Subscription based business models are taking the world by storm. Subscription revenue has grown a whopping 437% since 2011, fighting high customer acquisition costs that are rising by a factor of 50%. Now, 70% of business leaders believe subscriptions are key to the future of prospecting, capturing leads for software, automotive, music, and food and beverage industries.
Transitioning to a subscription business model may take months or even years, but it might be necessary to succeed in an increasingly competitive marketplace. Exploring the definition of subscription based business models, let’s evaluate the types and advantages of models used by accomplished organizations, as well as the practical steps you can take to transition effectively.
What is a Subscription Based Business Model?
Subscription based business models charge customers a certain fee over the course of predetermined intervals to unlock products, services, or platforms – like Netflix’s monthly fee to access its library of content.
- Invoicing typically occurs over a monthly or yearly basis.
- Subscription based business models are focused on customer satisfaction.
- Subscriptions must be corroborated with customer experience in order to succeed.
Best Subscription Business Models
Subscription based business models have been around for several decades, although few have lasted the test of time like these commercial models.
Below are some examples of successful subscription models seeing positive growth in 2022:
- Box or Curation Subscription Models: This is one of the most common types of subscription programs, offering customers a curated box of specific goods or items.
- Access Subscription Models: By paying a set amount every month, customers have the opportunity to access products, services, or the surrounding brand’s community.
- Replenishment Subscription Models: Customers love replenishing their household goods without dragging themselves off to a physical store, which is why replenishment subscriptions are in high demand for cosmetics, vitamins, and baby products.
There are a number of pre-existing brands that have incorporated subscriptions into their overall business model. These range from exercise brands to vehicle sales, and are rapidly expanding into new industries.
- Disney+ providers premiere access to shows and movies for a single monthly price.
- Peloton sells large exercise equipment, as well as subscription-based workouts.
- Volvo and Audi are testing subscription car models within their current customer base.
- Xbox GamePass and PS Now provide a database of video games for a set fee.
- MDVIP is a subscription based healthcare plan that covers annual visits and exams.
Types of Subscription Business Models
There are three major types of subscription business models used by eCommerce companies: pure subscription, consumption models, and hybrid subscription models. Although none of these models can be classified as bad or good, there will likely be just one that fits your business and product offerings.
Considered to be one of the most straightforward business models on the market, a pure subscription program works exactly the way it sounds. Customers pay a set amount on regular intervals to receive their product or service, usually with unlimited access to the USP until their subscription is cancelled or not renewed.
Spotify is an excellent example of a pure subscription model. Customers pay a set amount each month to enjoy premium access to their music without ads or interruptions. DACH businesses like Steady and UNOWN also offer this type of business subscription, giving unlimited access to their product in return for a set monthly fee.
Customers that only pay for products and services as they are used are engaging in a consumption subscription model. No money is owed to the business until the customer’s point of use, resulting in varied revenue rather than consistent income. Consumption models are less common than pure subscriptions, although they have been used with great success over the past few years.
Perhaps the best example of a consumption model includes Uber or Lyft. Customers only pay for services rendered, and won’t owe any fees on a set interval. SaaS apps like Twilio and Stripe also charge customers using usage-based pricing, each with excellent results.
Hybrid Subscription Model
A combination of consumption and pure models, hybrid subscriptions are easily the most complicated type of business model for consumers and commercial businesses. Both fixed and variable revenue will be expected from the customer, usually paying a set fee on a regular basis with premium or add-on options.
Hybrid business models are best conceptualized like a monthly phone service bill. You owe a set amount of money per month by nature of the company (pure subscription), and may also pay overage fees only on specific months (consumption subscription). Modern companies using hybrid subscription models include Workday, Cloudflare, and Nest.
Subscription Business Model Advantages
There’s no question that subscription based business models are quickly reshaping the eCommerce industry. Gartner Research Director Laurie Wurster believes that nearly all new entrants to the world of business will eventually offer some type of subscription model. This is primarily due to convenience, ease of growth, steady revenue, and reduced costs.
Subscription models are easy to use, extremely efficient, and very cost-effective for the average consumer. This makes current customers far more likely to remain with a company, becoming brand ambassadors for potential leads.
Help Customers See You as a Channel to New Discoveries
Offering valuable content through social media, blog posts, and online communities, subscription businesses allow consumers to view their brand as a resource. Subscription models can leverage their unique formats to acquaint customers with various products and services, which may become a repeat purchase in the future.
Supports Accurate Revenue Estimation
Because subscription businesses know exactly how much their customers are paying, they can easily estimate projected revenue on a quarterly and yearly basis.
Save on Additional Marketing and Acquisition Costs
Strong digital marketing campaigns and a large organic reach can reduce the amount of marketing required to create new leads. This could potentially lower acquisition costs by a large degree.
How to Move to a Subscription Business Model
No matter what type of business you run, moving to a subscription based business model requires you to look at revenue, customers, and outcomes differently. Begin the process correctly by following the steps outlined below.
Assess the Viability and Volatility of Your Product
Your market research should reflect on the long term impact of your product. Assess the general need of your subscription product, and whether or not it will still be desirable in the future. Consider important elements such as:
- Customer need
- Market saturation
- Manufacturing cost vs price point
Price Conservatively but Make Payments Accessible
Price your subscription in a way that doesn’t prioritize heavy sales or deals, protecting you from potential profit losses. For example, if you are selling a product that fits a major consumer need, you will likely be able to make the sale without offering major bargains.
It’s also important to make your payment options as flexible and accessible as possible. Allow for a variation of options, including secure payments through credit cards, digital wallets, PayPal, and hybrid models.
Invest in Influencer Marketing and Other Acquisition Marketing
In a subscription business model, community is everything. Invest plenty of time and energy into building digital relationships, both to garner interest for your product and to convert interest into consumerism. Content marketing, social media campaigns, and related tactics should be designed with the customer’s experience in mind.
Prioritize Customer Experience Through Multichannel and Omnichannel Marketing
Speaking of customer experience, it’s important to leverage multiple channels to acquire long-term customers effectively. Choose to use either multichannel or omnichannel marketing in the earliest stages of your business, focusing heavily on customer feedback. Note that both multichannel and omnichannel marketing are particularly impactful when used together, but they are most efficient when your business is mature and steady.
Rely on Third-Party Tools to Run a Tight Ship
Incorporating a subscription model into your business can be challenging. Online shop services like Shopify do not offer subscription-based modeling, instead business owners are required to download extra apps or pay for integrations. Even then, most integration services are focused on B2C organizations, and exclude other markets such as B2B. Brands needing customized subscription invoicing may not be satisfied with bare-bones offerings. For this reason, it’s important to think bigger – and much more long term – for the success of your company.
With so many irons in the fire, it can be difficult to keep up with each subscription business process at once. Integrative tools like ERPs help business leaders stay organized, scale effectively, and pull analytical data to better serve customers and follow up on industry trends. Solving subscription growth issues both easily and automatically, eCommerce brands can rely on a series of automations to enhance their offerings and reduce manual labor.
If you’re looking for an ERP platform with the ability to scale alongside your subscription business model, xentral could be the perfect fit. Book a free demo today to try out the platform for yourself, or chat with us online using the embedded form.