Why you should offer the model of subscription
Today, it's common for someone to keep more than five subscriptions in operation at once. Since the initial subscription model was launched around 160 years in the past and the subscription-based business model has gained popularity across all fields. Food kits, online classes streaming services, meal kits all benefit from this distinctive business model , which is different from the traditional model we all know - purchasing an item or service in exchange for an upfront, one-time cost. With more and more customers opting for an access option to their purchase rather than ownership, we're here to discuss and address the issue of whether a subscription model is right for a business's success. First, let's go over the basics : what exactly is a subscription business model?
What exactly is an Subscription Business Model, and how does it work?
Subscription-based business models are a kind of recurring revenue model offer a product or service in a way that the seller earns a steady stream of income, and the consumer generally has unlimited access to the service or product. The basic concept behind a subscription model is that it requires customers to make multiple smaller installments for the good or service, rather than paying one lump sum at the beginning. Differing from the standard business revenue model the subscription model is more focused on maintaining customer relationships than acquisition.
This is a brief overview of how subscriptions typically function:
- Consumers identify subscriptions they're attracted to.
- The consumer then signs up, sometimes choosing when or how often they want to receive the product or service.
- When you sign up, the subscriber's payment information is captured, which will be billed either on a monthly or an annual basis, or another frequency decided on by the organization.
- After the subscriber has established the subscription, they'll receive the subscription as long as they make recurring payments or up till they end the subscription.
It's important to note that the details of subscriptions can differ between businesses, but this outline is generally how most subscriptions function.
Advantages of Subscription Business Models
Through the entire pandemic, the subscription business model kept many businesses afloat, even generating extra income. Recurly reports that in the days following the end of the pandemic, in March 2020 the growth in subscriptions was 20 to 40% higher than before COVID.
However, long before the financial crisis caused through Covid-19, business owners were discovering the benefits of using a subscription model. In fact, the Subscription Economy Index (SEI) reports 437% increase since the beginning of January. Looking forward to the future, UnivDatos Market Insights anticipates that the subscription online market to increase at a compound annual growth rate of 72.9% between 2021 and 2028.
We'll explore several of those advantages below:
New Customer Acquisition and Retention
The benefit for subscriptions is they're the most effective means to increase profits than one-time transactions. Harvard Business Review states that it can cost approximately five to 25 times more to get a new customer than to maintain an existing customer, contingent on the industry. A study conducted by the consulting company Bain & Company found that in the financial services industry the increase in retention of customers by 5% results in an increase of 25% in profit.
If you're using subscription models it's a great way to set yourself up for success as you're able to continue making profits from customers that whom you've already won.
You'll still want to focus on the acquisition of new clients. However, with a subscription-based model as opposed to a single transaction , you might find you can get an increase in the value of your marketing efforts and budget for the long haul.
Predictable Revenue
Customer Retention
To enlist a larger customer base
It's well-known that the price can deter customers from purchasing it. A benefit of a subscription is the fact that it permits the user to place your item at a more affordable price point, lowering the price barrier to many buyers and allowing them to budget into the cost of their bills each month. This naturally makes your products or services easier to access, and thus, can increase your client base.
The challenges of a Subscription Model
Have you decided that a subscription model is right for your company? While subscriptions offer excellent benefits, they do not come without their faults. A few of the biggest problems businesses have in the context of subscriptions aren't obvious, which is why it's best to prepare.
Subscription Fatigue
As you may know, there's a subscription for everything that can lead users to have many subscriptions. The result is an increase in subscription fatigue and a sense of being overwhelmed and fatigued of having to sign to subscriptions. This feeling has the power to stop some people from signing up to yet another subscription, and instead, they may opt for a one-time purchase.
Another aspect of fatigue from subscriptions relates to the total amount an individual customer could be spending for subscriptions. One survey in 2021 discovered that the typical participant in the U.S. was spending $373 each month for subscriptions. That's an increase of 15% from their 2018 study. This suggests that customers are prepared to buy services on a subscription basis. But, the research also revealed that respondents underestimated how much they were actually spending for subscriptions.
So, subscription sellers should keep in mind that while consumers are willing to spend for subscriptions, providers are competing with every other service that their potential customers are buying on a subscription basis.
Managing Churn
Subscription Types
In the wake of the explosion of subscriptions, certain types are becoming increasingly sought-after. These include:
Auto-Renewal Subscriptions
One of the most well-known subscription types is auto-renewal subscriptions often referred to as forevergreen subscriptions. In this model, businesses earn revenue on a regular basis until the customer cancels their subscription. The most common examples of this kind of subscription are Netflix, a streaming service as well as Ipsy, a subscription box company.
Tiered Billing
Users-Based billing
Also called the per-seat billing model, these subscriptions bill customers based on the number of users who access the product every month or throughout the throughout the year. Basically, as more users make use of the software then the price increases. Salesforce and Slack are two popular software applications that are widely used, use this type of subscription model.
Insights about Membership
To demonstrate the effectiveness of membership memberships by analyzing our own data about how much users earn with as well as without memberships. We looked at those who were paying their bills through checkout sites and looked back until March 2016.
Average GMV for each type of transaction
The first step was to look at the average gross value (the sum of all sold) across all different payment types for all Heroes from Q2 2016 and Q4 of 2021. We removed outlier customers that resulted in higher numbers.
"All kinds of payments" refers to an Hero who provides one-time transactions, subscriptions, or multiple payment options. The term "multiple payments" is dividing the cost of a one-time transaction over installments.
The study found that clients who are able to offer all payment options get the best average GMV, earning nearly 6-fold more than those that offer one-time transactions for their sole payment type.
Customers who offer only the one type of transaction - that is, multiple payment, one time transactions, or subscriptions - make lower than those who offer two or more kinds of transactions. Particularly, subscription transactions have the most expensive average GMV for customers who just offered one kind of transaction which was nearly $500 higher than customers who only offered one-time transactions only.
The Average Return per Transaction by Transaction Type
Also, we looked at the average revenue per transaction between March 1st 2016, through March 7, 2022. The subscription-based transaction category is with the lowest amount, which is $38. However, keep in mind that it renews.
The average transaction value for one-time transactions is $108. So, if someone offers a monthly subscription at $38 and continues for 3 months, they will earn more than the standard one-time transaction costs.
Ultimately, the power of providing different types of transactions can be found in changing the decision to shift the purchase decision from "yes or not?" to a product that is "which solution is most effective?". In the event that customers have the option to choose, they will feel more confident purchasing.
Thus, offering a subscription could be a factor in increasing the revenue of an online company than only offering products on a one-time transaction basis.
4 Strategies for Making a Profitable Subscription
The use of this flexible model in your business is an issue of choosing the appropriate strategy, and mainly, being prepared. By using tried-and-tested strategies for the adoption of a subscription-based model similar to the ones below, your subscription business will be set up for success:
- Establish goals before you start. Before you transition from the traditional model of business into a subscription-based model, take a look at the objectives you'd like to attain with your new model. Growth in revenue, and faster? More positive relationships with your customers? Determining the goals you want to achieve will make sure you're creating the most efficient pricing strategy possible for your customers - for example, using the auto-renewal feature in place of tiered bill.
- Gain customers with an enjoyable user experience. It's a no-brainer increased customers translate to more revenue - which is why signing up for your membership should be as frictionless as possible. Achieving a positive customer experience from the start is a sure way to ensure that the number of customers you acquire increase steadily over time. Plus, a seamless experience will help battle subscription fatigue.
- Build strong customer relationships. We have already established that this model of subscription is designed to focus on retention of customers over the acquisition. The model is based on long-lasting and solid relationship with customers. Maintaining your customers' satisfaction and reminded of the value of your product is vital. In the event that they are not, they'll click the cancel button with no second idea. One of the best ways to build lasting relationships is through an online membership platform that creates credibility, increases trust among your followers and helps you stay connected to your audience.