Subscription models are not new to SaaS or eCommerce. But as the global subscription economy grows, companies are identifying new opportunities to build recurring sources of revenue into their businesses. Various industries are adopting the subscription service model to diversify their revenue streams, from food delivery with HelloFresh to automotive access and coffee subscriptions.
While subscriptions offer some serious perks in the form of consistent cash flow, customer analytics, and higher lifetime value, high churn rates and evolving customer expectations are ever-present threats to guard against. High-powered subscription management, from implementation to monitoring key success metrics, is crucial to building and maintaining a subscription that offers consumers ongoing value.
In this blog, we’re delving into all the essentials of subscription business models and how companies in the SaaS sector can leverage subscription offerings to drive sustainable growth.
TL;DR
- A subscription business model involves customers paying a fixed, recurring fee at regular intervals for continuous access to a product or service.
- Subscriptions offer predictable cash flow and the potential to build long-term relationships that reduce the need for constant marketing efforts. However, subscription offerings also face a high churn rate due to subscription fatigue and competition.
- The main types of subscriptions are access subscriptions, replenishment subscriptions, and curated subscriptions.
- The food service subscription model combines regular food delivery and recipe guidance to cater to various dietary preferences, simplifying meal preparation for users of any cooking skill level.
What is the subscription business model?
A subscription business is a revenue model where customers pay a fixed, recurring subscription fee at regular intervals (weekly, monthly, or annually) in exchange for a product or service. Subscription services are typically based on offerings where consumers benefit from long-term access or delivery, rather than a one-time purchase. The subscription business benefits by receiving recurring revenue in exchange for the product/service, which ensures predictable revenue—so long as customer churn rates remain under control.
The most common types of subscriptions include:
Access subscriptions.These subscriptions charge customers a fee in exchange for access to a specific product or service. Streaming services including Netflix, Spotify, and software like Adobe are some of the most widely used access subscriptions.
Replenishment subscriptions. Replenishments are based on consumer goods that consumers need to restock on a recurring basis, such as groceries, household goods, and personal care products. Meal kit subscriptions like Hello Fresh and shaving subscriptions like Dollar Shave Club offer a weekly or monthly subscription for essential goods.
Curated subscriptions. Curated subscriptions offer customers a selected assortment of new products each month or quarter based on consumer feedback or listed preferences to create a personalized customer experience. Curation is most common in the wellness and beauty space; subscription boxes like Birchbox and FabFitFun are some of the most well-known curated subscriptions.
How does the subscription business model work?
A subscription business model is based on a specific product or service that a business plans to offer on a subscription basis. This could be a Software as a Service (SaaS) product, a subscription box, or a replenishment service. Consumers will sign up to access or receive this offering at specified intervals over a set period of time, such as monthly, quarterly, or annually. The company collects revenue via debit or credit card for each cycle of the subscription, which is then reinvested into the business. The food service subscription model simplifies meal preparation for users of any cooking skill level by combining regular food delivery and recipe guidance, catering to various dietary preferences.
Types of Subscription Models
Subscription models can be categorized into three main types: Curation, Replenishment, and Access. Each type has its unique characteristics and benefits, catering to different consumer needs and business goals.
Curation Business Model
The Curation Business Model involves delivering a curated selection of products or services to customers on a regular basis. This model is popularized by companies like Birchbox, Blue Apron, and Stitch Fix. Curation businesses seek to surprise and delight customers by providing them with new items and highly personalized experiences. By leveraging customer feedback and preferences, these businesses can offer a tailored experience that keeps subscribers engaged and excited for each delivery. This model is particularly effective in industries like beauty, fashion, and gourmet food, where personalization and discovery are key drivers of customer satisfaction.
Replenishment Business Model
The Replenishment Business Model is all about convenience and cost savings. Replenishment subscriptions allow consumers to automate the purchase of essential items, often at a discount. This model is ideal for businesses that offer products that are regularly consumed or need to be replaced, such as household goods, personal care items, and groceries. Companies like Dollar Shave Club and Amazon Subscribe & Save have successfully implemented this model, providing customers with the ease of automatic deliveries and the benefit of discounted prices. By ensuring a steady supply of necessary items, replenishment subscriptions help consumers save time and money while fostering brand loyalty.
Access Business Model
The Access Business Model involves providing customers with access to exclusive content, products, or services for a monthly fee. This model is popular among businesses that offer digital products or services, such as streaming services, software, and membership sites. Companies like Netflix, Spotify, and Adobe Creative Cloud exemplify this model by offering continuous access to their vast libraries of content or software tools. The key advantage of the Access Business Model is the ability to generate consistent, predictable revenue while building long-term customer relationships. By offering valuable and exclusive access, businesses can attract and retain subscribers who are willing to pay a monthly fee for ongoing benefits.
How can SaaS companies implement a subscription business model?
A business has to determine the appropriate pricing strategy for the subscription offering they are creating. This could be a multi-tiered pricing strategy, where different price points exist for access to escalating benefits and features. Alternatively, you might have a single plan with specific add-on features, or a ‘freemium’ model with certain paid add-ons.
The frequency of your subscription is also a key consideration, depending on the nature of your product or service. For example, a subscription box could be offered at a bi-monthly, monthly, or quarterly basis. This could be set at gradually escalating price points to encourage upselling and increase Monthly Recurring Revenue (MRR).
Recurring payments and billing are naturally the centerpiece of any subscription, as the business needs a way to seamlessly bill customers every subscription cycle and minimize churn or failed payments. This generally requires businesses to keep customer payment details on file to avoid payment delays that affect cash flow or profitability. This is where Stax Bill is a huge asset to automate the repetitive side of subscription billing and management, so you can focus on building a great offering.
Regardless of whether the subscription is a product or service, you need to provide a way for customers to access their subscription, make changes or upgrades, and contact customer support if needed. The most convenient set-up is a web portal with unique login details for each customer.
Advantages of a subscription business model
Recurring revenue stream
Because subscription-based businesses aren’t relying on one-time sales on a regular basis to generate profitability, they can build much more predictable revenue and augment this with cross-selling and upselling opportunities and raise average revenue per customer. By locking in long-term relationships with customers, successful subscription businesses can more easily plan sustainable growth strategies and robust customer loyalty initiatives to maintain MRR and boost customer lifetime value
Lower customer acquisition costs
In SaaS and eCommerce, customer acquisition costs are only rising as competition in the sector heats up. With so many options available, it’s easy for consumers to bounce between different vendors based on price or convenience, making it challenging for businesses to ‘lock in’ a stable customer base.
A major advantage of subscription pricing is that rather than maintaining a high volume of one-off transactions, companies must prioritize building lasting customer relationships that are sustained over multiple subscription cycles. Once a subscriber is acquired and the customer is paying for a product or service over time, the need for ongoing marketing efforts to bring customers back is reduced. Instead, your efforts can go towards improving customer retention and bolstering the customer experience.
Valuable customer insights
Because customers are usually locked into subscriptions for a period of time, subscription companies have the opportunity to gather a wealth of data about consumer preferences, usage, and purchase history which can be used to create more targeted marketing efforts and inform future product development. You can even consider offering subscribers a discount in exchange for completing a survey to learn more about how they are using your subscription, which can help to improve retention
Disadvantages of a subscription business model
Churn rate
One of the biggest drawbacks of the subscription revenue model is that consumers are prone to so-called ‘subscription fatigue’. Once a customer has grown accustomed to a subscription, it becomes harder to maintain the same sense of surprise and delight that keeps them excited for the next cycle. As a result, churn rates for subscriptions are high, especially for subscription offerings in discretionary categories. Other factors, such as growing competition, economic climate, and changes to product categories also contribute to customer churn and make it difficult for subscription businesses to maintain predictable revenue, even with strong forecasting.
Meeting customer expectations
When paying an annual or monthly fee, customers have high expectations for the product and service they’re subscribed to. Subscribers expect consistent value—and if this isn’t met—customer dissatisfaction and churn are likely to follow. Subscription providers must maintain high-quality, engaging, and relevant experiences if they expect customers to stay subscribed over the long term. However, responding and adapting various subscription offerings and pricing models to changing customer needs is an ongoing process that requires significant time and resources.
Maintaining customer support
As your subscription uptake increases, customer support needs to scale in tandem so customers feel supported and have queries or problems resolved in a timely manner. However, building this infrastructure while also maintaining quality and responsiveness is a major challenge. Automation tools can provide some support in managing and allocating support tickets, but new customer support personnel need to be trained and supervised closely during onboarding, which takes significant time and resources.
Key Metrics for Subscription Businesses
To measure the success of a subscription business, it’s essential to track key metrics. Here are some of the most important ones:
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is the predictable revenue earned from subscriptions in a particular month. It’s a critical metric for subscription businesses, as it helps them forecast revenue and make informed decisions about growth and investment. MRR can be calculated by multiplying the number of subscribers by the average revenue per user (ARPU).
Other key metrics for subscription businesses include:
- Annual Recurring Revenue (ARR): This metric represents the total revenue a business expects to earn from subscriptions over a year. It provides a long-term view of the business’s financial health.
- Average Revenue Per User (ARPU): ARPU measures the average revenue generated per subscriber. It helps businesses understand the value of each customer and identify opportunities for upselling or cross-selling.
- Customer Lifetime Value (CLTV): CLTV estimates the total revenue a business can expect from a customer over the entire duration of their subscription. It’s crucial for assessing the long-term profitability of customer relationships.
- Customer Acquisition Cost (CAC): CAC calculates the cost of acquiring a new subscriber, including marketing and sales expenses. It’s essential for evaluating the efficiency of customer acquisition strategies.
- Churn Rate: Churn rate measures the percentage of subscribers who cancel their subscriptions within a given period. It’s a vital metric for understanding customer retention and identifying areas for improvement.
By tracking these metrics, subscription businesses can gain valuable insights into their performance and make data-driven decisions to drive growth and success. Understanding these key metrics allows businesses to optimize their subscription pricing strategy, enhance customer relationships, and ultimately build a successful subscription business model.
11 Interesting Recent Statistics on the Subscription Business Model
Subscription services are most commonly found in the software and eCommerce industries, but new inroads are being made in other sectors as subscriptions have become an integral component of our daily lives, changing the way we consume media and purchase goods and services.
Here are 11 statistics about the subscription business model and its impact on the global economy:
The subscription economy is forecast to reach a market size of $1.5tn by 2025
The Subscription Economy Index report found that the subscription economy has grown by 435% between 2011 and 2021. This is attributed to the growing trend of companies shifting from a ‘pay-per-product’ licensing model to a subscription business model where customers are billed on a recurring schedule.
All new software entrants and 80% of historical vendors are offering subscription-based business models
Source: Gartner
In agreement with other recently-published research, a report by Gartner, a global research and advisory firm, argues that the Software-as-a-Service (SaaS) model has not killed the software market. However, the model is growing rapidly and pressuring legacy providers to include SaaS options or risk losing market traction.
63% of publishers say turning audiences into paying subscribers is a key challenge when creating subscription products
Source: Digiday
According to online media trade magazine Digiday, media publishers are increasingly eyeing subscriptions as a revenue-generating alternative to advertising. However, these publishers admit to struggling with conversions. Additionally, 43% of publishers pointed to developing products that people will pay for as their biggest challenge to subscription model adoption.
The global car subscription market is set to reach $38.4 billion by 2031
Source: Straits Research
Luxury car manufacturers are switching up their traditional business models and adding subscription options. Cadillac, for example, launched a car subscription concierge service of cars and SUVs in 2018. The service allows for the company’s vehicles to be delivered and picked up on demand for customers via a smartphone app.
69% of households now subscribe to one or more video streaming subscription services
Source: Deloitte
Replacing traditional TV subscriptions are video streaming subscription services, according to Deloitte’s 13th edition of their digital media trends survey. Their report indicates subscribers utilize an average of three video streaming services. Additionally, 43% of U.S. consumers have both pay TV and streaming subscriptions.
41% of households subscribe to one or more streaming music services
Source: Deloitte
Deloitte’s report includes survey responses from 2,003 U.S. consumers. According to the results, music streaming service adoption saw an increase of 58% from last year. At close to 60%, adoption among Gen Z and millennial consumers is even higher. In fact, Spotify recently announced it has reached 100 million paid users, the first music streaming company to do so.
70% of business leaders say subscription business models will be key to their prospects in the years ahead
Source: Global Banking and Finance Review
Manifesto Growth Architect, a growth strategy consultancy, surveyed 504 senior business leaders across the retail, finance, leisure, automotive, and utility industries for their ‘How to Make Money from Membership Economics’ report.
While many leaders saw the value of the subscription model, only 24% were currently implementing it, and a mere 7% were generating significant revenue via membership. Another quarter of businesses were trying out membership models but were not sure how they would evolve, and 22% saw potential but were unsure how to proceed.
53% of senior finance executives say at least 40% of their organizations’ revenues are recurring
Source: CFO
According to a report by CFO Research, in collaboration with software provider Salesforce, recurring revenue business models (also known as subscription or usage-based models) are on the rise. The report indicates that 23% of C-suites—top senior officers in a company—and boards are incorporating such business models into their strategic planning. Additionally, 17% of C-suites and boards are planning to launch a new or additional recurring revenue business in the near future.
48% of businesses with a recurring revenue model struggle to meet accounting and reporting challenges
Source: CFO
As a result of regulations enacted in the past few years, subscription revenue has to be recorded according to certain standards. Revenues earned through a subscription model have to be recognized when realized and earned, versus when it is received. If not properly managed, subscription model businesses can face audits and compliance issues around revenue recognition.
The average subscription billing vendor is growing 30%–50% annually
Source: The Paypers
The rise of the subscription business model has led to a corresponding increase in the necessity for subscription billing management platforms. The subscription and billing management market was valued at $3.8 billion in 2018 and is expected to reach $10.5 billion by 2025, according to Zion Market Research.
70% of businesses believe that recurring revenue models are the future of their industries.
Source: Manifesto Growth Architects
Despite this, only 10% of them are currently deploying subscription models. This is most often due to challenges surrounding implementation and managing recurring billing and accounting correctly, as this requires a big operational shift from one-time purchases.
Final Words
As more and more everyday products and services are repackaged as subscription offerings over one-time purchases, this sizeable shift in the economy offers a range of challenges and opportunities to businesses in a range of industries, including retail, SaaS, communications, travel, and more. Recurring revenue helps to diversify revenue streams and offers businesses a lucrative way to build long-term customer relationships, but at the risk of high churn and maintaining a complex billing and accounting system. This is where Stax Bill makes subscription management a breeze with its all-in-one recurring and subscription analytics solution – for a simple monthly fee, you can rest easy that your subscription is running smoothly
Quick FAQs about Subscription Business Model
Q: What is a subscription business model?
A subscription business model involves customers paying a recurring fee at regular intervals to access a product or service continuously. This model offers predictable cash flow and fosters long-term customer relationships, reducing the need for constant marketing efforts.
Q: What are the different types of subscription models?
The main types of subscription models are:
– Access Subscriptions: Customers pay for access to a specific product or service, such as Netflix or Spotify.
– Replenishment Subscriptions: Regular delivery of essential goods, like groceries or personal care products, offered by companies like Hello Fresh or Dollar Shave Club.
– Curated Subscriptions: Personalized selection of products delivered regularly, popular in industries like beauty and wellness, exemplified by Birchbox and FabFitFun.
Q: How do subscription models benefit businesses?
Subscription models provide businesses with predictable revenue streams, lower customer acquisition costs, and valuable consumer insights. They enable companies to plan sustainable growth strategies and improve customer retention by fostering long-term relationships.
Q: What are the challenges of running a subscription business?
Challenges include managing high churn rates due to subscription fatigue, meeting evolving customer expectations, and maintaining scalable customer support. Businesses must continually adapt their offerings and pricing models to retain subscribers.
Q: How can companies reduce churn rates in subscription models?
To reduce churn rates, businesses should focus on providing consistent value, engaging customer experiences, and personalized offerings. Regularly gathering customer feedback and adapting to their needs can help maintain subscriber interest and satisfaction.
Q: What are key metrics to track in a subscription business?
Important metrics include Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Average Revenue Per User (ARPU), Customer Lifetime Value (CLTV), Customer Acquisition Cost (CAC), and churn rate. These metrics help businesses understand performance and make informed decisions.
Q: How do subscription businesses set pricing strategies?
Pricing strategies can vary, including multi-tiered pricing, single plans with add-ons, or freemium models. The chosen strategy should align with the value offered and target consumer expectations, potentially encouraging upselling to increase Monthly Recurring Revenue (MRR).
Q: What role does technology play in managing subscriptions?
Technology is crucial for automating billing processes, managing customer data, and providing a seamless user experience. Tools like automated billing software help minimize churn and ensure smooth payment cycles, allowing businesses to focus on enhancing their offerings.
Q: Why are subscription models popular in the digital economy?
Subscription models are well-suited to the digital economy because they offer a recurring revenue stream from digital products or services, such as streaming platforms or SaaS. They provide consumers with ongoing access and convenience, aligning with digital consumption habits.
Q: How can subscription businesses leverage customer data?
Subscription businesses can use customer data to gain insights into consumer preferences and behavior, which can inform targeted marketing strategies and product development. Offering incentives for feedback helps improve retention by tailoring offerings to subscriber needs.
