It seems that every day a new start-up is announcing a subscription-based business model. But what exactly is this type of business, and is it right for your company? Subscription models have been around for centuries, but they have really taken off in recent years. There are pros and cons to using this type of revenue stream, so let's take a closer look.
What is a subscription business model?
A subscription business model is one in which customers pay a recurring fee for access to a product or service. And that’s the key thing to remember: most of the time customers are paying for access, not ownership.
There are different types of subscription models:
- Access to content: This could be a magazine, a website, a streaming service, an app, a video game and so on. Customers pay a monthly or annual fee for access to the content.
- Access to service: This type of subscription gives customers access to a service, often with some kind of physical product included. For example, a customer might pay a monthly fee for a laundry service that includes pick-up and delivery.
- Access to a product: This type of subscription provides customers with a physical product on a regular basis. Subscription boxes are the typical example: this is a fairly new type of subscription model in which customers pay a monthly fee to receive a box of curated products. This could be anything from makeup to clothes to books.
- Product rental: This is where customers rent products instead of buying them outright. For example, they might pay a monthly fee to rent a designer handbag or a piece of exercise equipment.
Who uses subscription models?
There are a number of different industries that use subscription models, including:
- Media: Newspapers, magazines, and online content providers often use subscriptions.
- Service providers: Subscription models are also used by a number of service providers, such as gyms, spas, and even dating websites.
- Software: Apps and other software programs often use subscription models, especially if they offer a free trial period. They are common in the software-as-a-service industry (SaaS). Another examples are online gaming platforms, such as World of Warcraft, which allows players to subscribe to the game on a monthly basis.
- Retail: Products like clothing, jewellery, and handbags can be rented on a monthly basis.
- Artisans and artists: Subscription boxes are popular among artisans, such as jewellery makers, potters, and woodworkers.
What are the pros and cons of using a subscription business model?
There are both pros and cons to using a subscription business model. Let's take a look.
- Subscriptions can provide a steadier stream of revenue than other models, such as one-time purchases. This predictability can be helpful when planning for things like marketing and product development. Moreover, they can be scaled up or down easily as your business grows.
- Subscriptions can help you build customer loyalty, customer retention and customer engagement. In fact, they have a high level of personalisation: you can offer different levels with different perks, or allow customers to subscribe for just one month at a time. If customers are happy with the service, they are more likely to stay subscribed, which leads to long-term relationship.
- It can be difficult to acquire new customers, as they have to be convinced to sign up for the service and keep paying month after month. This can be a challenge if there is a lot of competition in the market.
- The churn rate could be high. There is always the risk that customers will cancel their subscriptions, which can lead to fluctuations in revenue.
- It can be difficult to change pricing without losing customers. This means that companies need to be careful about how they pricing strategies.
One thing to remember is that the subscription business model needs the same care as other business models. The customer experience is fundamental, for this reason brands must invest in customer service, they must be present on social media, find their own pricing model and check the fundamental key metrics to find out what works and what doesn't.