subscription business model

Subscription Business Model: A Comprehensive Guide For 2022

Khyati Hooda
By Khyati Hooda 10 Min Read

A subscription business model is a powerful tool for a company’s growth strategy. It is because it gives the company recurring and predictable revenue and stability. Subscribers also benefit from this business model due to convenience and all kinds of value propositions available depending on what they want or need.  

Understanding how applicable this business model is can mean that one’s new venture will either succeed or be saved by understanding its usefulness in helping grow their old venture too!

What is the subscription business model?

A subscription business model is when you offer a product or service in exchange for a recurring fee, usually monthly. As long as your customer wants access to that product or service, they need to pay the monthly payment. 

It is a business model based on the relationship with customers. The longer the customer’s history, the more value they have for your company and vice versa.

Revenue models that work on subscriptions benefit both the company and the customer. Subscription-based revenue models, like a monthly automatic purchase you know you’re going to need in the future, are beneficial for both company and customer. 

As a business owner who sells products or services that can be repurchased on an automated basis, this is helpful because your customer automatically purchases from your store month after month.

Hence, your business never suffers during tough times. It also helps retain customers for future sales rather than having to keep re-engaging them more often through marketing efforts alone by securing recurring monthly revenues (MRR).

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How the subscription business model revenue works

The subscription business model can be a company’s greatest challenge and its customer’s best experience. Unlike companies that make one-time sales, the company’s revenue for this type of selling depends on maintaining customers rather than new ones. To keep up with the competition, it must focus on delivering high-quality products and services to support its current buyers rather than find new ones.

The subscription companies’ customer acquisition method is similar to any other successful business. However, there’s a big difference in marketing planning.

The reason is that because of the continuous payment from users required by subscription companies (because of their fee structure), they want to make sure it doesn’t become too burdensome for subscribers and cause them to abandon their subscriptions.

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According to statistics, subscription companies take a long time to recover the amount invested in acquiring each customer. That is why these businesses need to control how much they are spending on acquisitions to be sustainable in the long term. 

One of the most widely used strategies is employing free models (a proposal that provides you with free access) and then regularly convincing some part of this audience with a premium paid version.

Once a company has subscribed users, it must deliver on its expectations. Otherwise, they will cancel the service. The company needs to understand its target audience and what they want or need very well for this to happen. 

Unlike traditional businesses, subscription companies spend more time and energy maintaining those who are loyal. That means customers while trying, not how long it takes them before acquiring new ones (which is considerably lower). 

The turning point is to guarantee satisfied clients who remain loyal thanks to being confident with your brand’s goods; these people will also be your marketers.

5 Benefits of the subscription business model 

Some of the benefits of a subscription business model are – 

1. Convenience  

When people are busy, they can take advantage of subscriptions. They put in little effort, and by doing so, they get their favorite products delivered to them when needed. This is more seamless for customers who don’t have the time or energy to do research on new products or shop around in stores.

2. New Products

More than just saving money from not having to travel to the store, people get a chance to try new items that they may not have purchased themselves. Take Snack Crate, for example, where you can buy boxes of snacks worldwide. You might find a fantastic snack that you never knew existed.

3. Predicts revenue

With subscription models, it’s much easier to predict how much revenue your company will get each month.

With recurring payments from customers, you know when they will pay and roughly what the amount is for. When you factor budget into your business strategy, this helps give you an accurate representation of resources for yourself.

4. Attracts more customers

When a product or service has what seems like an expensive price tag, it might be more affordable to purchase the thing on a weekly, monthly, or even yearly payment plan. 

For example, buying a car – if you don’t have enough cash right away for the total cost but are still willing to make payments over time, then this is an option. The point is that sometimes the total upfront cost can be prohibitive, and we want our customers to still enjoy their chosen products without having financial constraints thrown in their way.

5. Customer Acquisition costs

Instead of winning over potential customers who don’t know or trust your brand, subscription business models allow you to do business with people who already know and trust you. This cuts down on marketing costs and frees up time for more customer referrals, usually the most effective way to market a product.

  1. Relationship with a customer – 

One of the benefits of working with the same customers is that you develop a stronger relationship as time goes on. When your service team provides excellent customer support, customers learn to trust them and become accustomed to working with your brand. This plays an important role when they have to decide whether or not they will renew their subscription.

Streaming services

Netflix is one of the most well-known companies that use this business model. These companies offer content and the experience they provide to their users. The customer has access to an extensive content catalog as long as they keep paying.

Some of these companies also use the freemium strategy – not enough people would pay if there weren’t an option for them at all – which is happening with Spotify, where half of its customers want both options.

Monthly subscription boxes and kits

These subscription boxes are a booming business that typically offers subscribers things like food, wine, and baby clothes. They monetize delivery convenience to you at your doorstep for an affordable fee. 

There is also a curatorial service- where products are selected based on the taste and interests of the company. You will then receive such items at your doorstep from time to time with no extra cost (usually).

Software

There is a growing trend among software and game companies who have chosen to use the subscription business model instead of selling their product once. 

Known by the acronym SaaS – software as a service, these companies maintain recurring revenue while also guaranteeing that they will always be able to update and develop new features for their customers. 

This growth in subscriptions allows these businesses to continually create updates or fixes at any given time- which would not be possible if users had purchased an individual copy of the program all at once instead.

Recurring and long-standing services

The service industry is based on the subscription business model if you’re not conscious of it. Since ancient times, companies such as rental and leasing services have offered their products or services to customers with recurring revenue – monthly or yearly payments. It includes insurance providers who charge a fee for every month that they provide coverage to an individual’s home.

Conclusion

The subscription business model offers stability and great sales potential for any company. At the same time, it faces many challenges concerning marketing strategy and planning. However, the chances of success are high if the company works on goals or indicators- focusing on delivering a quality product and service while paying close attention to the customer relationship.

Also Read: How to Create a Business Model You Can Scale

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Posted by Khyati Hooda
Khyati is an entrepreneur, marketing consultant and growth hacker. She helps sustainable revenue growth through marketing for SaaS and subscription companies. Her expertise lies in building scalable customer acquisition strategies and implementing effective digital marketing campaigns that drive high-quality, low-cost leads for startups. Khyati has managed over $50M in marketing budgets across various industries including technology, finance, education, retail, consumer goods and more - successfully delivering over 15x ROI for her clients.
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