From Microsoft 365 to Netflix, subscription business model success stories span across nearly every industry. Could a subscription payment model work for your business? Here’s a closer look at how it works.
What is subscription revenue?
With a subscription business model, you charge customers a recurring fee to access your service or product. The recurring fee can be charged at any interval, typically monthly or yearly.
Subscription services provide recurring revenue for a business, offering a steady stream of income. Businesses are better able to accurately forecast future growth, assisting with inventory planning and reinvestment strategies. Recurring revenue has a positive impact on cash flow, giving start-up businesses a buffer for growth.
Are subscription businesses profitable?
The subscription business model has been on the rise for well over a decade. By 2018, 15% of online shoppers reported having signed up for one or more subscription services. By 2020, over 40% of online shoppers in the UK reported using subscription services.
Unlike single-product pricing models, businesses don’t need to continually invest in marketing strategies to attract new customers. Customers commit to longer-term contracts with steady, recurring payments. Subscription business models also make it easier to upsell and cross-sell related products for added value. Your customers are in regular communication with you, building loyalty and trust. This opens the door to upselling – provided they continue deriving value from what you’re selling.
What are the different subscription models?
Not all subscription services are the same. There are a number of subscription models to choose from. The best option will depend on what you’re selling:
The curation model is probably what springs to mind initially when you think of subscription boxes. Examples include businesses like Birchbox and Stitch Fix, which aim to provide the user with a unique, custom experience.
Benefits of the curation model include a high potential for profit. According to BlueCart, average subscription box profit margins fall between 40 and 60%. Consumers will pay a premium for what they perceive as luxury items or an exciting experience to look forward to each month. On the flip side, challenges include high churn rates if the subscription’s novelty wears off, so it’s important to continue innovating with products and services.
While curated subscriptions focus on non-essential items, the replenishment model is based on customer convenience. Customers sign up to receive items like vitamins, pet food or toiletries at regular intervals, usually at a discounted rate. Examples include Amazon’s Subscribe and Save deals.
The replenishment model typically has high customer retention rates, because the subscription offers items that the customer is likely to continue purchasing for the long term. Downsides include the need for competitive pricing to entice customers to sign up. For replenishment subscribers, convenience and value for money come first.
With the access model, businesses offer exclusive first access to products, services, or content. Examples include members-only shopping platforms like Brand Alley or JustFab. The consumers sign up for the access alone, and then may gain benefit from personalised special offers.
Advantages of the access model include the opportunity to bundle products and services for greater value. Access subscription models create a community of like-minded members, offering targeted marketing opportunities for businesses. Challenges include more difficulty sourcing exclusive products and deals. You’ll also need to maintain the communities, which requires time and effort.
Subscription business model metrics to track
There are multiple metrics you can use to track how well your subscription business is doing. It’s important not only to think about the cost of customer acquisition, but also about retention, churn, and recurring revenue. Here are the top subscription business model metrics to follow:
Monthly recurring revenue (MRR) pulls together all your monthly revenue in a single figure for easier comparison
Annual recurring revenue (ARR) allows you to look at the bigger picture by tracking your revenue from all sources across the full year
Average revenue per user (ARPU) narrows down your focus to the revenue produced by a single user, usually per month
Customer lifetime value (CLV/LTV) shows how much revenue your subscription business will generate from a single subscriber overall
Churn rate is usually expressed as a percentage, showing how many customers are cancelling their services each month. If your churn rate is increasing over time, it may show that you need to adjust your products, services, prices, and/or customer outreach
Customer acquisition cost (CAC) calculates the total spend on sales and marketing required to convert each new subscriber
Tracking these figures indicates whether you’re moving in the right direction, or if your business model needs adjustment.
Subscription business model tips
The subscription payment model can yield generous profits with the right strategy. Here are a few final tips to increase your chances of success.
1. Create an exceptional onboarding experience
First impressions last a lifetime, so be sure the signup process is as streamlined as possible. Provide a great customer experience with tools like TrueLayer’s Verification API that can verify new customer accounts in seconds, using open banking APIs. Rather than waiting days for authorisation from the bank, they can sign up for the subscription with instant confirmation.
2. Ensure a smooth payment process
Automation works best for recurring payments. If your customers need to manually submit a payment each month to access their subscription, it’s likely you’ll lose a few of them along the way. Payment methods like Direct Debit or continuous payment authorities (CPAs) have traditionally been popular for subscription businesses. But Variable Recurring Payments (VRPs), which are powered by open banking, are likely to become a powerful option for businesses in the near future.
3. Provide outstanding customer service
When subscription services work well, they can forge strong customer relationships that last a lifetime. Boost customer retention rates with friendly, responsive customer service. If there are any issues with your products or services, respond to queries and complaints as quickly as possible.
4. Acquire customers across multiple channels
Appeal to a broader demographic of customers by communicating to them across multiple channels. You can also provide different pricing tiers based on individual needs for wider acquisition and reach. Companies that use structured tiers can attract more casual consumers that want to try a new product, along with those who want more comprehensive services.
5. Clearly define your goals
The very first step any new subscription business should take is to clearly set out goals. Are you more interested in fast growth or higher revenue? These might require different approaches. By defining where you wish to go with your business, you’ll be better placed to identify the right pricing strategy.
Variable recurring payments set to transform recurring payments
Open banking payments are growing in popularity month over month, with over 3 million successful payments in November 2021 alone. But until now, it has largely been industries like igaming, financial services and ecommerce businesses that have collected payments via open banking.
However, Variable Recurring Payments (VRPs), which are powered by open banking. While still in development, VRPs will combine the seamless user experience and bank authentication of open banking, with the ability to collect payments on a recurring basis.