The subscription business model (SBM) is a popular approach that many companies use to retain customers and increase sales. From streaming services like Netflix, iTunes, and Amazon Instant to meal kits like HelloFresh and Gousto, businesses of all sizes effectively implement this model.
If you are looking to start a subscription-based business or just want to enhance your marketing efforts by increasing the lifetime value (LTV) of your customers, this article is for you.
Further down, we will take a closer look at what an SBM is, how it works, what benefits it offers, and how to implement it correctly to achieve the set goals.
What Is a Subscription Business Model?
A subscription business model is a model that implies selling a certain product or service to a customer that they can repurchase on a weekly, monthly, or yearly basis. The concept of subscription is not new, of course.
However, the advancements in technology and changes in consumer behavior have led to an explosion in the subscription economy in recent years.
The subscription model is a win-win for both a business and a consumer. Here’s why:
- As a business, you can increase the loyalty of your clients and establish long-term relationships with them, while saving your marketing budget on re-engagement;
- Customers, in turn, can enjoy the convenience of accessing a product or service that they plan to use in the future.
The question is, can a subscription-based approach be applied to any brand, service, or product? To get an answer, let’s first find out how it actually works.
How SBM Works
As we have mentioned, subscription-based businesses have been around for ages, with the earliest known example dating back to the 1600s, when book clubs and magazines were first introduced. Customers received regular deliveries of books or magazines for a recurring fee.
The same concept is being used by many companies today. Rather than working solely on a business revenue model, where revenue comes from a one-off purchase, organizations are now moving towards implementing a subscription model that creates a steady stream of income.
What’s great about a subscription-based approach is that it can be implemented by any brand and industry. The key thing is that your product or service must be valuable to users so that they want to pay for it for a certain period of time.
An example of how an SBM is being used by software companies is iTunes. The folk behind the company have created a proprietary library of over 90 million music videos that are only available to subscribers.
And since this library not only provides access to a huge collection of music but also allows users to listen to it without ads, as well as tune into radio stations, many people are willing to pay a fixed monthly fee to be able to unlock its features.
For a new product that consumers are not yet familiar with, a free trial can do a trick.
Benefits of a Subscription Business Model
We have already figured out one important benefit of an SBM for businesses – the opportunity to receive a stable outcome. Now let’s look at some other advantages that make this business model beneficial for organizations.
- Customer Retention
A subscription-based approach allows businesses to retain customers by offering them ongoing value and a consistent experience. Once you get clients, you won’t need to re-acquire them, which will allow you to cut down on marketing costs.
An SMB works great for attracting new people as well, especially if the product or service you are offering is quite expensive. If you let people pay for it according to a certain payment plan, they are more likely to buy it, and you, in turn, are more likely to get new loyal customers.
- Improve the Cash Flow
Another important advantage is that a subscription business model allows businesses to improve their cash flow. Unlike a traditional BM, where organizations only get the revenue when a customer buys a product, in this model, they receive payment in advance for the goods or services they provide.
- Valuable Customer Insights
Companies operating based on the SBM have the advantage of being able to gather valuable data on the behavior and preferences of their customers. This information can then be used to improve their products or services, as well as their marketing and sales strategies.
- Lower Customer Acquisition Costs
Since subscribers are already paying customers, the cost of acquiring new customers can be significantly reduced. This can help businesses allocate more resources to improving the customer experience and retaining existing customers.
Last but not least, an SMB offers plenty of space for flexibility. Once you learn who your customers are and how much they are willing to pay, you can offer them a choice of subscription options, such as monthly, quarterly, or annual plans, so they can go for the one they are most comfortable with.
Examples of SBM Types
Whether you are a food service, a provider of a content streaming service, or a Saas company, a subscription business model is a one-size-fits-all approach that anyone can implement. Here are some of the most popular subscription model examples:
- Streaming services. Streaming services were among the first who started to use an SBM. Many giants in the industry, such as Netflix, Hulu, and Spotify, have become successful thanks to subscriptions;
- Software subscriptions. Companies that have a great product can charge their users for access to this product on a recurring basis. A case in point is Adobe Creative Cloud;
- Monthly subscription boxes. This is another popular subscription model that allows companies to monetize the convenience that they offer by delivering consumer goods right to the customer’s door. Dollar Shave Club and Stitch Fix are great examples;
- Newspaper and magazine subscriptions. Of course, the pioneers of the SBM, magazines and newspapers have gone nowhere, and they can still be purchased for a subscription fee. However, these days, they can be offered both in print and digital;
- Food services. Similarly to subscription boxes, food service providers can provide meal kits with delivery on a subscription-based model. HelloFresh, for example, offers an assortment of meals tailored to different diets, which sets it apart from the rest;
- Health and wellness. In this industry, many different types of subscriptions can be used, starting from DVD fitness videos to streaming services. To attract new customers, Whoop, for example, provides a fitness band with each subscription.
Strategies to Implement a Subscription Business Model
As you can see, a subscription-based business model is a powerful tool to attract customers, increase their lifetime value, and reduce marketing costs. However, it requires careful planning and execution to get it right. With our tips, however, you should be able to build an SBM like a pro.
- Identify Your Customers’ Willing to Pay
One of the first things to do is analyze your target audience. By understanding who your potential customers are, you will not only be able to interact with them more efficiently but also understand their willingness to pay. This will help work out the best subscription plans for them and put fair prices.
- Set Clear Goals
Understanding what you want to achieve with an SBM is just as important as knowing your audience, so the next step is to set goals. Here are a few questions you may want to ask yourself:
- Do you want to increase revenue?
- Do you want to improve the customer retention rate?
- Or maybe you are looking to attract customers to a new product or service that they are not familiar with?
When you answer these questions, you’ll be able to create a long-term strategy that will help you achieve your goals.
- Optimize the Customer Experience
The customer experience is a critical aspect of an SBM. Therefore, you need to make sure that the interaction with your product or service for customers, from the sign-up process to ongoing usage, is seamless and enjoyable. This can include:
- Providing excellent customer service;
- Implementing a user-friendly interface;
- Streamlining the sign-up/billing process;
- Offering a great set of features that are relevant to your customer’s needs, and more.
- Make Your Offer Valuable
To stand out from the relentless competition, you should be able to differentiate your subscription and offer valuable services or products to your customers. For example, you can offer some exclusive content that can be accessed only by subscribers for a fee.
If it’s not content, it could be a forum or community, personalized recommendations, or early access to new products or features.
- Measure Success and Iterate
To ensure the success of your SBM, it is important to plan growth right from the start and measure the performance of your service, because, otherwise, it would be like driving blind.
So, be sure to keep track of the key KPIs and optimize your offering as required, and it won’t take long before you notice a substantial increase in your following.
To recap, a subscription-based business model is a powerful tool that almost any company can benefit from. However, it requires careful planning, strategic execution, and ongoing optimization.
Whether you are looking to start an SBM or want to implement it into an existing business, our strategies and tips have you covered.