Guide to Subscription Business Models for 2019 – Price …
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The subscription business model is here to stay. Of course it’s one of the predominant business models for modern software, but you’d be hard-pressed to find an industry that hasn’t seen at least one subscription success story in the past few years.
That’s what makes this strategy so appealing. Done right, it’s a powerful tool for growth.
By understanding how this business model works and what it means to truly nail your pricing strategy, you’re building the foundation for success.
What is a subscription business model?
The subscription based business model is a business model that charges customers a recurring fee — typically monthly or yearly — to access a product or service.
Subscription revenue model
A subscription revenue model helps you capitalize on the compounding value of customer relationships. That means that as long as your customers continually see the value your company provides for them, they’ll continue to pay you for it.
Recurring revenue models lead to higher revenues and stronger customer relationships.
This compounding growth is what makes customers so powerful here. Through subscription, customers become more valuable the longer they use your product.
The state of subscription business models in 2019
The subscription model continues to grow in popularity. According to our research, customer acquisition costs (CAC) are up more than 50% and willingness to pay for software has declined steadily for the past five years. There’s never been a better time to start capitalizing on your customer relationships through subscription.
And it’s not going away any time soon. According to a survey by McKinsey & Company, 46% of customers already pay for an online streaming service and 15% have subscribed to an e-commerce service within one year of the survey.
That’s why companies such as GoPro and Adobe have pivoted to this business model; it’s the most reliable way to continue adding value for customers. They understand how this pricing strategy helps position them for long-term success.
Popular subscription-based businesses
It doesn’t matter if you’re a SaaS company, streaming service, or a subscription box; the first step to better understanding the model is by looking at some successful subscription companies across industries.
Streaming services
Content streaming services are probably the most well-known examples of the subscription business model. Companies like Netflix and Spotify have built incredibly successful businesses by leveraging the growth potential of subscription.
They do this by monetizing content and showcasing their value through the entertainment experience they provide. Both are great examples of value-based pricing, and Spotify’s freemium plan is a great case study for how to boost acquisition.
Monthly subscription boxes
Subscription boxes like Stitch Fix and Dollar Shave Club built their businesses by streamlining the process of shopping for consumer goods, like clothing and personal hygiene products. Their subscription pricing works because it monetizes convenience for their customers.
Their subscription pricing is combined with the strategic use of data and personalization to develop the strong customer relationships that drive their growth. Everything is tied together to create circumstances where customers are willing to pay a premium for the ease of receiving these items right to their door.
Food services
Meal-kit services, like Blue Apron and HelloFresh, are another example of companies that use a convenience-based subscription model. They’re similar to the subscription boxes in this way, but add value by providing access to niche products like selections catered toward different types of diets.
Supplementing their base subscription price with add-ons and upsells, both Blue Apron and HelloFresh capitalize on a higher willingness to pay among their vegan, paleo, and gluten-free customers. This is a great example of how to boost ARPU through expansion revenue.
5 tips for subscription businesses
Applying this versatile business model is a matter of finding the right tools and strategy. With our comprehensive knowledge of the subscription economy, we’ve put together five tried-and-true strategies to implement in your own subscription business.
1. Determine your goals early
What exactly do you want to accomplish through subscription? More revenue, faster growth? Adopting this business model requires you to define these goals early on. This helps ensure you’re building the best pricing strategy possible for your specific goals. When your recurring revenue is tied directly to the monthly or annual fees, long-term strategic thinking is important.
These goals will then help you define how you build your buyer personas and structure your pricing tiers. Matching the features included in your tiers with the needs of different target customers helps you craft a better overall strategy.
2. Boost acquisition with a better experience
It’s a simple equation: more customers = more revenue. That’s why signing up for your subscription service needs to be as easy as possible. A great customer experience will improve your acquisition numbers over time. When combined with a great overall onboarding journey, you’ll also find a higher average willingness to pay.
The option to sign up should also be available in every channel you use. It’s far easier to drive the growth of your company when a steady stream of customers is signing up for the service, regardless of where they’re seeing you and your content.
Once you’ve improved your acquisition numbers, you can better offset the percentage of customers you lose to churn.
3. Streamline the billing process
Don’t lose out on revenue because your subscription billing system isn’t reliable. Most modern software services have a number of complex processes involved in account billing and you need to nail all of them. Your customers won’t suffer a complicated billing process for very long.
This ties into the idea that product experience is an important factor for successful subscription. Your customers must realize the value of your product or service every step of the way, especially when they’re actively trying to pay.
4. Develop strong customer relationships
The subscription business model is dependent on strong and lasting customer relationships. If your customers aren’t happy, or aren’t reminded of the value your service provides on a regular basis, they will cancel. Focus on retaining customers for as long as possible by fostering these relationships.
This is where your buyer personas really shine. With an accurate portrayal of your customer base, it’s easier to keep your company in line with their expectations. This not only requires a good experience, but reliable data on feature preference and overall willingness to pay. The more you know about the customer, the better your pricing strategy will be.
5. Plan for growth before it happens
A good subscription business model helps you scale. This steady stream of predictable income, evaluated against churn rates and operating costs, ensures the growth you project is sustainable. Without this knowledge, your growing customer base can quickly overload your infrastructure.
There aren’t any other business models that provide this same kind of consistency. When you track MRR, ARR, and churn rates effectively, it’s easy to make adjustments as your company grows. That makes your company more agile and free to continue providing the best possible experience for the customer as well as your team.
Nailing your subscription pricing models
Now that you understand the strategies used in building a subscription-based business model, it’s time to take it a step further and look into how to manage that model once it’s up and running.
Use freemium to acquire customers, not as a pricing model
Freemium pricing is an acquisition tool, not a model for consistent revenue. It widens the top of your funnel considerably and gives you more time to nurture new customer relationships. This boost to acquisition is what drives MRR for companies like Slack and Dropbox, and helps to offset CAC in the long term.
Net dollar retention for freemium products is also much higher.
By allowing customers to experience the value you provide through a freemium plan, you’re making it easier to offer them upsells, add-ons, or premium pricing to increase and build on that value.
Change pricing often as you refine your product
Subscription-based pricing models are highly adaptable; it’s easy to test and re-evaluate your prices on an ongoing basis. Through direct customer and market research, you’ll know when conditions are favorable for a change and can proceed with the knowledge that you’ve set the company up for success.
Create a process for re-evaluating your pricing every six months. While updates and improvements to your product usually necessitate an update to your pricing structure as well, analysis every other quarter will ensure that you’re always thinking about what’s best for your business as well as your customers.
Always give customers a choice
A one-size-fits-all price doesn’t work for subscription businesses. Give customers the choice of a specific pricing tier based on their individual needs. This helps you appeal to more buyers, which can drive more widespread customer acquisition.
Our research shows that companies with structured pricing tiers consistently have a higher ARPU than those without. You’ll base these tiers on relative feature preference and willingness to pay data, which means you’ll appeal to a number of different types of customer.
Learn more about subscription businesses at Recur 2019
Join us in December for Recur 2019 to learn more. We’ll talk through all things recurring revenue, subscription pricing, and SaaS metrics with some of the brightest minds in the industry. It’s the most effective space for you to share knowledge and trade secrets with subscription brands in a variety of industries.
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How to Excel at the Subscription Economy – Neil Patel
The term “subscription economy” refers to the business of offering subscriptions to consumers. For some companies, their entire business relies on a subscription business model. Examples of these include Netflix, Spotify, Zipcar, and all SaaS companies.
Others companies offer subscriptions in addition to their pay-per-product businesses. Examples of these include Amazon / Amazon Prime which incorporates a subscription into their pay-per-product business model.
Sightglass Coffee offers both pay-per-product and subscription services. Walmart launched a subscription-based food delivery service. (Which has since been shut down).
Some startups, such as NatureBox, Dollar Shave Club, Trunk Club, Wittlebee, and Blue Apron, are based entirely on a subscription business model.
Currently, there is an increase in subscription companies as part of a larger shift from the product economy to the subscription economy. Businesses now need to handle customer loyalty, pricing, and selling very differently.
Running a subscription company means there is a continuing relationship with the customer. No longer does the business-customer relationship end with the swipe of a credit card.
Since the subscription business is new to many consumers, you may need to explain its benefits and embrace its uniqueness. In this post, we’ll run through the keys a subscription company should emphasize, and we’ll provide you with additional resources.
Emphasize Uniqueness and Differentiating Quality
If you’re running a subscription business, people may not be familiar with it. People are used to a pay-per-product business. They aren’t used to discovering new products through a subscription service.
A unique feature of a subscription business is the ability it provides to discover new products. Let’s look at a few examples:
NatureBox, a subscription snack company, highlights the discovery aspect on their homepage:
Blue Apron tells prospective customers their service delivers food crafted by chefs, they send only the ingredients needed, and that it’s “delivered right to your door”:
Dollar Shave Club tells visitors they get razors delivered to their door and don’t have to worry about buying them at a store:
The greatest marketing turns perceived weaknesses into strengths. Some see a subscription as second rate, so it’s the job of the marketer to embrace its uniqueness and then market it as something superior to a pay-per-product business.
A successful business needs to have a differentiating quality. Subscription businesses differentiate from the typical model, and most offer some unique quality. This quality can be product discovery, saving a trip to the grocery store, no software or hardware (SaaS), or getting clothes delivered to your door. It’s important to emphasize this uniqueness.
Emphasize Convenience
Netflix accents convenience on their website and in their ads. They promote the freedom to watch movies at any time (with an internet connection) and the fact that it’s available on multiple devices:
In this DVD advertisement, Netflix stresses the ability to “rent as many DVDs as you want. ” In the sub-headline, they point out the contrast between a subscription business and a pay-per-product business with the line “unlimited DVD rentals”:
On the features page of Trunk Club, they highlight the convenience of their subscription service versus pay-per-product mall shopping:
Love With Food shows the convenience and discovery of their subscription service:
The auto-refill programs available at places like Coastal Contacts and 1-800-Contacts automatically send customers a new shipment of contacts as soon as their supply runs out. This eliminates the need to go to a store or to keep track of when to reorder.
An edge for SaaS products is the flexibility they allow to access data from any device. This is much more convenient than hard software which requires a separate product for each device.
In eCommerce companies, a strength is the opportunity to shop online and buy directly from a computer or mobile device. This is a convenience for people who prefer to avoid large retail stores and instead buy online.
Emphasize Variety
Variety is the spice of life. And for some subscription models, variety is a key benefit.
A perk of GameFly is the vast selection of games to play, all at a flat monthly fee. GameFly draws attention to this on their homepage:
Rdio, the streaming music subscription service, shares the unique benefit of their service: a massive music library where a user with an internet connection can play any song from anywhere. This is an advantage of their subscription model and not something a user can get from a pay-per-song product.
BabbaCo, which delivers boxes of various materials for kids, shares the wide variety they provide. They write:
“Each month we will deliver a super fun activity kit featuring different hands on projects, books, puzzles, games, imaginative play, sensory activities and more! ”
Variety is a unique quality of nearly all subscription businesses. But not all subscription models have the virtue of variety. SaaS products are only one product. For SaaS, you may want to emphasize some of its other properties, such as the merits of on demand software, secure data, and the fact that no hardware or software is needed.
Emphasize Simplicity
Simplicity is key for any business you’re in. It’s especially important if you have a newer model, like a subscription service. Many subscription companies have a “How it Works” page to explain their unique subscription model. NatureBox’s How it Works page shows three steps that their business operates on:
A part of the Blissmo homepage is dedicated to showing visitors how their subscription product works:
In many cases, the subscription model actually is easier for consumers. Let’s look at a few examples:
Using Both Pay-Per-Product and Subscription
Using both a pay-per-product business and a subscription service can be confusing for customers. Amazon seamlessly integrates both into their product pages. They place the “One-time delivery” and “Subscribe & Save” right next to each other, allowing customers to compare for themselves.
If you run a business that offers both, be sure that customers know of both and can easily compare the two. Simplicity is ultra-important in these cases.
Sightglass Coffee is one company that offers pay-per-product and subscription services. Under the Store menu, they give Subscriptions a clear distinction.
Previously, Netflix allowed customers to buy some DVDs. They now have scrapped that and stick to rentals and streaming.
Advice from the Experts
In order to give the best advice to readers, it would be a good idea for me to ask people who run subscription companies for their advice. I did just that with two separate companies, one a snack subscription service and the other a SaaS company. Here is the question and their responses:
What’s your best advice for running a subscription-based company?
“Focus on the customer. For many categories of products, the majority of consumers don’t want to be locked into a subscription model. Therefore, you have to convince a potentially skeptical consumer to sign up. You have to prove to the customer that you have the best products or offer compelling value. To do this, you need to know who she is, what motivates her to buy, and how you will keep her. The subscription implies that you will provide value on a sustainable basis, so think about what happens after the first few months. How do you make the experience unique? ”
-Gautam Gupta, Co-Founder and CEO of NatureBox
And…
“The one, single most important thing we’ve learned at Buffer about subscriptions is pricing. We learned that pricing is not something that stays fixed, but something that you can change over time. So far, we head these different pricing models:
from Free/$5/$20
to: Free / $10 / $30
to: Free / $10 / $99
to: Free / $10 (now)
A lot of people get very anxious when they first think about pricing because they feel they need to get it “right. ” I think you can change your pricing all the time to see what works best. The only thing is always be good to existing customers:
If you go from higher to lower, give existing customers the lower price.
If you go from lower to higher, keep your existing customers on the lower price. ”
-Leo Widrich, Co-Founder of Buffer
I’d like to thank both Gautam and Leo for providing their input!
Additional Resources:
Zuora has proposed new income statements for subscription companies. You can find a webinar where they discuss it here and the slides on Slideshare.
Zuora also has discussed the “Three SaaS Metrics That Matter” in a presentation with slides.
Anything you’d like to add about the subscription economy? Put it in the comments!
About the Author: Zach Bulygo is a blogger, you can find him on Twitter here.
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The 3 Most Common Types of Subscription Models (With Brand …
Did you know that in the UK, each person spends an average of £552 on subscription retail services in just one year? Yes, it seems us Brits can’t resist a good subscription, especially when it comes to things like entertainment, food, grooming and health.
The subscription economy has boomed over recent years, with a sizeable spike throughout the recent period of lockdown. In fact, according to research by Barclaycard Payments, the UK market grew by 39. 4% year-on-year during July 2020, and is now valued at a whopping £323 million!
Looking for their own piece of the subscription pie, 10% of UK retailers launched their first subscription service during lockdown, adding to the 28% who already offered this type of service beforehand.
Different retailers offer different types of subscription models depending on their industry, the products they sell and their target audience, amongst other factors. Subscription services offer a host of benefits for consumers and retailers alike, with some models boasting particular advantages to look out for.
Today, we’ll be exploring the three most common types of subscription models and what makes them so popular with consumers and merchants. Plus, with a little help from Chase Alderton, Growth Marketing Manager at ReCharge, we’ll be looking at some stand-out examples of each service in action to get you inspired. Let’s get started.
#1 The curation model
Starting with the most popular model, we have the curation subscription service. Subscribers receive a unique selection of items on a regular basis, tailored to their personal needs and preferences.
Why is this model popular with consumers?
First off, curation-based subscriptions satisfy shoppers’ increasing desire for personalisation. Receiving a monthly box of curated goodies contributes to an intricately tailored customer experience, making subscribers feel understood, valued and connected.
There’s often an element of surprise with each subscription box too, building a sense of excitement and anticipation for each delivery.
Not only this, but the curation model offers a great chance for consumers to discover new products that they haven’t tried before – usually in the form of product samples. They can test out these new items without the permanence of spending money on a full-size version – a major attraction for curious consumers!
What are the benefits for retailers?
Aside from the usual benefits that subscription ecommerce brings, such as increased return on customer acquisition costs, lower retention spend and better financial forecasting, the curation model is a valuable opportunity to build richer relationships with your customers.
Armed with detailed knowledge of your subscribers’ preferences and usage behaviours, you can serve up personalised content at every step of the customer journey. By tailoring your messaging, ads and recommendations, you’ll be providing a memorable experience that encourages engagement and builds loyalty.
Another big benefit of this type of subscription model is the organic brand amplification that comes with it. Enthused subscribers often spread the word about their latest subscription box amongst family and friends, as well as across their social channels. A monthly deluge of unboxing videos across social media is a great way to raise your profile and build your subscriber base.
Curation crowd-pleasers
From beauty goodies and books, to sleepwear and stationery, even chocolate and cheese, there’s a subscription box out there for just about any product you can think of! With curated subscriptions leading the pack as the most popular model, it’s no surprise that so many retailers are implementing tailored monthly boxes as part of their product offering.
We asked Chase Alderton, Growth Marketing Manager at leading ecommerce subscription platform ReCharge, for his favourite examples of the curation model in action:
“Hunt A Killer is certainly one to watch, ” says Chase. “A curated mystery game to be solved at home using the unique pieces included in each box, the plot thickens every month with each new delivery. Users sign up for one of multiple games and discover new clues to the mystery in each box, with the chance to solve the crime and catch the killer in the sixth and final box. ”
For brands in the jewellery industry looking for some subscription inspiration, Chase highlights Pura Vida and their popular Bracelet Club offering: “They offer a bracelet club where they deliver hand-selected bracelets on a monthly cadence. Subscribers can get a curated selection of bracelets of all types of styles and colours delivered directly to their door, making for a great monthly treat. ”
#2 The replenishment model
With this type of subscription model, consumers can automate the purchase of commodity items so that they receive replenishment deliveries on a regular basis. Often referred to as a ‘subscribe and save’ model, this variation of subscription ecommerce is becoming increasingly popular in the food and drinks, health and wellness, and grooming industries.
Benefits for subscribers
Replenishment subscriptions represent the ultimate in convenience for the modern, time-poor consumer. Getting their desired consumables delivered direct to their door at regular intervals, and being able to set this up in just a few clicks, is an attractive prospect for shoppers.
Plus, not only does subscribing to a regular delivery save consumers time, it also enables them to save money on each order and monitor their expenditure more efficiently.
Advantages for merchants
Even if you sell the most commonplace of consumables, implementing a subscription service could add a competitive advantage to your brand. With customers signing up to regular deliveries at predetermined intervals, you’re ensured a consistent source of recurring revenue (providing you keep subscribers happy, of course! ).
Higher retention rates means increased customer lifetime value and much better return on customer acquisition spends. What’s more, you don’t need to eat away at your retention budget and invest in extensive remarketing.
As a retailer offering a replenishment subscription, you can accurately predict what stock you need and when. You can anticipate demand and supply with more confidence than the traditional ecommerce business model allows, making your business processes much more consistent.
Replenishment subscription role-models
Which brands have pulled off the replenishment model best? Let’s hand back over to Chase from ReCharge to get his thoughts:
“The replenishment model is extremely popular with consumers. The ability to deliver the products a customer needs at the appropriate timeline is priceless.
For all the new parents out there, Hello Bello offers a super-convenient subscription diaper service, with bundles being delivered every four weeks. They release creative patterns and seasonal designs in all sizes and materials so babies can stay stylish each and every month!
1st Phorm is a fitness supplement company focused on helping you keep your workout routine strong. Whether it’s a pre-workout blend for weight-lifters or all types of vitamins, choose your supplements and get them delivered at bi-weekly or monthly intervals for consistency (plus, save money when you subscribe! ). ”
#3 The access model
With access-focused subscriptions, subscribers pay a regular fee to obtain attractive member-only perks such as exclusive discounts or early access to new products. This type of subscription model is popular in the fashion, apparel and food verticals, as well as for brands selling digital subscriptions.
Key consumer value
It’s all about exclusivity with the access model. The allure of being the first to access new products or receiving limited discount codes is a key trigger for consumers to sign up to a subscription, with 53% citing exclusive content as their top sign-up reason in Barclaycard’s recent survey. Being part of a VIP club, part of an exclusive community of shoppers, makes them feel special.
What about the value for retailers?
Beyond the typical financial and forecasting benefits that come with subscription ecommerce, the access model is an effective way to foster loyalty, engagement and retention.
When customers feel special and valued, they’ll respond with loyalty towards your brand. Loyal shoppers will keep coming back for more, often spending more with each transaction. This rise in retention can then boost your bottom line!
Loyal customers are also more likely to recommend your membership program to others – saving you money on customer acquisition.
Access subscription in action
This type of subscription model is on the rise, but which brands have already implemented it successfully?
“Eight Sleep is an innovative mattress company that provides access to a subscription mobile app to analyze each night’s sleep, ” describes subscription expert Chase. “Buy the mattress once and pay monthly to continue to monitor your sleep each and every night. Members can also upgrade to the latest mattress technology at an exclusive price. ”
Highlighting another brand who have successfully implemented the access subscription model, Chase mentions fan favourite, Freshly Picked: “This baby moccasins brand created a membership program called The Fringe where they give members access to discounts across the site, free shipping, and early product releases. They grow brand loyalty by offering subscription to an exclusive club where you can then purchase products within the membership. ”
Final takeaway
Whether it’s signing up to a monthly box of surprise makeup products, getting a razor delivery on repeat, or paying a monthly fee for exclusive member-only perks from your favourite fashion brand, it’s safe to say that we’re living in a subscription society!
As we’ve seen, there are generally three types of subscription models popular with ecommerce businesses: curation, replenishment and access. The model that’s right for you will depend on your products, niche, USP and customer personas.
We hope you’re feeling inspired after seeing each model in action (thanks Chase! ), and ready to spice up your ecommerce operations with a swanky new subscription service.
Swanky: your subscription ecommerce experts
Here at Swanky, we really know our stuff when it comes to subscription services. We’ve completed three of ReCharge’s five largest migrations in the last year alone!
Check out the story behind one of our subscription success stories, Friction Free Shaving, and find out how we created a sleek new site for this fast-growing cosmetics brand, complete with a silky smooth subscription flow, resulting in a 240% increase in revenue.
If you have a subscription business that needs a new home on Shopify Plus, or want to give your subscription site a swanky new makeover, get in touch with our team today.
About The Author
Hannah Leary
Hannah is Swanky’s Content Manager and Copywriter. She enjoys researching the exciting world of ecommerce and crafting engaging articles to help ecommerce managers around the world make the most of their presence online. Her blogs specialise in ecommerce strategy, website design and store optimisation.
Frequently Asked Questions about monthly subscription model
What is subscription model example?
Examples of these include Amazon / Amazon Prime which incorporates a subscription into their pay-per-product business model. … Some startups, such as NatureBox, Dollar Shave Club, Trunk Club, Wittlebee, and Blue Apron, are based entirely on a subscription business model.
What are the different subscription models?
As we’ve seen, there are generally three types of subscription models popular with ecommerce businesses: curation, replenishment and access. The model that’s right for you will depend on your products, niche, USP and customer personas.Sep 22, 2020
What is subscription model pricing?
What is subscription pricing? In the subscription-based pricing model, customers pay on a regular basis for a service or product. Subscription pricing is different than pricing for traditional products, as pricing is often based on the length of the subscription, making longer subscriptions the cheapest options.Jun 28, 2021