What Is Subscriptions Business Model? Product Managers Take
We have already learned about what a Business Model is and how it works in our previous blog. If you have not yet read the blog you can go and check out the blog here. A business model is a mechanism for capturing value. It means that when a company creates value for its customers, it also aims to recapture a portion of that value for itself. So, essentially, a business model serves as a way to capture the value generated.
Recently, I’ve been exploring ways to generate multiple sources of income for my current product, I’ve learned about a lot of business models and have stumbled upon one called as Subscriptions Business Model. When discussing subscriptions, it simply means that you have subscribed to something. This can include a YouTube channel, an email service, a newsletter service, and so on.
What is Subscription Business Model?
A subscription business model is when customers pay regularly (usually monthly or yearly) to use a product or service. It’s become popular in many industries, like software, media, and e-commerce because it benefits both businesses and customers. A great example is Netflix’s subscription model, where you pay every month to watch movies and series. Some other famous examples, along with Netflix, include Hotstar, Twitter Blue, Instagram Verified, Medium, etc.
How does it typically work?
Let’s take a step-by-step approach to how a subscription business model typically works;
Let’s assume you have a product or a service that is useful to others and many of the users find it valuable and are willing to pay in return for the product/service regularly (weekly/monthly/quarterly/yearly). This product or service that we are talking about can be software, exclusive content, or a service as your offering.
Now as the users who are willing to pay for the service, they are then converted to your customers. You as a company will now work towards building subscription plans. Now the categorizing of the subscription plan depends on many things, depending on the features, billing frequencies(weekly/monthly/quarterly/yearly), and added services the pricing of the the plans will differ. A subscription service can have one or multiple tiers based on the offerings, each tier can have a different pricing depending on the offerings. These offerings with pricing associated with it are called Subscription Plans.
Once you have built your subscription tiers, now it is time to bring new users on your platform which can then be converted to customers who buy your services and become your subscribers. You have to then with the help of marketing have to attract new users. This phase of your product is called Customer Acquisition.
Once you have users on your platform, the next step is to show the full potential of your product to the users. You can either ask them to book 1 on 1 call where one of your team members from the acquisition team can explain to them in detail how your product works and how it can help the customer, or you can show them tutorial videos of how your product works. Post this the users who landed on your platform can complete registration on the platform who are interested in your product/service. Once registered they can check out the various tiers of subscription available on the platform and select one accordingly. Once they have selected a pricing model, they will enter their payment details for the payment of the subscription, this is how usually the Registration and Payment process looks like.
Once the registration is done, the customers who have subscribed to your product/service gain Access. They can then start using your product.
Based on the subscription tier customers have selected and the billing cycle of the payment, your product subscribers are billed. This billing cycle can be weekly/monthly/quarterly/yearly. You will be required to send your subscribers reminders of the billing cycle, and invoices post-payment as proof of payment. This is what is called Recurring Billing.
While you are acquiring new users to convert them to customers and subscribers, it is also important to retain your current customers. You need to focus on retaining current subscribers by improving your product, addressing their concerns and providing them value over a longer period. Providing excellent customer service and ensuring customer satisfaction is crucial for keeping customers and preventing them from cancelling their subscriptions.
You need to always focus on maintaining the user-friendliness of the platform, subscirbers should always have the flexibility to upgrade downgrade or even cancel their subscriptions.
Always make sure that you are Personalizing subscriber’s experience with the help of timely collected behaviour data. This can be done by recommending new things based on their personal preference this helps improve offerings on the platform.
A few things to remember are, that as your user base or subscriber base grows, your revenue grows, which leads to opportunity growth, this in return helps you to stabilize your product, invest more in acquisition, help build new streams of revenue or enter new markets.
Always make sure that the subscribers are heard and if any accurate suggestions are nominated by the subscribers to improve the offerings, get it implemented and make it known to the subscribers this makes them feel heard, always close the Feedback Loop.
Always stay on top of the competition with constant innovation. Do remember to note all the competitors in the market and the new entrants so you stay always on top of all.
In short, subscription businesses depend on customers who keep paying regularly for access to a product or service they like. The key is to give value, keep customers, and build lasting relationships to grow steadily.
How do we generate revenue using this model?
So we now come to the most important question, how do we earn using this model? You might have got a hang of this business model by now and a short idea of how we will be earning. So let’s learn in detail.
In a subscription business, revenue comes from customers who pay regularly to use a product or service. They pay at set times, like every month or year. This ongoing payment from customers is how the business makes money.
First and foremost the obvious is subscription fees, customers subscribe and keep paying regularly to keep using your product or service(as mentioned earlier).
Subscriptions can be billed at different times like every month, every three months, or once a year. It depends on how the company sets its prices and what the customer prefers. This is called the billing frequency.
We talked about various tiers of pricing, you can provide various subscription options with different features and prices to suit different customers and budgets. The more features subscribers want, the higher the price they pay.
If your services are good enough, existing subscribers might upgrade from their current tier to an upper tier. You can make extra money by offering extra things like add-ons, upgrades, or special features that subscribers can choose to buy along with their regular subscription.
Companies need to persuade subscribers to keep renewing their subscriptions when they reach the end of their payment periods because that’s how they keep making money. Always remember retention and renewals is the key to the subscription-based business model.
In simple terms, the subscription business model depends on keeping current subscribers happy, getting new ones, and finding ways to give more value to everyone to keep making money and grow over time.
Things to keep in mind
- Keep customers happy by offering something they find valuable.
- Set prices that work for your target audience and ensure a steady income. Offer different options.
- Find effective ways to attract new subscribers, like advertising or partnerships.
- Work on keeping subscribers by providing good service and addressing their issues.
- Safeguard customer data, follow privacy laws and make sure your business complies with the law.
- Be ready to grow your business as more people subscribe while maintaining customers smooth and positive experience.
- Listen to what customers say and use it to improve and offer excellent support to solve problems quickly.
- Set up secure and reliable payment systems.
- Watch what competitors are doing and adapt and stay up-to-date with what’s happening in your industry.
- Keep talking to your customers to understand what they want.
- Think about offering more or different things to reduce risk and make more money.
- Make it easy for customers to cancel if they want.
- Think about the right thing to do, especially regarding privacy and how you treat customers.
Pros & Cons of Subscribers Business Model
Every business model has its pros and cons, lets see what are the advantages and disadvantages of the subscriber business model.
Pros of Subscriber Business Model:
Steady Income
Subscriptions offer a predictable stream of money, making it easier to plan and invest.
Customer Loyalty
Subscribers often stay with a brand for a long time, reducing customer churn.
Lower Costs
It’s often cheaper to keep existing subscribers than to find new ones constantly.
Valuable Data
Subscriptions provide useful information about customer behaviour, helping improve services.
Varied Pricing
Different subscription levels can fit various budgets and needs.
Engagement
Subscribers stay engaged with the brand over time.
Cash Flow
Regular payments help with managing money.
Upselling
You can sell more products or services to current subscribers.
Scalability
It’s usually easy to grow by adding more subscribers.
Cons of Subscriber Business Model:
Churn Rate
High cancellation rates can hurt revenue.
Initial Costs
Getting new subscribers can be costly, and it may take time to make up for these expenses.
Customer Expectations
Subscribers expect a lot, and failing to meet their expectations can lead to cancellations.
Market Competition
Lots of companies compete for subscribers’ attention and money.
Support Costs
Providing good customer support can be expensive, especially as your subscriber base grows.
Overexpansion Risk
Growing too fast without a solid foundation can lead to financial trouble and service issues.
Quality Maintenance
Keeping a consistent level of quality in your products or services is crucial to keeping subscribers.
Payment Complexity
Handling regular payments can be complicated, and payment issues can affect revenue.
Regulatory Challenges
Following data protection and consumer rights laws can be tough, especially in different countries.
Tech Reliance
Technical problems or outages can disrupt service and make customers unhappy.
In short, the subscription business model can provide steady income and loyal customers, but it also brings challenges related to retaining customers, facing competition, and dealing with operational complexity. Success in this model depends on understanding your industry, managing customers well, and consistently delivering value.
What metrics do you need to track for this model?
Tracking the right metrics is vital for subscription businesses. These numbers show how you’re doing and where you can do better. Here are some important metrics to keep an eye on:
Monthly Recurring Revenue (MRR)
This metric measures all the money you expect to get from your subscribers each month, including their subscription fees and any extras that they buy.
Churn Rate
Churn rate is the percentage of customers who cancel their subscriptions in a certain time frame. Lower churn rates mean more customers are staying with you.
Customer Lifetime Value (CLTV or LTV)
CLTV estimates how much money a customer will bring in during the whole time they stay subscribed. It helps you understand how valuable long-term customers are.
Customer Acquisition Cost (CAC)
CAC is the cost of getting a new subscriber, which covers things like marketing and advertising. When you compare CAC to CLTV, you can see if it’s worth the money you spend to bring in new customers. Do remember if CLTV is lesser than CAC then you are making a loss on that customer.
Net Revenue Retention (NRR)
NRR calculates how much money you keep from existing customers after considering cancellations and downgrades. If it’s above 100%, it means your current customers are bringing in more money, showing revenue growth.
Conversion Rate
Conversion rate shows the percentage of people who visit your website or show interest and end up becoming paying subscribers. It helps you see how well your sales process is working.
Average Revenue Per User (ARPU)
ARPU figures out how much money you make from each subscriber on average every month. It helps you know how much each subscriber is worth to your business.
Subscriber Growth Rate
This metric measures how fast your number of subscribers is increasing. A good growth rate is important for business growth.
Usage Metrics
Depending on what you offer, keeping an eye on how much customers use your features, consume your content, or engage with your service can tell you if they’re happy and finding value.
Customer Satisfaction (CSAT) and Net Promoter Score (NPS)
Surveys or feedback tools can tell you if customers are happy and if they would recommend your service to others.
These are a few of the important metrics, there are other metrics such as Gross Margin, Failed Payment Rate, Landing Page Conversion Rate, Cohort Analysis, Customer Support Metrics, Retention Rate by Subscription Tier, Referral and Affiliate Program Performance, Mobile App Metrics, etc. can be used to monitor the health of the model.
Links to learn about other business models,
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