A subscription business model is a powerful tool for a company’s growth strategy. This is because it is a business model that benefits from recurring and predictable revenue. In addition, it is usually a very advantageous business model for both sides, the company and the subscriber, as it ensures stability for the business while offering convenience to users. The subscription business model includes a wide range of value propositions, from physical and digital products to all types of services. Therefore, understanding the applicability of this business model well can mean the success of a new venture – or the salvation of an old one. Let’s check it out.
What is the subscription business model?
The subscription business model is any business that offers a service or product in exchange for a recurring fee, usually monthly or annually. That is, as long as your customer wants to have access to that product or service, they need to pay.
It is also a business model based on the relationship with the customer. The longer the relationship, the more value that customer has for the business.
Subscription Business Model Canvas
The Subscription Business Model Canvas has the following structure:
How the subscription business model revenue works
The great challenge of the company that opts for the subscription business model is also responsible for the subscriber’s positive experience: the focus on user retention. This is because, unlike companies that make one-time sales, the company’s revenue based on the subscription model depends on the maintenance of buyers. Thus, it needs to deliver a high quality product and service in order to prevent its customers from migrating to the competition (the churn).
To begin with, the subscription companies’ customer acquisition method is the same as any other business: marketing. However, there is a big difference in marketing planning. Let me explain. Since the subscription business model requires a continuous payment by the user, this fee is usually cheap, to prevent becoming a burden to the subscriber, causing them to give up the subscription. Therefore, in general, subscription companies take a long time to recover the amount invested in the acquisition of each customer (CAC).
That is, these businesses need to accurately control the amount they are spending on this acquisition, so that it is a sustainable business in the long run. One of the most widely used strategies is to employ the freemium model, attracting top-of-the-funnel customers with a free proposal and then convincing part of that audience to migrate to a premium paid version on a regular basis. So, once the company has a subscriber base, it needs to deliver a value proposition that actually meets the user’s expectation. Otherwise, they will simply stop subscribing to the service. This means that the company needs to understand very well who its target audience is and what their needs are.
In other words, unlike traditional businesses, subscription companies need to invest much more time, energy and capital in maintaining their subscribers, while trying to reduce their acquisition cost. And the turning point is that if the company does its homework very well, it guarantees satisfied users who, in addition to being loyal to the brand, will still be its marketers.
Popular subscription-based businesses
As mentioned earlier, the subscription business model works for a wide variety of businesses. Check out some industries that usually benefit from it:
They are some of the most famous companies that apply the model, including Netflix, for example. These businesses are based on offering content and the experience they provide to the user. The customer has access to a huge catalog of content as long as they keep paying. Some of the companies that apply this business model also use the freemium strategy. This is the case of Spotify, for example, which captures new customers through the free option. Today, half of its users are already paying.
Monthly subscription boxes and kits
This type of business has grown exponentially in recent years and there are already subscription boxes / kits for everything you can imagine, from food and wine to baby clothes. These companies monetize the convenience to the user who, for a very affordable fee, receives at home the type of product they need, at a frequency that is useful and opportune. And in some cases, there is also a curatorial service. The company makes a selection of products, based on the taste and interests of the customer, who will receive such selected items at the door of their home.
Many software and game companies have chosen to use the subscription business model instead of selling the product once. Known by the acronym SaaS – software as a service, these companies guarantee recurring revenue while maintaining their updated value proposition for the customer. This is because the subscription business model allows software companies to continue updating and developing new features for the product, and the user will always have access to the best and latest version of the software, without having to worry about new purchases and downloads.
Recurring and long-standing services
You may not have realized it, but services as old as rentals, leasing, insurance and the like are also based on the subscription business model. All of these companies allow the customer to access and benefit from their product or service in exchange for recurring revenue – monthly or yearly.
The bottom line
As you can see, the subscription business model offers stability and great sales potential for businesses. At the same time, it faces challenging issues with regard to marketing strategy and planning. However, if the company works with goals and indicators, focuses on delivering a quality product and service and pays close attention to the customer relationship, the chances of success are significant.