Subscription Business Model and How it Works?

Every business thrives in having recurring sales. As an entrepreneur, you need to make continuous sales to remain in business. For this reason, you develop a marketing model that enables you to acquire customers. Your model enables you to win customers and make sales. However, your business will be sustainable if you have a customer retention approach.

Here is where the subscription business model comes into play. This model enables a business to not only acquire customers but also continue doing business with them. But before considering subscription as your business model, you need to know about it and how it works.

What is the subscription business model?

The subscription business is a model where you generate revenue by charging your customers’ continuous fees at given regular intervals. The intervals can be monthly or annually. This model is among the oldest business approaches.

If you are old enough, you are familiar with newspaper subscriptions. You had an opportunity to subscribe and pay a given amount per month to get daily newspaper deliveries at your doorstep. With the introduction of the internet, the subscription model is now a common practice among many businesses ranging from internet service providers, digital TV companies to businesses offering SaaS (Software-as-a-service).

How Does Subscription Business Model Work?

The subscription business model aims at customer retention. For this reason, it focuses on getting recurring sales than a one-time purchase. Customers continue enjoying consistent supply and delivery of goods or services and pay a recurring fee.

This model involves the product owner or seller and the customer or subscriber. Instead of selling a product or service to the customers at a one-time price, you sign them into a subscription program. Here, the customers continue paying a particular fee while you as the seller ensure convenient and timely deliveries to them.

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The subscriptions have automatic renewals and subscribers will keep paying the fee as long as they are getting value from your services or products. With this aspect, this model enhances the customer-seller relationship.   

Example of a subscription business

As mentioned earlier, newspaper and book publishers were the founders of the subscription business model. Business owners could subscribe to a newspaper company that would deliver the paper per morning. With technological advancement, subscription businesses are growing at an exceptional rate.

Some of the businesses using this model include Netflix. Netflix is a subscription-based movie and documentary service provider. When you become a Netflix subscriber, you pay a monthly fee to enjoy your favorite and upcoming videos and movies.

Also, Amazon Prime is another example of a subscription-based service. You pay a monthly fee to enjoy prime services and offers on different products. As well, many websites hosting companies and cloud computing service providers use the subscription business model.

Pros and cons of subscription business model

The subscription business comes with a bundle of benefits and shortfalls. Before adopting it as your model, it is essential to be aware of these aspects. Here are some of the pros and cons of the subscription model.

Pros

Enhanced customer retention

Customer retention is crucial to any business. As an entrepreneur, you need to develop a system that ensures the customer comes back and continues to do business with you. Realizing this goal in the one-time purchase businesses is a handle tackle. You need consistent marketing to keep customers coming back.   

Unlike the one-time purchase, the subscription model focus on customer retention. Your customer continues making recurring sales by paying the subscription fee.  So, as long as you are offering customers value for their money, they will continue using your products or services.

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High convenience and predictability

For customers, the subscription model guarantees them convenience. They are certain that they will get your products whenever they need them. Also, they know how much they will be paying as the subscription fee is a flat rate. This aspect helps them in financial planning and budgeting.

For you as the business owner, the subscription model enhances your predictability. With recurring and regular subscription fee payments, you can determine how much income or revenue you will generate in a given period. This element is unlike other forms of businesses where you cannot predict with certainty how much you will make. Hence, the model improves your revenue predictions and planning.

Strong in-built market database

No doubt, marketing is the most expensive affair in business. You need to spend time creating awareness about your business to attract new and recurring customers. However, in the current age, having a customer database is the key to winning recurring sales.

With the subscription model, you create a strong in-built customer database. The database allows you to market to the current customers and seek referrals. For instance, you can request them to refer their friends and family in exchange for a free monthly subscription. This way, you lower your marketing cost while gaining new customers.

Stable customer-vendor relationship

A business-customer relationship is critical to the success of any venture. For you to continue making sales, you need to connect with your customers. However, relationship building is a process that requires consistent interactions. The one-time purchase does not of opportunity for this process.

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Since the subscription model involves recurring fees, it keeps vendors and subscribers connected. This connection offers the vendors an opportunity to learn about the subscribers and their needs. Through the provision of products and services that align with customer needs, the vendors build and maintain a strong relationship with their subscribers.

Cons

Loss of interest

While customers can be eager to subscribe to your services, they will not have the same interest throughout their lifetime. Customers may lose interest or find that they do not need the services or products. This change or loss of interest will hurt your business. So, you need to keep revamping your products to maintain the subscribers’ interest.

Susceptible to minor hitches

Hitches and technical errors are regular issues in business. While they might have a minor impact on other ventures, they can be the cause of a downfall in a business using the subscription model. The small hitch act as a disappointment to the customers. In most cases, customers can unsubscribe to your services particularly when the issue becomes a regular case.

Conclusion

In a word, the subscription business model is the new norm in the 21st century. Businesses are coming up with strategies of enjoying recurring sales by launching subscription programs.

While it benefits both the entrepreneur and customers, you need to keep it refreshed and up to date. Customers will lose interest in your products and services if you offer them the same package for a long time. Nonetheless, it is a superb way to ensure consistent and predictable revenue generation in your venture.

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