In this ever-changing world, the latest trend for soaring businesses is the Subscription business model. We go for Netflix instead of regular TV, for Dollar Shave Club instead of a regular shop, for Blue Apron instead of cookbook recipes. These changes go quite unnoticed but make a huge difference in the market trends and business strategies of companies.
The upsurge of subscription companies is partially because of the changed psychology of the customers. The subscription-based companies provide various options depending upon the features offered on different plans which gives the customers an option to choose a plan according to their need. Subscription boxes have also become very popular these days, Birchbox for instance.
Entrepreneurs are setting their foot in the business industry with innovative subscription services which have become one of the fastest growing segments in business today. If you want to start a business in the subscription services, take a look at the important information to learn all about the subscription business model.
What is Subscription Business Model?
If you think the subscription service is a new invention in the business world then you’re wrong. The subscription business model is a modern approach towards older services like daily newspapers and monthly magazines. It has now become a strategic approach for growth, revenue, and brand loyalty of many companies.
A subscription business model is the one in which the customers pay a fixed amount of money on fixed time intervals to get access to the product or service provided by the company. In a basic subscription model, the company provides a product or a service on a monthly or yearly basis. This gives a recurring revenue to the company and pocket-friendly offers to the customers.
More and more startups are attracted towards this model because unlike other retail business models, in a subscription business model, you have a record of subscribers and hence no inventory issues are raised. This gives them assured and a predictable account of a constant revenue stream. The renewal of a subscription is periodic and automated often. Companies or organisations providing memberships also come under this category.
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How does Subscription Business Model Work?
The subscription business model works in different patterns depending upon the product or service provided by the company. Basically, a company starts by establishing a fixed price point for the product provided by them. The company also needs to decide how often and for how long the company wants to provide the service or the product.
If you’re planning to provide in-house product, it is easier to decide the price point, but you also need to think about how much the customers will be willing to pay you on a recurring basis. If you’re starting out as a contractor, you need to guarantee a steady product line and availability. Also make sure your fixed price point doesn’t undercut your profit margin, as a customer once subscribes to your service, you can’t raise prices for that fixed interval.
From the customer’s perspective, this model is very upfront. Once the customer has signed up and paid for the product, the customer will receive the predetermined product on regular basis. If the company is providing a service, the customer will get access to use the service.
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This way the subscription-based companies are focused more on customer retention rather than customer acquisition. These companies tend to have the upper hand as they have more opportunities to interact with customers and have access to record customer behaviour towards their products or service. They can use this to check when the customers tend to cancel the subscription and use this information to avoid pitfalls. Hence they get more chances to cross-sell and upsell.
How is Subscription Business Model Different From Freemium Business Model?
The two terms are often taken under a single umbrella. But to be precise, the subscription business model is a part of the freemium business model. The freemium business model works on a two-tiered model. It provides a free product with limited features or sometimes fully apt product and a paid product providing all features or add-ons with extra features likewise. The subscription business model provides no free product, although some companies offer free trials. However, it provides different products/plans having different prices.
One could say that a freemium model is an extension of the subscription model but the challenges faced by the companies offering freemium are many. The major problem is user conversion; how to convert the free users into paid users. If you want to read more about the freemium business model, read our blog “Analysis of the Freemium Business Model”
Types of Subscription-Based Business Model
There are several types of ways to make the subscription business model work for you. All you need to do is find the right type of approach to reach your customers to provide your product in the best way possible. Let’s have a further look upon the variety of ways you could execute a subscription based business model:
1. Membership-based Model
If you have a service that you could provide on a membership basis, for instance, tutorials or secret tricks to reveal only to subscribed users, this model could work perfectly well for you. By targeting a niche audience, you could bring together the most active and interested people. The membership websites are generally based on skill sharing like art, dance, music, or cooking tutorials. Even magic is offered under this model, Magic Stream for example.
2. Subscription Box Model
The subscription boxes offer great potential and are gaining popularity since 2010. Today there are innumerable subscription box varieties available on the web. The market is still growing for niche services. In this model, customers sign-up for boxes that usually have a theme and later these boxes are delivered on monthly basis on their doorsteps.
There are three types of boxes:
- Retail Boxes: In this, the customer pre-selects all the items to be delivered.
- Mix Boxes: In this, the customer pre-selects some of the products and rest are curated by the box creator.
- Mystery Boxes: In this, the customer receives assorted products based on the theme and all the products are a surprise.
All these boxes are great to start with. Yet you can build a brand image with the mix and mystery boxes. The best example for this would be the Dollar Shave Club. They provide shaving equipment along with great brand experience. The company understands its audience and uses witty statements to make their customers laugh.
3. Free Trial Model
This model is suitable for digital services like online video streaming, online education and fitness training. They give a free trial of generally a month or 7 days which results in user engagement and users often take the paid subscription plans.
To make this possible, you need to have more social media engagement and provide limited and attractive free lessons online to get followers and later convert them into customers. Naturally Sassy is an example of this model, it provides video lessons to help people get fit through ballet movements.
4. Cross-sell Model
This model is useful for the already established companies to expand their opportunities and give a better customer experience. For these companies, the subscription business model is not their core model but an extension. If you have a brick-and-mortar store and want to increase user engagement, you can build an online platform or use subscription boxes.
If you’re selling musical instruments, you could create online video tutorials and keep the subscription costs low which will eventually benefit your main business.
Explanation of Subscription Revenue Model
The subscription revenue model is simpler and more predictable than other models. The subscription revenue model is based on a fixed payment by the subscribers on regular intervals. These companies offer various plans based on different features provided and price difference. In this model, the company focuses more on customer retention as their revenue is generated through these subscribers.
These companies do not provide one-time purchases. They get recurring payment which guarantees the company’s ongoing support from the customers. This is also beneficial for the customers as they have to pay small amounts at regular intervals which is not very hard on their wallet.
This model also offers diverse revenue streams with the price variations depending on the level of functionality of the product. This is also an advantage for the customer as they can pick the most suitable offer for them.
Another advantage of this model is that the subscriber is highly engaged as they’re motivated to ‘cash in’ the full value of their payments and there is less need of marketing the product to the already existing subscribers. The customers are bound to pay the company on regular intervals hence the company does not need to spend extra resources on existing users which is a win-win situation for both, the company and customer as well, for they are not annoyed by the marketing tantrums.
Take a stationery subscription box for example. If you’re selling a box full of stationary tools that cost $5 to a customer for a 12-month plan, you have secured $60 revenue from one customer. Now if you are to sell this in a traditional way, it will take you longer and you’ll have to spend more resources on selling 12 stationery rich boxes.
This way the subscription revenue model is modest and has many advantages for both the ends which is why there is a hype for this model capturing the attention of booming entrepreneurs.
Subscription Based Companies
There is an ample number of examples of subscription based companies. Industries offering digital services as well as physical products are using a subscription business model to flaunt their businesses. There are several companies cross-selling their products with the help of the subscription business model. Let’s take a look upon a few subscription based companies to form a better understanding of the subscription business model.
Netflix is a subscription service providing online streaming videos which works on a membership-based model. Netflix has a three-tiered subscription business model. The clients pay every month for access to TV shows, motion pictures, documentaries and other media content in various qualities (SD, HD, Ultra HD).
Netflix has grown into a worldwide blockbuster content provider with its quality content and user engagement. It provides three plans: Basic ($8.99), Standard ($12.99) and Premium ($15.99) per month. It also provides a one-month free trial. This way, Netflix follows a membership-based three-tiered subscription business model.
You can find everything you need to know about Netflix in our blog, “Netflix Business Model”
Amazon started out as a book store that has now turned into a gigantic platform providing e-commerce services as well as online video streaming platform. Amazon also follows the subscription business model for its venture, Amazon Prime and Prime Video.
By subscribing to Amazon Prime, the customers secure a free fast delivery option and have access to Prime Video which provides online streaming media content. Amazon also offers Kindle and digital books to its e-readers. Amazon Kindle is another strategy of the company to drive the users to Amazon content as it comes with a 30-day Amazon Prime trial.
This way Amazon follows a bundled subscription plan and cross-sells other products. If you want to know more about the Amazon business model, you can find it in our blog “How does Amazon Work?”
A Few Measures to Take While Using a Subscription Based Business Model
The subscription based business model is suitable for useful, interesting and high-quality products that can be regularly updated. Below are the few measures one needs to take before executing a subscription based business model for their startup.
- You need to take care of the issues of expired debit or credit cards.
- You need to keep your products up-to-date with the market trends continuously to keep your users engaged.
- You need to find a gap in the market and fill that with your new ideas.
- Subscriptions don’t work on demand, you need to create a demand for your product. We have various companies selling basic things like socks or shaving equipment that have created hype.
If you’ve never heard of this term before, let’s have a look at what it actually means;
The phrase ‘Subscription Fatigue’ is termed for overwhelm of feeling nervous, people have, for not making most of the apps and software they have subscribed. Due to the emergence of a large number of subscription websites and offers in many industries, many people are going through this as they’ve subscribed to many such websites. The customers are prune to use subscription services. This results in a problem for the companies offering subscription.
To overcome this problem, you will have to make sure your company is offering something bigger and better. You can bundle your products like Amazon Prime or even Apple. Unlike many subscription services that provide a single price point, you could provide tiered prices by offering different plans for a subscription. The major factor of any subscription business model is user engagement and customer relationship. By keeping a few points in mind, you can tackle the problem caused by subscription fatigue.
Subscription fatigue proves that the subscription business model is extremely popular among users. But because of this, users are supposed to prune their subscriptions which is why businesses have to work harder to acquire more and more users.
The major advantage of using a subscription business model is the guaranteed outcome because the users not only want access to your product or service, they want it on a regular basis. Hence you build an entire chain for the preset time of recurring revenue at once instead of a one-time sale.
In a nutshell, you need to convince your customers that your service or product is worth paying the monthly subscription fee. You need to maintain and update the quality of your products. Customer service is the key in all businesses and for this model, it should be highly stressed as the motive of your business is to convert a one-time transaction into a long-term relationship.
There may not be a subscription service for your industry, but this shouldn’t stop you from starting one because, in the end, a startup idea is about filling gaps by bringing innovative ideas to life. If you want to read more about how to convert your ideas into action, read our blog – The Ten Steps Needed To Get Started With Your Online Business Ideas
Are You Enthused To Become a Part of the Subscription Based Companies?
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