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What is a Subscription Business Model How Does It Work?

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Priya Naha

Senior Writer:

green tickReading Time: 9 Minutes
green tickPublished : September 13, 2022

Summary: A subscription business model is an idea of selling a service or product to receive monthly or annually recurring subscription revenue. This blog will discuss the subscription business model, its work, and its benefits. We’ll also learn about building a subscription business model and some fine industry subscription model examples.

Every other industry is turning towards a subscription business model.  According to Businesswire, subscription business revenue grows 437% over nearly a decade as there is a consumer buying preferences shift from ownership to usership.

The below graph shows that subscription businesses have been consistent in outperforming sales revenue growth of non subscription businesses. The subscription businesses in the subscription economy index have grown nearly 6x faster than S&P 500 over the last nine years.

Subscription Economy Index Level GrowthSource

But, to implement a subscription model, you must know what it is. So, here we are, with our in-depth insights on the subscription business model, its benefits, examples, and much more. Read on!

What is a Subscription Business Model?

Subscription Business ModelsSource

A subscription business model is based on the idea of selling a service or product to receive monthly or annually recurring subscription revenue. A subscription model focuses on customer retention over customer acquisition.

As a customer, you can automatically repurchase a service or product that you’ll need in the future. As a business, you can retain customers for further sales frequently. In addition, you can secure the Monthly Recurring Revenue (MRR) to keep your business afloat even in the worst times.

How Does a Subscription Model Work?

To know how subscription model works, see the following diagram:

Subscription Model DiagramSource

In a subscription business model, companies can charge customers on a recurring basis for a service or product. Customers can choose how often and long they want to receive each offer. Many subscription based service systems provide the option to cancel or renew anytime.

You can think of a subscription business model as a contract between your business and customers. The customer agrees to pay for a service or product for a certain period, and companies fulfill the offer till the customers complete their recurring payments. After the contract is over, the customer can renew or cancel the subscription.

One fine example of how subscription model works is your local newspaper. While you can buy newspapers individually, most people reading them have a subscription. 

In that way, you get a newspaper delivered to your front door for a fixed rate rather than going to the store.

What are the Benefits of a Subscription Model?

Benefits of Subscription Model Source

The benefits of a subscription model are:

  1. Subscription models are customer convenient.
  2. Customers can find new products.
  3. Businesses can predict revenue accurately.
  4. Subscriptions can captivate more customers.
  5. Subscriptions reduce customer acquisition costs.
  6. Subscription Businesses build stronger relationships with their customers.

1. Subscription Models Customer Convenient

ConvenienceSource

When customers get a product delivered with little effort, they sign up for a subscription. Subscription businesses save people from researching new products and shopping for them in stores. The subscription businesses create a seamless customer experience.

2. Customers Can Find New Products 

Customers can find New ProductsSource

The subscription model allows customers to try items they have not purchased with their own money.

One such fine software subscription model example is Snack Crate. Here, you can purchase snack boxes from around the world. And with this subscription, you might discover a new snack you never knew!

3. Businesses Can Predict Revenue Accurately

Revenue PredictionSource

With a software subscription model, it becomes easier to predict your business’s monthly revenue. Since your customers pay repeatedly, it becomes easier for you to know when they’ll make a payment and how much it’ll be. Factoring budget into your business strategy will help you accurately represent your company’s resources. 

4. Subscriptions Can Captivate More Customers

Subscriptions Can Captivate More CustomersSource

Have you ever considered buying a product but taking a u-turn after seeing the price tag? Unfortunately, that happens with almost everyone. 

But a subscription business model offers customers an alternative. Charging annually, monthly, or weekly allows the customers to set the price at a more affordable point. In addition, it lets the customers budget it on their monthly bills.

For example, when people buy a car, most of them don’t purchase it outright. Instead, the customers put on a payment plan where they pay incrementally over time. And such a process allows customers to afford the cost of the car, even though they cannot afford it right away.

5. Subscriptions Reduce Customer Acquisition Cost

Subscriptions Reduce Customer Acquisition CostSource

Customer retention is way better than acquiring new customers. Rather than customers, who don’t know about your brand, it’s all better to do business with a loyal customer base. 

Subscription businesses cut down on marketing costs and allow companies to focus on customer referrals. In addition, Word-of-mouth marketing is more effective and less expensive than promotional advertising.

6. Subscription Businesses build Stronger Relationships with their Customers

Subscription Businesses build Stronger Relationships with their CustomersSource

Working with the same customer base will strengthen your business-customer relationship over time. With the service team providing fabulous customer service, customers learn to trust your company’s employees and become accustomed to working with your brand. In addition, it proves helpful when customers need to decide on their subscription renewal. 

6 Steps to Build a Subscription Model?

How to Build a Subscription Model?Source

To build a subscription business model, the following steps will help:

  1. Figure out if your business would make profits from offering subscriptions
  2. Set up a goal for your subscription based business
  3. Choose a subscription pricing strategy
  4. Improve customer experience for more sign-ups.
  5. Create a smooth onboarding experience 
  6. Make the billing process simple and easy.

1. Figure out if your business would make profits from offering            subscriptions

Before opting for a subscription based service, figure out whether offering subscriptions will make sense for your products or services. 

Do your products need continuous customer access like continuous services (content writing & consulting), exclusive media, and software products? Or are your products physical items that customers need refills for, like everyday products, books, or snacks? 

Once your company determines whether your products and services will benefit from a subscription model, move on to the next step. 

2. Set up a Goal for your Subscription Based Business

You are all set if you have the right goal to focus on! The right plan will guide your process while you create subscription pricing levels and packages. For example, you may want to increase your small business client base or attract high-value clients. You may even want to grow revenue by a certain percentage, increase customer retention, or boost sales. 

Once you’re sure of your end goals, you can select a pricing structure to help you with customer retention. Your subscription business model will also help you determine the proper wording for your website copy.

3. Choose a Subscription Pricing Strategy

When you create your subscription business model, depending on the type and nature of the model, you need to select a specific subscription pricing strategy. For example, if your goal is to sell more user seats, you’ll go for a per-user pricing model that provides subscription discounts to businesses with more users. 

Creating your subscription levels and packages is fun. For example, you can create a package that kick starts your subscription based revenue model for simple subscriptions. 

And as you gather feedback from your customers and learn more about their preferences, you can create several packages that serve different segments.

4. Improve Customer Experience for More Sign Ups

You can always captivate your customers with simple, straightforward subscription packages. No user wants to ponder how to sign up for a subscription once they get to your social channels and websites. 

Try including a call-to-action button on your homepage’s top right or left corner.

Once the potential customers get to the pricing page, they can ponder over which package they should choose based on the pricing and language of each subscription level. 

Always ensure that your pricing page has an option to get in contact with your team via email or live chat. 

If you have no idea about creating a pricing page, you can always look at some top-notch pricing page samples.

5. Create a Smooth Onboarding Experience 

The onboarding process is different depending on the product you sell. For example, the onboarding process might occur with cues if you sell software. And if you sell a physical product, the onboarding process can be done over mail. 

6. Make the Billing Process Simple and Easy

When you have well-designed packages, excellent onboarding, and customer service, you are sure to get renewals. So, ensure that your billing system is set to accept and process recurring payments.

You must have a payment gateway on your app or website, so your customers don’t have to navigate various links to renew their subscription. With a renewal, you have a chance to build a stronger customer relationship and provide additional value to your customers. You can also toss in other features or extra goodies for customers who’ve been with you for a long time.

5 Best Subscription Model Examples

Subscription Model ExamplesSource

Subscription business models are ruling in various industry sectors. Some fine subscription model examples include:

  1. Health & Wellness
  2. Cars
  3. Gaming 
  4. Education & Professional Development 
  5. Entertainment

1. Health & Wellness

Health & Wellness Subscription ModelsSource

With increasing pressure on health systems, private companies and governments are looking for effective ways to personalize services along with lowering costs.

The subscription businesses come as a great boon! With a subscription model, patients can have access to meditations, medications, and a community of wellness enthusiasts. 

Happify and MDVIP are two health & wellness subscription model examples. 

2. Cars

Car Subscription Models Source

Cars are one of the top-notch subscription model examples. You don’t have to decide which car to purchase any longer! With the subscription business model, people can use rental subscriptions and change what they drive, giving them access to various vehicles. 

A subscription business model gives customers the feeling of owning various products without the responsibility, cost, and clutter of buying them.

The move to a subscription model paves part of the way toward a future model. 

For example, car brands like Audi, Porsche, and Nissan have moved towards a subscription business model. 

3. Gaming 

Gaming Subscription ModelSource

After the video game industry was called the “year of subscriptions” in 2019 by GameSpot, there was no stop! As a result, the gaming industry has become one of the best subscription business model examples.

Games are now shifting to subscription businesses that offer access to multiple varieties of games rather than buying individual ones. A subscription business model offers players novelty and variety while still allowing publishers and platforms to maintain control of their products.

Xbox Game Pass and PlayStation Now are some gaming subscription business model examples.

4. Education & Professional Development

Education & Professional Development Subscription ModelSource

The educational and work-life scenario is forever changing. And this pace of change forces employees to renew their learning and skills simultaneously. Some pressures that employees and organizations face are acute practices, new technologies, and an ever-increasing need to solve complex problems. 

The global e-learning market has grown and consolidated with numerous companies using a subscription business model that addresses the needs of individuals and organizations.

Linkedin Learning and Code Academy are two fine subscription model examples.

5. Entertainment

Entertainment Subscription ModelSource

Entertainment is a broad category and a highly competitive market. The subscription business model is one of the widely used business models in entertainment. Reports suggest that the global video streaming market will grow at a CAGR of 19.9% by 2029! 

Amazon Prime, Netflix, and Disney Hotstar are some stellar subscription model examples. 

How will a Subscription Business Model Help You? 

How will a Subscription Model Help You?Source

Multiple industries like consumer electronics, fashion clothing, consumables, and in-home fitness have taken advantage of the subscription model. With the right plan, innovative tactics, and creativity, you’ll find the secret that leads to happier customers and better retention rates for your business. So what are you waiting for? Get your subscription business model now.

Frequently Asked Questions

With the evolution of the subscription business, almost everything can be purchased using a subscription business model. Everything works best for a subscription business, from streaming movies to buying snacks and clothes.

The key metrics to monitor in a subscription business model include:

  1. Customer Lifetime Value
  2. Monthly Recurring Revenue
  3. Annual Recurring Revenue
  4. Revenue Churn
  5. Churn Rate
  6. Renewal Rate

With subscription management, you can manage and fulfill the subscription order.

A membership business model focuses on community-building efforts, whereas a subscription business model is entirely customer or product-focused.

A perpetual license model is an ongoing subscription that is priced on a monthly or yearly basis, whereas, a subscription model has a set duration of monthly or annual charges that the user can define.

The subscription business model is sustainable because businesses can lock customers for an extended period. It ensures a steady recurring revenue stream.

Updated : November 21, 2022

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