retention. Instead of burning your resources in acquiring new customers, retaining them helps you focus on the value of your product or service. If done effectively, you gain loyal customers — an essential ingredient to a successful business.
2. It provides a predictable recurring revenue.
When you can predict how much money comes into your business within a period of time, you become better at forecasting your sales and streamlining your finances. A subscription business model allows you to do that.
3. It provides your customers with more options.
While you control what you offer, the subscription packages with differing price points provide options for customers with different budgets. It also becomes easier for you to add or remove features from the packages as you see fit.
The subscription business model is a beautiful way to build a steady income stream and create lasting customer relationships. Converting new customers can be very satisfying, but sticking to this strategy is not sustainable. When you don’t take care of your current customers, they will not stay for long.
With subscriptions, you focus on keeping current customers happy rather than finding new customers all the time. Not only does this save you money on lead conversions, but it also helps maintain a productive customer relationship.
No matter how attractive it may seem, starting a subscription business model is not easy. Before customers subscribe to your product or service, they must understand what you do or offer and trust it.
After all, if customers do not find value in your product or service, it might not be something they would want to pay for on a regular basis.
To ensure you run a successful subscription-based business, you must learn how to prepare for it and make it appealing to your target customers.
How to switch to a subscription-based model?
Know your target market
Before planning out what services to offer, you need to understand who you want to serve — from purchasing habits to needs that you want to target. Next, determine if your service is something your customers might want to get access to regularly.
If you’re considering offering different subscription packages, break down what certain customer groups might need and map out what comprises each package.
Know your competition
When you’re wading through territory that you’re unfamiliar with, it helps to look at what other vendors are doing. Not only do you get to see what’s working and what’s not working for them, but you also get to identify what makes you unique.
Monitor how your competitors are doing their business, and instead of imitating, think about how you can add more value to your services.
Determine your pricing strategy
Determining how much to offer for your products or services may be done in several ways. Perhaps you can look at how much other vendors are charging for theirs, or you can go with your records and base your pricing on how much it costs for your business.
Here are four popular subscription pricing models you can consider for your own business:
1. The fixed or flat-rate pricing model
As it sounds, a fixed or flat-rate pricing model is where a customer gets access to one product or service at a fixed rate every month/period. It’s easy and straight to the point, leaving little room for confusion.
This pricing model is perfect for traditional subscriptions like magazine issues or subscription boxes. However, it is also less flexible than other pricing models because you are limited to the same offer for every single one of your customers.
2. Tiered pricing model
The tiered pricing model has several subscription packages with different features that match different buyer personas.
Although revenue is less predictable in tiered pricing than in flat-rate pricing, this model allows you to scale and attract other customers because you are targeting different needs and varying budgets.
3. Per user pricing model
This pricing strategy is viral for software platforms or tools. A per-user pricing model is a form of the tiered pricing model that focuses on how many users have access to a product or service.
Again, think Netflix.
The price increases when you enlist more members or users to the platform upon registering.
4. Usage pricing model
On the other hand, the usage pricing model offers packages that limit how much of a service a customer can consume within a specific time period.
This type of pricing strategy is widespread in telecommunication brands. For example, an email marketing brand may choose to offer a package where a customer can send up to five hundred emails per month.
The more extensive the emailing list, the higher the fees.
Choose a payment gateway/channel.
Don’t forget to secure a safe payment gateway where you can accept payments. When you’re running a subscription-based business where receiving fees is regular, it is vital to pick a payment gateway you and your customers can trust. You don't want to risk losing customers over an unreliable payment channel.
You must also pick a payment gateway that can handle recurring payments automatically if you’re offering subscription plans.
In addition, the gateway must include the ability to save customers’ details safely for future transactions and the ability to charge cards on preset schedules. This way, you don’t have to send invoices manually every month just to get paid.
Offer a freebie
One of the best ways to get people to hop into a recurring membership or subscription service is to give something of value for free. This can be a free consultation, a complimentary one-time service, or a bonus.
Like in free sampling in the supermarket, you allow your target customers to get a taste of what it’s like to work with you. People typically like instant gratification. In this case, free and low-risk actions.
Always look for ways to improve your customers’ experience. Getting them onboard is one thing, while getting them to stay and continue their subscription is another. Pay close attention to how they use your product and service and listen to their reviews or comments.
If you want to retain and keep your customers satisfied, this also means communicating with them regularly through different channels. This helps maintain your relevance in their business and is an excellent opportunity to let them know what you have in store for them.
Keep your customers happy.
Signing up for a subscription is basically entering a new business relationship. To keep your customers happy, it is also essential to make an effort to be available for them when they need you. This means opening communication channels and preparing to answer any questions they may have about your service or product.
Encourage loyalty and reviews.
Finally, encourage a growing customer base by allowing them to leave and read reviews. Not only does this promote your business to other people, but you also get to see how else to improve your product or service!
It does away with the mindset of getting through a one-time sale and moving on to the next customer. Instead, it promotes loyalty and the cycle of repeat transactions.
Through this, you also become more aware of customers’ changing needs, opening opportunities to improve the quality of your products and services.
If you are a business owner or a service provider looking to build stronger relationships with your customers and a steady stream of income or profit, the subscription business model might be perfect for you.