Spotify, Netflix, Medium, Amazon Prime, The New York Times – the list goes on. These are just a few of the companies that took the leap of faith into one of the most promising business models in 2021 – subscriptions.
As the COVID-19 pandemic continues to live amongst us, we can agree that subscriptions are here to stay. A new yStats.com report revealed that:
- Consumers of retail products and digital media are quickly turning to subscriptions to get essential items and premium content.
- The United Kingdom recorded an increase in new box subscribers, 20% of whom joined after the restricted access to local stores amidst the pandemic.
- Most of subscribers in 2020 and 2021 reported that they had registered for subscription boxes and multi-services.
- Video subscriptions in Asia-Pacific are expected to jump to almost half a billion subscribers by 2025.
All this can be attributed to the COVID-19 pandemic which has had a major hand in accelerating the rising demand for subscriptions around the globe.
This article explains what the subscription business model is all about and what it has in store for the future.
What is a subscription business model?
A subscription business model is a type of venture where a company delivers high-value products and services to the customer regularly. In return, the consumer pays a regular monthly fee, sometimes called a premium or subscription.
Unlike traditional businesses that put their energy into acquiring new consumers, a subscription business model offers much more.
Organizations invest in maintaining the buyers they already have while optimizing their budgets to keep providing valuable products and services. The bigger half of the marketing budget is reallocated to product improvement and customer retention, while the smaller portion goes on acquiring new ones.
Companies have learnt that they don’t need many new customers. Only repeat customers that can be kept with value provision. Savvy marketers understand the value of consumer relationships, and so, customer service remains at the core of the subscription business model.
How does a subscription model function?
A subscription business model involves:
- A company that offers a service
- A consumer that pays for the services
The company provides a product/service. The consumer pays a monthly or yearly fee to keep getting the service.
Let’s take the example of VlogBox, a leading video distribution and monetization platform that provides monetization solutions for CTV/OTT channels, helping to boost revenue for video content creators.
When content creators want to start a channel on CTV, they can choose a plan depending on their needs. We provide the requested services, for instance, custom design, or marketing support among other services at a flat fee for a month and as long as both sides get what they want, the relationship has an infinite time.
Numerous other companies use subscription business models, including newspaper & media companies, SaaS, fitness providers, motor vehicle services, lifestyle & healthy eating, social media, and many more.
Types of subscription business models
Up until a few years ago, companies spent a lot of money on new customer acquisition. Millions were wasted on consumers who only bought once. Then came the trigger to sustainable revenue – periodic subscriptions.
Here are the top three renowned subscription business models of 2021:
- Streaming services
- Subscription boxes
- SaaS Subscription Model
When we talk about streaming, Netflix is the first thing that comes to mind. And that’s just because it happens to be the most popular streaming service for movies and series. According to statistics, Netflix has over 213 million paying subscribers contributing to its 25 billion dollars in 2020.
Netflix offers unlimited access to movies and series for its subscribers. What’s even more impressive is that all the streaming content comes at a fraction of the price it would cost to watch individual movies in theatres.
Subscribers can access movies, series, and shows of their choice whenever and wherever they want for as little as $14 per month (Standard plan). No need to worry about penalties for missed return dates because all content is hosted remotely. Now that’s a deal too sweet for anyone with a strong internet connection to decline.
Other streaming services that charge a monthly fee include Amazon Prime Video, Funimation, Disney+, and HBO max.
Subscription boxes are a type of subscription services that offer subscribers physical products, including delicious food. The past two years have seen mandatory lockdowns restricting access to food joints and stores. Subscription boxes grew in popularity as a solution for people who needed necessities but couldn’t go to the store.
Blue Apron is a leading subscription box, according to a Clutch survey that took place in 2019. The New York-based company offers to bring a meal kit including ingredients and recipes right to a subscriber’s doorstep.
The service takes away the need to think about what to eat next by bringing subscribers balanced meals, fresh ingredients, and a recipe to try. Clearly, this benefits subscribers as it provides value in terms of daily meal suggestions accompanied by the ingredients and a recipe.
Other subscription box companies include different niches. The grooming product supplier Dollar Shave, Ipsy for makeup products, and Barkbox, a supplier of dog products are among them.
SaaS subscription model
Today, many companies around the globe depend on process automation for faster results, revenue maximization, and consumer satisfaction. To achieve this, they use various programs that charge a monthly fee or a monthly fee billed yearly.
Grammarly uses a good example of a Subscription-as-a-Service (SaaS) model to provide value to customers while generating a stable income stream. For as little as $29 a month, content creators get unlimited access to an AI writing assistant that helps improve written content, edits mistakes, checks for plagiarism, and offers word suggestions that suit the context.
By ensuring that the user gets value in impeccable content, the company can bet that the customer will stick around.
Advantages of subscription-based business model
Adopting a subscription business model puts the company ahead of the competition in many ways. Here are some of the advantages if you are wondering what a subscription business model can offer:
Easily Predictable Revenue
Traditional models would see a client buying only once then leaving. There is no way to tell if they would come back or if they would find other options. With a subscription business model, things are different. Although they can be canceled anytime, you can safely predict your future revenue a bit more accurately than with traditional methods.
Attracting More Customers
A subscription business model with a lower upfront cost, attracts more consumers. Companies hunting for new buyers can use a free trial as a tactical advantage to draw new buyers to their product. The goal is to prove to them that the product is worth their investment and also get feedback on how to improve the product or service.
Increased Customer Retention (And Lower Customer Acquisition Costs)
As mentioned before, marketers understand the value of a repeat customer. It takes a little investment to get them to try new products. On the other hand, new consumers require convincing with emails, ads, and follow-ups, which can be expensive without seeing a return on your investments.
Subscription models focus on consumer retention by providing high-value products and services while slashing the cost of acquiring new ones.
Stronger Bonds With Customers
Most subscription services often have “communities” or groups of like-minded people. They love the service and are always on the lookout for the best interests of other community members.
By building communities, companies using subscription models can get valuable feedback on what to improve to make the services more useful to the customer. It is this kind of interdependence that leads to better customer retention and loyalty to the company.
Increased Customer Lifetime Value (LTV)
Customer lifetime value refers to the total amount of money they spend throughout their stay on the platform. Subscription-based services can offer great products and services accompanied by excellent customer support.
All efforts are aimed at keeping the user around for as long as possible. With long-term consumers, the company can enjoy prolonged subscriptions, especially with multiple loyal ones.
How to start a subscription business model: 6 effective tips
Adopting a subscription business model isn’t just about creating multiple user accounts and charging a flat fee for product/service delivery. A lot goes into the process, as you can see below:
1. Determine your strategy
A good type of subscription business model begins with a good plan. Strategies define the journey along with its various obstacles. Start with defining the goals for adopting the model. Most companies want:
- Increased revenue
- Bigger market share
- Company growth
Create a long term and short term strategy depending on what the end goals are. If the company needs to increase revenue, a good pricing strategy can be a fix. Adopt a low price to enter the market and segment the products into different packages at different prices for the growing consumer base.
2. Multichannel support
Nowadays, clients can be found on an array of channels – on social media, email, Q&A forums, review sites, and the company’s website. Subscription businesses have developed ways to reach their users wherever they are.
Set up company email accounts, phone numbers, email addresses, social media accounts – anything that helps communicate better with consumers. Streamline customer service and add live chat support with 24/7 customer service.
3. Set up convenient payment
Payment in any type of subscription business model can be a tricky business. Billing customers depends heavily on factors such as the billing dates and payment system (credit cards, online banks, wire money, crypto, etc.)
It can get really confusing to collect monthly or yearly subscriptions while also incorporating donations. Get a billing system that’s dependable to run the subscriptions and make accurate invoices for customers.
4. Develop strong customer relationships
Customer relationships are at the core of subscription business models. A happy customer is likely to come back. The company has to keep the consumers happy by addressing their needs, listening to their complaints, and delivering quick, lasting solutions. Constant communication through the various channels also communicates that the business cares about its customers and that they can trust it to deliver.
5. Change pricing often as you refine your product
Changes in pricing can make or break any business strategy regardless of how solid it is. A low upfront cost is a great strategy for a subscription service to acquire and retain customers. Should you upscale the company, changing prices must be done appropriately without creating a negative ripple effect on the subscribers.
The rule of thumb is to avoid neglecting the already existing customers. Raise prices gradually rather than abruptly. It gives the old subscribers time to adapt while new subscribers begin with the latest prices.
6. Give subscribers a choice
Customers are inclined towards avoiding commitments. When starting out, they tend to steer clear of subscribing to services that feel restrictive.
Let subscribers cancel subscriptions whenever they want. After all, they could always come back provided that the company gives value. Similarly, giving them the option to sign back up is a good gesture as the door is open for them to return if they want.
Lastly, create new packages for the evolving needs of the subscriber.
For example, when finding their way on a WordPress site, a new user will often only need the basic features and thus the option to pay only $4 a month for what they want will make the most sense. As the user gets more comfortable with the service and can utilize more features, they will see the need to upgrade to a higher package.
Subscription business models have shaken the business environment for both companies and businesses. If you’re thinking about jumping in on the action, get ready with:
- A refined business plan
- A valuable product/service
- A flat fee/price
- Top-tier customer service
Although these aren’t all the tools required, you can always start with what you have and scale upwards.