Is the Subscription Model for Your Business?
A regular, monthly influx of revenue from faithful customers? Who wouldn’t want to get in on that?! But how do you know if a subscription model is a right approach for your business?
Somewhat unsurprisingly, very few companies leverage the subscription model in their business today. In fact, Gartner predicts that 75% of B2C companies will offer subscription services to their customers by 2023.
After all, the demand is there: more than 80% of consumers have at least one subscription type (e.g., streaming, cosmetics, Saas, etc.), an increase from 72% in February 2020.
But, is the subscription model for your business? And at that, what type of subscriptions? Where should you even start?
What is a Subscription Business Model?
A subscription business model is when your customers pay for your product or service on a recurring basis.
You earn recurring revenue in this model, which increases the lifetime value of each customer. Because of this, retention of existing customers as a business goal grows in importance, especially when compared to non-subscription models where one-off payments are the standard.
Your customers can subscribe to your business on one of the membership plans that you decide to offer. These usually reflect a period of time, i.e., businesses will offer monthly, yearly or quarterly plans. In most countries today, the law requires that you let your customers cancel their subscriptions anytime at no additional cost.
In the real world, the first “modern” subscription you’ve taken out was probably Netflix. Today, however, you most definitely have at least five: spanning from music streaming services to cloud storage and productivity apps such as Microsoft Office.
Different Types of Subscriptions You Can Offer
Subscription models today come in three types:
- the replenishment subscription model,
- the curation subscription model, and
- the access subscription model.
The replenishment subscription model is when your business repeatedly delivers commodity products (e.g., toiletries, groceries). Usually, the customers would subscribe for this membership on a “subscribe and save” option where the product is cheaper and conveniently delivered to their front door when needed.
The curation subscription model is when your business delivers collections of products to the customer, explicitly tailored to the uniqueness of that customer. This personalization is usually discovered through quizzes and regular feedback from the customer, who is keen on surprises and trying new stuff likely to be according to their taste.
The access subscription model is when your business allows exclusive access to your products or services for paying members. Some time ago, these would be country clubs. Today, the best example is Netflix. Remember: exclusivity sells!
Now that we have that down let’s look at the actual benefits that come with a subscription business.
Why a Subscription Business Is a Good Idea?
Revenue Is Easy to Predict and Forecast
With a subscription model, you have a predictable revenue stream. This makes it easier to keep your business afloat and operational and better prepare for any potential financial issues.
You can also make better-informed investments and spending decisions, especially if your product is affected by seasonality.
Affordable Prices + Customer Lifetime Value Increases + Upsells
By charging your customers periodically, you can offer affordable prices to a broader audience and get in touch even with those who previously might not be interested.
Unlike one-off purchases, your customers will constantly add to your revenue, increasing their lifetime value. And this is always a good thing, especially if your funding plan includes investors.
On top of that, you also can allow for up-selling and cross-selling new features and additional non-core products. You are getting more out of the same customer base.
Stronger Customer Relationships
Subscription models make it easier to create communities and foster loyal customers who don’t hesitate to refer others in their life to your product, and that in itself is priceless. On the sales side of things, it is also much easier to upsell to subscribers because they already know and trust your products or services.
It’s Cheaper to Retain Customers than Acquire New Ones
Retaining existing customers can be five times cheaper than acquiring new ones, and since you already have customers who buy from you regularly, you’ll be cutting down on your user acquisition costs.
Better Inventory Management (for Physical Products Only)
If you happen to sell physical products, a subscription model will also enable better inventory management due to better demand forecast data. Always be in stock!
Subscription eCommerce: The Ultimate Guide
We talked with developers who already utilize the subscription model via Crystallize in their businesses to provide you with the ins and outs of subscription ecommerce.
How to Start / Move To a Subscription Model?
What are the necessary steps you need to take to implement or start a subscription model for your business?
Start With the Basics
Having a great product or service in your hands is just a first step. Do the market research, find your niche, identify the market demand, define your offering, research the competition, establish pricing, whether you plan on offering trials, determine your marketing channels, etc. The more detailed you make your business plan, the easier it will be to put into action effectively.
While it is a long way from an idea to running a successful business, the early stages are the most important ones.
Choose a Subscription Type
We’ve been over the three subscription types. Sit down, decide on the product or service you want to sell, your niche, and then find the subscription type best suited to that product or service.
Settle on a Proper Pricing
There is a difference between a subscription pricing strategy and a subscription pricing model. The strategy entails price formatting on one of these approaches: value-based pricing, cost-plus pricing, competitive pricing, and demand-based pricing. I think the terms are self-explanatory, but if you find them puzzling, hit me up.
Pricing models, in general, can be fixed / flat-rate, tiered pricing, per unit/user, and per usage. Subscription Pricing in Crystallize can be as simple as a flat monthly charge or as complex as a fee that varies depending upon usage.
Settling on the proper pricing means you’ve gone through all these dimensions before forming a price. Then set and monitor crucial subscription KPIs regularly.
There are no cheats and shortcuts to creating the right price. What can help, though, is asking yourself and your stakeholders the right questions before settling on a price, i.e., Who are your customers? What are your fixed and variable costs? And How do your competitors price their products?
Tech Stack and Logistics
Research, the necessary software to operate your business. For example, don’t forget to look into payment processors capable of processing recurring payments from your customers with as many payment options as possible.
It goes beyond payment processors. How do you handle orders? Automation? Tech stack behind website/app? And it’s not only having a reliable tool backing your business that matters. The ability to quickly pick and choose the best ones and change them also matters.
Going with composable commerce architecture will help you with that.
Marketing Channels and Support
Being able to deliver your message to where your audience is at the moment is as important as the product itself. Once you successfully do that support you offer will make or break the business. Plan both of these early.
The concept of subscriptions isn’t new. Back in 1990, I was a proud National Geographics subscriber. Today, you can get anything from coffee over clothes to movie and magazine access via the internet.
B2B and B2C businesses are the most likely type of businesses that benefits the most from the subscription model. Think Slack, Dropbox, Freshworks, Calendly, Crystallize, as well as Dollar Shave Club, Nuwo, Birchbox, Farstad Coffee, or any and all newsletters and magazine subscriptions.
There is no doubt that the subscription business model offers endless growth opportunities for traditional and new-age businesses. The thing is, how prepared are you for it.
Do the research and reap the benefits. Sounds easy enough, right?