There are many different business models available to entrepreneurs who want to earn money by selling a service or product. The subscription business model is one of those models. Subscription business models charge a customer a regular payment in exchange for access to products or services for a set period of time.
It’s a business model that’s been around forever, introduced in the 1600s by newspaper and book publishers. But by the 2010s, thanks to the internet, its unprecedented popularity really took off.
Today, there are numerous subscription models that business leaders use to deliver their product or service. The subscription business model is increasingly deployed to different business sectors—from automobiles, to healthcare, to the Internet of Things (IoT).
But over the past decade, it was the subscription box that ruled the industry. There almost seemed to be a race for different subscription boxes to out-innovate the others with their product ideas.
And it makes sense. Predictable recurring revenues is the most obvious benefit of this business model. So naturally, the subscription-based business with the most novel idea would pull in the most subscription customers and therefore the most monthly recurring revenue (MRR). However, there are other benefits inherent in the subscription pricing model, for both the customer and the business.
UPDATE: We have revisited this topic to incorporate recent trends! You can read some of the interesting changes in the subscription business marketplace in our latest article 9 innovative subscription business models from cradle to space.
Here are four examples of early roll outs of the subscription business model and what made each of them unique.
Today, everyone leads busy lives, and time for shopping and self-styling is at a minimum. To address this, personal shopper and stylist services have popped up online.
Stitch Fix combines e-commerce with the in-store experience of retail shopping and personal styling. Each month, the service sends the customer five items an in-house stylist handpicked for them based on the customer’s answers to a lifestyle and fashion questionnaire at the beginning of the subscription.
The customer can then try on the clothes and keep only what fits and what they like. Feedback is also passed back to the stylist so the next box can be tailored to be more in tune with what the customer likes.
Talk about convenience.
One of the first subscription box services to gain widespread popularity was Dollar Shave Club.
The service promises to deliver razor blades to the customer’s door for just one dollar a month. There are other options available as part of the service, including shower products, deodorant, and shaving accessories.
In addition to the blades, each customer gets a free handle and has the option to purchase add-ons such as shaving cream and moisturizer.
The brand entered the market with a unique promotion that went viral online. Since then, the successful subscription service has grown and introduced new lines and improved customer options.
I want people to see us as one of the first online-only power brands in the category,” Dollar Shave Club founder and former CEO, Michael Dubin said at the time of the business’s launch in 2011.
And a power brand it became. It gave razor giants like Gillette and Schick a run for their money, claiming 48.6% of the market by 2015. In 2016, Unilever acquired the business for a whopping $1 billion.
Not a bad exit for a business selling one-dollar razor blades.
So what lessons can today’s subscription businesses learn from the early success of Dollar Shave Club?
- Content is king. Through silly, witty, and authentic videos and social media posts, Dollar Shave Club quickly became a household name.
- Pricing according to value. Dollar Shave Club came onto the scene when Gillette had the majority market share. It wasn’t selling the same luxurious, five-blade razors as Gillette, and it didn’t have to because that’s exactly what allowed it to offer such an unbeatable price.
- Good customer experience encourages customer loyalty. A subscriber needs to pause their subscription for a month? They can do it easily, without numerous emails from customer service begging them to stay.
Canadian book, toy, and home goods retailer Indigo used to provide a more unusual subscription service compared to others available online at the time.
Not only did customers not have to pay a subscription fee to receive their product, but the exact contents of the box weren’t guaranteed. The boxes could contain toys, comics, snacks, and other items for children.
The service worked like this: a customer subscribed to the site via email or a social media account and every quarter, the company randomly sent out a limited number of boxes to those on the list—receiving a box each quarter wasn’t guaranteed.
Subscribers could increase the chance that they would receive a box by signing up friends, advertising the brand on social media, and competing in other activities on the site.
The service was only available as a limited-time promotion and is no longer running. But the fun unpredictability and the nonexistent price tag allowed it to stand out from the crowd and incentivize customers to sign up.
Ever dreamed of flying across the country in a private jet, but never had the money to pay for one? You’re not alone. But now, that dream can become a reality thanks to the subscription business model.
Netjets is probably the most unique business model on this list. For a hefty subscription fee, customers can choose how many hours they wish to fly per month and then reserve that time as a share of the private fleet maintained by the company.
Subscriptions are available both for individuals and for businesses that require frequent travel from their employees. With subscription pricing, this can be an effective way to reduce travel costs.
There are also similar options for cars.
What about the ‘world’s first’ subscription businesses?
Innovation in the subscription business world didn’t stop with the first wave of subscription products to hit the market. Even now, companies from across different industries are working to adapt their revenue model to be able to offer subscriptions.
And the results have proven pretty imaginative.
We’ve compiled a list of nine of the ‘world’s first’ subscription businesses based on the subscription business model. The list is proof all types of industries from snowboards to airlines to virtual reality (VR) can innovate and experience growth with the subscription business model to open themselves to new markets.
The rise of subscription fatigue
Now, you could argue there can be too much of a good thing.
It’s good to keep in mind when you’re considering the subscription model that there has been a rise in recent years in a consumer condition known as subscription fatigue. With so many businesses trying out this recurring revenue sales strategy, some consumers are becoming overwhelmed with managing the multitude of subscriptions.
A recent report by Deloitte says the average American household has nine subscriptions, with 53% saying they’re frustrated to need so many in the first place.
Determine whether your customers will find it delightfully convenient to receive your offering on a recurring basis, or whether it will encourage them to look elsewhere to fill their needs.
Luckily, there are steps you can take to prevent some of the churn that may happen as a result of subscription fatigue.
It’s all about the customer experience, according to Patrick Campbell, CEO of ProfitWell. Hammering home the value by making your product as useful as possible and prioritizing customer retention over acquisition can both go a long way in combatting subscription fatigue.
“Subscription businesses that want to see success have to prioritize retention over acquisition. It’s the only way to remain in the right mindset to combat subscription fatigue,” he writes.
Success with the subscription business model requires the right recurring billing support
There are a number of options for those looking to start a subscription business. The only barriers to entry are legality and your imagination.
Consider how you can convert your business into a subscription business or what new business you would like to start. As recent years have shown, there is a growing demand by customers for this model, if you can do it right.
Your creativity and ability to innovate are fundamental to your success in the subscription industry, but so are the systems you have supporting you. After all, when you’re collecting recurring payments from hundreds or even thousands of customers, you don’t want to be doing it manually.
Instead, letting an automated billing software do the work for you can cut down your time spent billing by 80%—time you can use to drum up that next creative product offering.
FAQs about Subscription Business Models
Q: What is the subscription business model?
Subscription business models are unique strategies used by entrepreneurs that involve charging customers a regular fee for access to services or products over a specific period of time. This model was initially introduced by newspaper and book publishers in the 1600s, but its popularity surged in the 2010s with the rise of the internet. Subscription models have been deployed in various business sectors, including automobiles, healthcare, and IoT.
Q: Can you name some examples of businesses that have successfully utilized subscription models?
Some successful implementations of the subscription business model include Stitch Fix, Dollar Shave Club, Indigo, and Netjets. Stitch Fix is a personal shopper and stylist service that sends customers handpicked items based on their personal lifestyle and fashion preferences. Dollar Shave Club offers monthly razor blade deliveries for a dollar, along with other shaving accessories and products. Indigo provided an unusual subscription service where the contents were not guaranteed and there was no subscription fee. Netjets offers a service where for a subscription fee, customers can reserve hours for flying in private jets.
Q: What are the benefits of the subscription business model for business?
The subscription business model provides benefits like predictable recurring revenue, which is possibly the most significant advantage for businesses. This model allows businesses with unique and innovative ideas to attract the most subscription customers, thereby generating higher monthly recurring revenues. Other benefits include customer retention, offering potential value to customers, and promoting growth and expansion into new markets.
Q: What is ‘subscription fatigue’ and how does it affect the subscription business model?
Subscription fatigue is a state where consumers feel overwhelmed by managing multiple subscriptions. Given the increasing number of businesses opting for this model, some consumers find the model less appealing and more burdensome. A report by Deloitte reveals that the average American household has nine subscriptions, with 53% of consumers complaining about the need for so many subscriptions.
Q: How can subscription fatigue be combatted?
Subscription businesses need to primarily focus on retaining customers than acquiring new ones in order to combat subscription fatigue. The product or service should clearly define its value and usefulness to the customers, which, in turn, will help in reducing the churn that might occur due to fatigue. According to Patrick Campbell, CEO of ProfitWell, businesses need to make their product as useful as possible while prioritizing customer retention over acquisition.
Q: How does automation assist in managing subscription-based businesses?
Automation is instrumental in managing a subscription-based business. Implementing automated billing software can reduce the time spent on manual billing by 80%. This saved time can be constructively used to develop creative product offerings, thereby enhancing the overall efficiency of the subscription business.
Q: When planning to pursue a subscription business model, what should businesses consider?
Before moving to a subscription model, businesses must determine whether their product or service fits within the recurring basis model and whether their customers will find the regular deliveries convenient or burdensome. After evaluating these aspects, businesses should also ensure robust systems to support them as handling recurring payments from numerous customers manually can be onerous.