Business Tips

What is a Subscription Business Model, How Does it Work, and Is it Right for Your Business?

By
Fiverr Team
|
August 8, 2022
subscription

These days it seems like there’s a subscription service for just about everything – from makeup and razors to software and movies. With so many successful businesses moving away from one-time product sales and jumping on the subscription bandwagon, you may be wondering whether you should consider it too.

The following guide provides a deep dive into how the subscription business model works, some of the benefits it can offer, and our top tips for creating your own successful subscription service of your own.

What is a Subscription Business Model?

A subscription business model is one in which customers pay a small price to access a product or service and then continue to pay on a regular basis for ongoing access. This business model is based on the concept of creating recurring sales, typically on a weekly, monthly, or yearly basis. This is significantly different from a traditional revenue model, primarily based on the fact that subscription services focus on customer retention over customer acquisition.

A business that adopts a subscription model commits to earning the bulk of its revenue from customers making multiple payments for a prolonged period of time rather than paying a larger upfront price for a one-time purchase. If you’ve ever subscribed to a magazine, a content service like Netflix or Hulu, or a weekly meal delivery service, then you’ve already had first-hand experience with the subscription business model.

How a Subscription Business Model Works

Subscriptions aren’t a new concept. In fact, they were first introduced in the 1600s by book and newspaper publishers. Today, customers typically sign up for subscription services online, providing their credit card or checking account information and giving authorization for recurring charges. At the end of the subscription period, if the customer has not canceled, the subscription will automatically renew. A charge will be placed on the customer’s account, and he or she will receive uninterrupted access to the product or service they've purchased.

Examples of Subscription Business Models

There are many different types of subscription business models, from services like lawn care and HVAC maintenance to gym memberships, storage units, and more. One of the newest subscription business models is the subscription box. This includes makeup boxes, meal delivery, date night boxes, and more.

To show just how varied the subscription model can be, here’s a look at a few of today’s most popular subscription services:

  • Entertainment - Netflix, Hulu, Amazon Prime Video, Apple TV, Spotify, Sirius XM, Disney+
  • Consumables – Dollar Shave Club, Ipsy, Butcher Box, Man Crate, Barkbox
  • Gaming – Xbox Game Pass, PlayStation Now
  • Software as a Service – Google, Salesforce, Dropbox, Mailchimp
  • In-Home Fitness – Peloton, Fitbit Premium, Mirror, Tonal
  • Clothing – Rent the Runway, Stitch Fix, Trunk Club

Benefits of a Subscription Business Model

A subscription business model benefits consumers by providing ongoing access to products or services. It also offers a convenient and cost-effective way to try new things with a minimal amount of risk.

For business owners, offering subscription services creates even more benefits. Here’s a closer look at a few of the most exciting.

1. Predictable Revenue Streams

Since subscriptions are based on repeat business sales, this model makes it easier to predict the amount of revenue your business will receive each month. Once you understand how much is coming in and when it will arrive, you can confidently make business decisions. This may include reinvesting back into your company, improving your product, or focusing on developing other parts of your business.

2. Increased Customer Lifetime Value (LTV)

Your customer lifetime value is the total amount of revenue you can expect a customer to generate over the course of their relationship with your company. By providing consistent value over an extended period of time, you can create a fun and exciting experience that keeps them coming back for more. As long as your customers can safely assume that your subscription will continue offering them value, chances are, they'll happily continue paying your fee.

3. Lower Customer Acquisition Costs

Rather than working hard to engage potential customers who don’t yet know or trust your brand, a subscription business model allows you to focus your efforts on doing business with people who already love the products or services you offer. Many subscription-based brands also receive a significant amount of word-of-mouth referrals. This can be far more effective and less expensive than traditional advertising methods.

4. Stronger Customer Relationships

Repeatedly working with the same customers gives you the chance to develop strong relationships with them over time. It’s also easier to build a community since it’s likely that many of your customers have similar interests. When you make your customers feel heard and validated, they’ll quickly become a loyal and profitable fan base.  

5. More First-Time Customers

A product or service’s price point can sometimes prevent customers from giving it a chance. Charging weekly, monthly, or annually will allow you to set your price lower. By offering the opportunity to try something out without making a big financial commitment, you may be able to attract new customers who are curious about your brand.

How to Build a Subscription Business Model

If you’re intrigued by the idea of incorporating a subscription service into your business plan, there are some important steps you’ll want to take to set yourself up for success. Start with these five tips.

1. Start with Market Research

While the subscription business model has been excellent for many businesses, it may not be right for you. Before you dive in, be sure to do some market research to determine whether your business can benefit from offering a subscription service.

Consider whether you sell products or offer services that your customers will continually need. Also, determine how much capacity you have to provide a recurring subscription to a growing number of subscribers. If you find any potential weak points, be sure to address them before moving forward.

2. Create a Pricing Strategy

Take some time to think about whether you want to set a fixed subscription price or create tiers and whether you’ll offer any pricing incentives. It’s often best to start simple. Some business owners launch their subscription with just one option, then add more levels as they get feedback from their customers and learn more about their preferences.

3. Set Up a Seamless Sign-Up Procedure

It’s critical to make sure your sign-up procedure is straightforward, easy, and simple. This will make your marketing more effective and help prevent confusion that can cause potential customers to abandon their carts before they click “subscribe.”

You’ll also want to make sure your billing system is set up to easily accept and process recurring payments. In addition, your website design should include a user-friendly way for subscribers to update their contact and billing information and upgrade or cancel their subscriptions.

4. Scale with Infrastructure

To create a successful subscription business model, you must have an automated process that allows you to scale your business. Before you launch your subscription service, make sure you have seamless integration with your e-commerce system, payment gateway, and logistics and fulfillment companies. If you’ll be offering a physical product, consider using warehouse management software that integrates with your e-commerce site. You may also consider a bulk shipping service to streamline the process and lower your costs.

5. Provide Stellar Customer Service

The subscription-based model requires you to provide outstanding customer support. This shows customers that they can trust your brand to always make things right, no matter what. The service they've received can be a major factor when customers are deciding whether or not they’ll renew their subscription. Make it a point to go above and beyond, and your subscription business is far more likely to succeed.

Is a Subscription Business Model Right for Your Business?

With a bit of creativity and a solid business plan, you may find that the subscription business model is an excellent way to quickly grow your business. With help from Fiverr's experts, you'll be able to get the support you need every step of the way.

Fiverr Team
Whether you’re scaling up your small business or building a brand from scratch, we’ve got the resources you need to keep you informed and at the top of your game.
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