A subscription business model is a recurring revenue business model that allows you to leverage your customer relationships to create a steady stream of income. With a subscription, your customers are charged on a monthly or annual basis for a product or service.
Your customers get the benefit of easily repurchasing a product or service that they know they will need in the future.You get the benefit of customers returning to your business on a regular basis – and you have to work a lot less to re-engage them. For the right product, brand, and industry, the subscription model can be a very effective and lucrative approach to running your business.
In a subscription model, customers choose how long and how often they want to receive each offer, and most subscriptions provide the option to renew or cancel at any time.
Think of a subscription as a contract between you and the customer. The customer pays for a product or service for a period of time and the business provides those products and services at customer’s convenience when the customer completes the recurring payment. When the subscription is up, the customer has the option to renew or cancel their subscription.
Subscribers are considered “better customers” as they drive up the company’s revenue and the value of its business. The expected earnings of a company are directly proportional to its overall worth. The larger the pool of subscribers, the more revenue the company is expected to generate which increases the company’s value. Subscribers indicate a strong future earnings potential for businesses and lead to a better outlook for the company.
The lifetime value of a customer indicates how much they will likely spend at a business in their lifetime. This is important when making business decisions regarding customer acquisition and retention. If a customer’s lifetime value is estimated to be $300, a business will typically not spend more than that to retain that customer. Through subscriptions, the lifetime value of customers will increase due to the recurring nature of the relationship.
Since subscribers stay with the business longer, they will continue to purchase products or services from the entity until cancellation of their subscription. This results in recurring revenue.
The subscription model reduces uncertainty and paints a clearer picture of a business’ earnings the following month. Hence, financial projections become more accurate and the overall prediction of the growth of the company is more reliable. Also, with subscriptions, the volume of inventory is easier to determine, leading to a reduced risk of stock surplus or deficit. Controlling stock efficiently also means better management of costs and may decrease unnecessary business expenses significantly.
When regular customers convert to subscribers, a business can better track their behavior and patterns. Understanding consumer habits can lead to enhanced targeting and more effective campaign personalization.
Subscriptions also automate recurring payments, helping alleviate cash flow issues. Having more cash on hand allows the business to pay its liabilities, invest in expansion and significantly reduces the risk of technical insolvency. When opportunities arise, the business will also have the capability to take advantage of them.
Retaining customers has never been easy. Businesses must differentiate themselves from their competitors, offer attractive incentives, or have a killer product in order to “lock customers in”. The subscription model reduces the probability of customers switching to competitors as they have already pre-paid for products or services. Subscribers will continue to patronize a brand until they decide to drop the subscription.
Once you develop a subscription model, don’t just stop there. Find ways to keep subscribers interested and satisfied so they will continue to use your products and services.
The subscription model encourages customers to buy more. Depending on the terms of the subscription, customers will likely purchase more so they feel they’re making full use of their subscription. In addition, less popular products can be included as add-ons to their subscriptions, which can encourage employees to up-sell products beyond the subscription without being too aggressive.