Subscription Business Models

Subscription Business

Subscription business models have become increasingly popular in recent years, with companies across industries adopting this model to generate recurring revenue streams. From software companies to media outlets and even traditional brick-and-mortar businesses, subscriptions have proven to be an effective way to build long-term relationships with customers and drive revenue growth. In this article, we will explore the basics of subscription business models, their benefits, and drawbacks, and some of the most successful examples in the market.

There are many successful examples of subscription business models across industries. One of the most well-known examples is Netflix, which offers a monthly subscription fee to access its vast library of movies and TV shows. Another example is Dollar Shave Club, which offers monthly subscriptions for razors and other personal care products.

Software companies have also adopted subscription models, such as Adobe's Creative Cloud, which offers access to its suite of design tools for a monthly fee. Additionally, media outlets like The New York Times and The Washington Post have adopted subscription models to access their online content.

What is a subscription business model?

A subscription business model is one in which customers are charged a recurring fee for access to a product instead of a one-time expense. This recurring fee is often paid monthly or yearly, and the customer is often given the choice of which frequency to purchase at. The subscription revenue model helps you capitalize on the compounding value of customer relationships; If your customers continually see the value your company provides for them, they'll continue to pay you for it.

Benefits of a subscription business model

We've talked about how the subscription business model has become a dominant model in the industry, and how much growth those who have chosen to employ it have experienced. But what exactly is it that drives the adoption of the model and the growth that it unlocks?

1. Predictable revenue stream

Once you've been operating long enough to collect data, the number of customers you gain and lose in each time frame will be more predictable, making it easier to judge what your income will look like from one month to the next.

2. Recurring revenue

One of the big disadvantages of selling software for a one-time price is that you need to make massive improvements to the product in order to get people to buy the next version. This means holding back updates until a new version comes out. Recurring revenue solves that problem; customers get updates quicker and you are constantly getting paid.

3. Stronger & long-term customer relationships

With one-off pricing, customers pay you and the relationship largely fades into the background unless they need customer support or a new version is released. Because of the continuous updating cycle of subscription-based software, your ability to respond to customer feedback in a timely manner and built relationships is improved.

4. Lower customer retention spend

One-off software, while only a one-time fee, is a much larger expense than subscription services. When customers have already spent that money on the older version, they are reluctant to upgrade to a newer one. A greater marketing effort is required to convince them to upgrade.

5. Easier demand forecasting

With the right metrics, the same data that makes it easier to predict your revenue stream from month to month will make it easier to do demand forecasting.

6. Opportunities for upselling/cross-selling

subscription-based plans are more flexible. While you can offer different features for different prices on one-off software, moving between those isn't easy. A one-off purchase can't be downgraded to the next month, for example. It's much more practical, then, to offer a wider range of options for subscription-based services. Because they can move between plans readily, customers are more likely to try out a higher tier.

Subscription model examples

It doesn't matter if you're a SaaS company, streaming service, or subscription box; the first step to better understanding the model is by looking at some successful subscription companies across industries.

1. Streaming services

Content streaming services are perhaps the most popular examples of subscription-based businesses. Companies like Netflix and Spotify are incredibly successful businesses thanks to their leveraging of the growth potential of subscriptions.

2. Monthly subscription boxes

Subscription boxes like Stitch Fix and Dollar Shave Club streamline the process of shopping for consumer goods, such as clothing and personal hygiene products. Their subscription pricing works because it monetizes convenience for their customers.

3. Software subscriptions

Paying for software as a subscription allows customers to get access to the latest and greatest software immediately, rather than having to wait for the next major release. Even big players such as Adobe and Microsoft have adopted the strategy.

4. Magazine subscriptions

These are perhaps the oldest subscription-based services. Now, the magazines may be delivered in print or via digital means, but the concept remains the same. Customers who want to stay informed are willing to pay a recurring fee to get access to the latest info.

5. Food services

Meal-kit services, like Blue Apron and HelloFresh, also use a convenience-based subscription model. They're similar to the subscription boxes but add value by providing access to niche products like selections catered toward different types of diets.

6. Health & wellness

This category spans many types of subscriptions. BeachBody, once famous for its DVD fitness videos, has launched a subscription-based streaming service. Whoop provides a fitness band for a monthly subscription fee. This works well because it lowers the initial investment for those who may not be sure they'll stick with it. Other examples include Rootine- Rootine puts people’s individual nutrient needs in the core of their business model, Thera Box- Each monthly box has been curated by therapists with the goal to “inspire happier lives through practical joy boosting activities and thoughtful products, Hello Fresh-At Hello Fresh each week, you’ll receive all the ingredients you need to cook up some delicious and nutritious food for you and your family, Glo- Glo is your go-to digital space for all things yoga, Pilates and meditation regardless of your proficiency level.

7. Subscription Models Begin To Explore Financial Services Arena

The landscape has changed remarkably for financial institutions (FIs) over the last decade. Since the Great Recession, interest rates have been close to zero or at zero — a situation that has changed the revenue and profitability equation for banks over the past decade. Fees have been a common strategy for bigger banks, brokerages, and insurance companies, but competition from FinTechs and credit unions (CUs) has made it tougher to implement fees from a strategic perspective — not to mention the fact that younger consumers would like to see fees waived for everything from ATMs to checking to deposits to loans.

This begs the question of how banks can generate ancillary revenue. In an economy that is increasingly driven by subscriptions for everything from apps to electric bikes, it's possible that financial services could be the next hot area for subscription services.

There are certainly segment examples that at least point to that possibility. For example, insurance is a low-hanging fruit for the subscription economy, since monthly premiums are so structurally similar to subscription fees. InsurTech firm Lemonade, for example, is using subscriptions to tap into digital speed and scale to close the data gap with established insurers.

Some of the clever initiatives include:

·       Budgeting tools assist consumers in tracking their expenses and developing a budget based on their income and spending habits.

·       Financial advice – Subscription-based financial advisors provide tailored financial advice to consumers to help them accomplish their financial objectives.

·       Consumers can invest their money in stocks, bonds, and other securities through investment platforms. They frequently provide a variety of investment possibilities, ranging from low-risk to high-risk investments.

·       Credit monitoring services check users' credit reports for changes and notify them of probable fraud.

·       Robo-Advisory- Subscription-based Digital advisory apps for investors to get automated wealth management and investing customer journeys.

Tips for subscription businesses

Subscription pricing is a powerful and versatile business model. But implementing it correctly requires the right tools and strategy. With our comprehensive knowledge of the subscription economy, we've put together six tried-and-true tips to use while building your own subscription business.

1. Calculate willingness to pay

A big mistake made by subscription-based businesses is charging more, or less than customers are willing to pay. Doing due diligence on the market you're in will help you to optimize the price you charge for your products and may even help you split your product into different subscription tiers.

2. Determine your goals early

What exactly do you want to accomplish through subscription? More revenue, faster growth? Defining these goals early on helps ensure you're building the best pricing strategy possible for your specific goals. When your recurring revenue is tied directly to the monthly or annual fees, long-term strategic thinking is important.

3. Boost acquisition with a better experience

The more customers you have, the more revenue you'll get. This simple reality is why signing up for your subscription service needs to be as easy as possible. Great customer experience will improve your acquisition numbers over time. When combined with a great overall onboarding journey, you'll also find a higher average willingness to pay.

4. Streamline the billing process

Don't lose out on revenue because your subscription billing system isn't reliable. Most modern software services have several complex processes involved in account billing and you need to nail all of them. If your billing process is too complex, your customer won't stick around long.

5. Develop strong customer relationships

Without strong and lasting customer relationships, you'll be constantly losing customers and trying to replace them. Customers who aren't happy, or who aren't reminded of the value your service provides on a regular basis, won't stick around. Focus on retaining customers for as long as possible by fostering these relationships.

6. Plan for growth before it happens

A good subscription business model helps you scale. This steady stream of predictable income, evaluated against churn rates and operating costs, ensures the growth you project is sustainable. Without this knowledge, however, your growing customer base can quickly overload your infrastructure.

Nailing your subscription pricing models

Now that you understand the strategies used in building a subscription-based business model, it's time to take it a step further and investigate how to manage that model once it's up and running.

Rely on a freemium subscription model to acquire new customers:

Freemium is great for bringing in customers. But for it to work, you need to understand what it is and isn't. Freemium pricing is an acquisition tool, not a model for consistent revenue. It's designed to significantly widen the top of your funnel and give you more time to nurture new customer relationships. This boost to acquisition is what drives MRR for companies like Slack and Dropbox helps to offset CAC in the long term.

By allowing customers to experience the value you provide through a freemium plan, you're making it easier to offer them upsells, add-ons, or premium pricing to increase and build on that value.

Use a tiered subscription model to give your customers a choice:

A one-size-fits-all price doesn't work for subscription businesses. Subscription pricing makes it easy for customers to experiment and find the right plan for them. Give customers the choice of a specific pricing tier based on their individual needs and let them try them out. This helps you appeal to more buyers, which can drive more widespread customer acquisition.

Our research shows that companies that adopt structured pricing tiers consistently have a higher ARPU than those that don't. By using relative feature preference and willingness to pay data, you'll be able to appeal to a number of different customer types.

Charge your customers fairly with a usage-based subscription model:

A usage-based subscription only charges customers for the resources they've used. While this isn't practical for all subscription companies, it offers customers the best value for those they work with. When customers receive a 1:1 return on what they are paying, they're more likely to stick around.

Some companies have a base price that includes a certain amount of usage, and a usage-based fee for customers who go over that amount. For example, an email list provider may allow a certain number of emails to be sent for a set fee, and then charge an additional fee for every 1,000 emails over that amount. If you go this route, make sure you aren't giving them so much in the base price that they end up feeling as though they're paying for something they aren't using.

Change pricing often as you refine your product:

Subscription-based pricing models are highly adaptable; it's easy to test and re-evaluate your prices on an ongoing basis. Through direct customer and market research, you'll know when conditions are favorable for a change and can proceed with the knowledge that you've set the company up for success.

You should automatically re-evaluate you’re pricing every six months. Analysis every other quarter will ensure that you're always thinking about what's best for your business as well as your customers. You should also re-evaluate pricing whenever there's a major change in features.

Key subscription business model metrics to track:

Once you've got your basic strategy down, it's time to start tracking the important KPIs that will help you measure your progress and determine the health of your company. For subscription businesses, some of the most valuable KPIs to track include:

• Monthly recurring revenue (MRR) - This is simply the average amount of money that your company brings in per month. Ideally, this number will grow over time.
• Annual recurring revenue (ARR) - Annual recurring revenue is just like monthly recurring revenue, except it's calculated per year instead of per month.
• Average revenue per user (ARPU) - Like the previous two metrics, this one is based over a specific time period. Whether it's monthly or annually, the calculation is the same; simply divide the amount of revenue made during that time period by the number of paying customers for the period.
• Customer lifetime value (CLV) - This is the amount the customer spends with you from the time they sign up to the time they leave. Combined with CAC, below, it's a powerful metric.
• Customer acquisition cost (CAC) - This refers to the cost of marketing and other expenses required to get a single customer. If your CAC is higher than your CLV, you're losing money.

How Paddle products ProfitWell Metrics and Price Intelligently facilitate your SaaS subscription model strategy:

Thanks to our many years of experience in the subscription pricing industry, Paddle has a collection of tools and services to help companies just like yours make the jump to subscription pricing in the most profitable way possible.

ProfitWell Metrics

We've seen some great metrics for tracking the success of your subscription business. But you can't track those KPIs without the proper tools. ProfitWell Metrics is a free analytics tool designed specifically for subscription businesses. Metrics will make it easy to track the metrics above, and many more, as you work to grow your company.

Price Intelligently

Finding the best price for your subscription service, and the best tiers to split it into is difficult. Willingness to pay calculations requires a healthy dose of industry expertise, along with a fair amount of very specific data. Price Intelligently helps you find the right pricing by using our years of experience to collect and analyze the right data on your behalf.

FAQs

Why do subscription business models work?

Customers and businesses alike prefer subscription models because they provide a great balance of price versus value. Customers get the convenience of automatically having the product when they need it or getting immediate access to new features. Businesses get a more stable source of income.

What are the disadvantages of the subscription business model?

Because subscription businesses often rely on making their money in the long term as opposed to in one lump sum, they require customers to stick around for a while. Businesses that aren't careful about controlling churn can find themselves spending more on Customer Acquisition Costs (CAC) than they are getting back from existing customers.

What is the difference between a membership vs subscription business model?

These terms are often used interchangeably, and several different people may all mean something different when saying them. In general, memberships give access to physical locations, such as a gym or a golf club. Whereas subscriptions give access to the product or service being subscribed to.

Drawbacks of Subscription Business Models

While there are many benefits to subscription business models, there are also some potential drawbacks to consider. One of the main concerns is the risk of customer churn, which refers to the rate at which customers cancel their subscriptions. If customers feel that they are not getting enough value from their subscriptions, they may choose to cancel, which can impact revenue growth.

Additionally, subscription models require ongoing investment in product or service development to keep customers engaged and satisfied. Companies that fail to deliver high-quality products or services may see increased customer churn rates or lower customer acquisition rates, which can impact the bottom line.