SUBSCRIPTION BUSINESS MODEL: How It Works

In the subscription business model, users can get access to a product or service through a monthly or annual recharge. Each offer is customized to the length of time and frequency desired by the customer. Also, most subscriptions allow the flexibility to renew or terminate at any time.

Consider a subscription as a legal agreement between you and the subscriber. As long as the consumer makes all of their monthly payments. The business honours its pledge to provide a good or service for a set length of time. The consumer has the choice to either renew or terminate their subscription when the agreement expires.

Your Netflix streaming platform is a fantastic illustration. A lot of people subscribe monthly to watch movies.

What Is the Subscription Business Model?

A subscription business model involves the sale of a product or service in exchange for recurring monthly or yearly revenue. It is a framework that entails an owner giving access to a customer after a monthly or annual charge.

They prioritize customer retention over customer acquisition. It is primarily concerned with how to generate money so that a single consumer makes multiple payments for full access to a good or service rather than paying a large upfront one-time fee.

Understanding Subscription Business Model

The subscription business model is for business owners to better understand how to set up their businesses.

The economy is currently moving away from ownership of automobiles, software, entertainment, and shopping and toward more and more subscriptions. The customer’s lifetime value (LTV) rises as a result.

The process of renewing a subscription should typically begin monthly or annually. Make a plan so that you may conduct targeted client encounters to maintain a good renewal rate.

You can also examine the metrics for long-term relationships that determine the success of a subscription business.

Examples of Subscription Business Models

Examples of subscription business models are all around us in our daily lives. Accessing a gaming channel, watching movies and TV shows online, going to a fitness class, and other things. Due to their ease of use and simplicity, subscription business models are influencing every part of our lives. Here are some illustrations of the subscription business model.

#1. Streaming Service

Since the existence of digital media, there has been a need to provide users with limitless access to streaming services. The era of the neighborhood video store is over. Subscribers can now instantly access thousands of movies, music files, videos, and audiobooks for a small monthly price.

Typically, to use an online streaming service, subscribers must always have an active internet connection. The user can download a huge selection of songs on their device for offline listening, though, with some subscription services like Netflix. Once the subscription expires, these files are then automatically deleted from the app.

#2. Service-based software (SaaS)

The term “Software-as-a-Service” is frequently used to describe subscription software business models (SaaS). Many software companies have switched to a subscription-based business model since they first began selling their goods on compact discs. Customers are charged an annual or monthly price in exchange for access.

The consumer will be required to set up an account where they may pay the charge and choose to automate invoicing to purchase a SaaS subscription.

Following successful payment, either the customer will receive an access key in the mail or the download icon will show up in a “bought things” tab adjacent to the subscription order. Once the subscription period is over, the customer’s card will be charged once more, or the program will revert to the free edition with fewer functionality if they don’t pay or request a credit card chargeback.

#3. Content Subscriptions

Content subscriptions differ slightly from streaming services because they are consumed more actively than passively. This business strategy is appropriate for:

E-books
Electronic publications (magazines, newspapers, emails and academic journals)
Printed music
Statistics
Courses\sGames

After making a purchase, the buyer receives complete access to all previously added books, courses, articles, statistics, and games and is informed as soon as new content is added. Typical free versions of the content offered by content subscription business models include excerpts from books, a finite number of articles, or the abstracts of academic papers.

#4. Fitness and Health Subscription

The services covered by health subscriptions have expanded from the first offerings of dentistry and gym memberships. Some of the most current subscription models for health and wellness package together access to various services, such as 24/7 gym access, 24/7 doctor access, and a monthly or annual personal training session (referred to as “recurring”).

#5. Automotive Subscription

Even luxury automakers have gotten on board with recurring monthly automobile subscriptions. An automotive subscription allows the user access to a predetermined selection of cars. Any of these can be utilized while the subscription is valid, in contrast to rental cars, which remain with the customer for the duration of the rental.

High-flying business people can choose from a wider selection of vehicles and avoid ongoing maintenance by paying monthly for automotive subscription services. It can entail the opportunity for a working- or middle-class customer to experience driving a luxury car without having to pay the full cost upfront.

Subscription Business Model Metrics

Understanding subscription business model metrics will give insight into developing a strong brand. In this section, we discuss the essential subscription business model metrics to evaluate.

#1. Monthly Recurring Revenue

Monthly Recurring Revenue (MRR) is the monthly revenue from a subscription. Recurring fees need to be converted to a monthly amount (e.g., quarterly divided by 3). For instance, if a company sells annual, half-yearly, or quarterly plans the revenue would be split by 12, 6, and 4 appropriately. Add up all of the MRR at the customer level from all current subscriptions.

The MRR from new customer accounts, product upgrades, and product downgrades can also be tracked and monitored by businesses.

#2. Annual Recurring Revenue (ARR)

Once you understand MRR, calculating your annual recurring revenue is simple (ARR). This is an illustration of a subscription’s annual revenue. This statistic is useful for identifying patterns over time and establishing growth objectives.

ARR is useful for examining additional business health metrics. You can calculate ARR like this:

Sum up the subscription revenue for the year with recurring revenue from upgrades then subtract revenue lost from cancellations and downgrade of that year.

This makes it easier to determine where base subscription rates can be changed so that they would be effective across the board. These figures are examined by businesses like Netflix to see if a pricing increase can be implemented without impacting their turnover rate.

#3. Churn Rate

Expect some churn as a company: the quantity or proportion of consumers that cancel a subscription during a specific payment cycle. Even if you want a low churn rate, when you notice significant spikes, it may be time to make some changes.

Businesses have the option of calculating the turnover rate monthly, quarterly, or annually. A water bucket with a leak is a typical illustration used to describe churn.

A thriving subscription business ought to continuously add more customers than it loses. For companies with very high initial client acquisition costs or low lifetime value, the metric is crucial.

Calculate the total number of clients you lost throughout a period by dividing it by the total number of customers you had at the start of that time.

Analyzing the major causes that cause churn is essential. Predicting it is never easy because a variety of internal and environmental factors may have a role.

You can try to collect information on the reasons why customers cancel their subscriptions, depending on how they do so. This information can be used for analysis and upcoming client retention initiatives.

#4. Revenue Churn

Revenue churn, as opposed to subscriber churn, describes the percentage of revenue lost from existing customers over a specific period. It is more important to manage and monitor customer turnover. You can calculate it like this:

Calculate the income lost as a result of both voluntary and involuntary terminations, as well as the revenue at the beginning of the period, and downgrades in the period minus upgrades in the period.

Mid-term turnover is more difficult to forecast, but your entire company can help you stay on track with renewal rates.

#5. Rate of Renewal

To calculate the renewal rate, the total number of subscriptions renewed in a particular time is divided by the total number of subscriptions due for renewal in the same period.

Your renewal rate needs to be high enough in a successful subscription business to put you on a growth trajectory for the whole operation, whether that’s in terms of total customers or revenue. The renewal rate can also be determined on a revenue basis by multiplying the actual renewal value during a given period by the potential renewal value for the same period.

#6. Customer Lifetime Value

CLV is a projection of average customer profit over the course of their customer relationship (from signup to churn). Again, this figure should always be higher than 100% in a successful subscription business.

The most crucial statistic for a subscription business is, by far, customer lifetime value (CLV). It shows the potential total revenue from a consumer.

It serves as the maximum amount you should spend on customer acquisition. CLV also assist you in making crucial business decisions about sales, marketing, and other significant expenses. You can calculate it by multiplying the average revenue per customer by the gross margin percentage and dividing the result by the customer churn rate.

Monthly Subscription Business Model

A customer signs a contract with a company for a monthly subscription in which they agree to pay a recurring monthly charge in exchange for goods or services. Examples of monthly subscription business model:

Receiving a box of tangible goods every month
Paying a monthly fee for a subscription
Getting access to gated material that renews every month.

What Is an Example of a Subscription Model?

Streaming services: You can access Amazon’s TV and movie content with a Prime membership,
Computer services: Access to services like software, infrastructure, networking, and storage is made possible by businesses like Oracle, AWS, Azure, Google, IBM, and Salesforce.
Content services: You can access e-books and courses like Cousera, Udemy.

Is a Subscription Business Profitable?

Subscription-based businesses can be incredibly successful when done right. Before the Covid-19 outbreak, subscription-based businesses were becoming more and more popular, but the pandemic merely accelerated this trend. While under quarantine, customers still had requirements, and a subscription-based business was the ideal way to meet them.

Some of the most profitable subscription-based companies, including Amazon, Netflix, Chewy, Walmart+ grew their bottom lines as a result of the pivots that the epidemic forced them to make.

How Do Subscription Business Make Money?

The subscription business model makes money by charging clients a recurring fee that is handled on a regular basics. Recurring revenue, also known as subscription revenue, is based on developing long-term connections with clients who will pay on a monthly basis for access to the good or service.

What Is a Subscription-based Model?

A subscription-based pricing model is a payment structure that enables a client or organization to buy or subscribe to a service for a predetermined length of time at a predetermined fixed cost. Typically, subscribers make a yearly or monthly commitment to the services.

How Do I Create a Subscription Model?

You can start a new business or expand an existing one using subscription business concepts. We’ve got a simple five-step approach if you’re interested in beginning your own subscription business.

#1. Select a Subscription Plan.

Making a decision about the subscription model your company will utilize and the product(s) it will sell is the first step.

If you already have a popular clothing line, switching to a subscription business model can be a terrific way to ensure consistent monthly income. On the other hand, you might simply wish to start from scratch with a fantastic subscription box theme that you have.

Whatever the case, your initial step should focus on developing your subscription concept and outlining how it might operate.

#2. Choose Your Subscription Items.

Select the products your subscription business will sell each month. In order to provide brands’ products in your monthly subscription at a lesser cost to your company.

Creating a “prototype box” or trial subscription at this stage will also give potential customers with an idea of the kinds of goods they can expect to get each month. Just make sure the things you start positioning for marketing photographs correspond to the same types of products you’ll actually be sending. This doesn’t have to be entirely correct just now.

#3. Charge for Your Membership Choices

You may start setting the price for your membership once you’ve decided what kinds of things you’ll be selling and how much your new subscription service will be able to pay for them. There might even be many subscription tiers, depending on your products.

#4. Create a Webpage

It’s time to make your website once you’ve decided what kind of subscription you’ll be providing and how much it will cost. You can display images of sample products here, invite users to sign up for their next box, and provide details on the goods they get each month.

Additionally, Shopify makes it simple to build a website for your subscription business. Shopify makes starting a subscription business simple, whether you want to create subscription boxes from scratch or add a recurring purchase option to your current business.

#5. Promote Your New Subscription Company.

You must present your new subscription business to your target clients so that they can sign up now that it is ready to sell. Success in any business depends on marketing, but starting from scratch, can be intimidating.

Even though it may appear like progress is being made slowly at first, business growth is exponential. Simply said, you must work hard and be patient while you build your subscription business.

What Is a Subscription Strategy?

A subscription marketing strategy is a technique used to attract new clients and keep loyal, recurring clients. You must identify your subscription sweet spot before you can fine-tune your subscription marketing plan.

In Conclusion,

Starting a business with the subscription business model is a good idea when looking at the benefits. However, the subscription model might likely take to start showing results so you must be patient. Understanding the subscription business model is a critical indicator for predicting future growth

FAQs

What are the three types of subscription?

An unlimited usage agreement is a set amount charged for limitless access to a good or service under the subscription model.

The fixed-usage agreement is a fixed fee for a fixed amount of products or services over a specific period of time.

Pay-as-you-go-subscription is the billing model, sometimes the convenience model or no-commitment billing, enabling customers to make periodic purchases of goods or services without making a long-term commitment. Customers are always free to end their subscriptions.

What are the benefits of subscription business

It makes everything run more smoothly when you know the amount of money coming in each month. It also means you are aware of the amount you can put back into expanding your company.
The cost of acquiring customers is rising, which is a significant reason why startups fail. With a subscription-based business model, customers pay you on a monthly basis, which reduces the amount of money you need to spend on acquiring new clients.

How do subscription agreements work?

A customer signs a contract with a company for a monthly subscription. They agree to pay a recurring monthly charge in exchange for goods or services.

SUBSCRIPTION BUSINESS MODEL: How It Works

Table of Contents Hide