How Does A Subscription Business Model Work

The subscription business model has been introduced previously. It’s been around for a while, with some of the biggest global companies, like Microsoft, Netflix, Adobe, and Gillette, leveraging the power of this recurring revenue model. 

However, more is needed to make it a business model for the big and mighty. Even small businesses, like [insert successful small business examples], have proven to adopt and use this model effectively, inspiring confidence in its potential. 

The best thing is that the market will not just grow but explode over the coming years, presenting exciting opportunities for businesses of all sizes. 

Recent reports indicate that the subscription e-commerce market is poised for significant growth. It is projected to reach a staggering $478.2B by 2025, with a CAGR (compound annual growth rate) of 68%.

This exponential growth is driven by subscription services’ increasing popularity, convenience, and the potential for consumer cost savings. 

This makes the subscription business model an excellent opportunity for aspiring and existing e-commerce business owners. 

Today, we will explore this exciting topic in more depth, specifically how to unlock recurring revenue with a subscription business model.

What Is a Subscription Business Model?

Before anything else, let’s understand what a subscription business is and how it works. In simple terms, a subscription business model is a type of business where customers pay a recurring fee for products or services.

The subscription can be weekly, monthly, or yearly, depending on the company and the type of products or services. 

Subscription Business Model

Such business models are beneficial both to the customer and the business owner. 

For customers, they enjoy the convenience of automatic purchases at discounted prices. 

On the other hand, business owners benefit from a steady stream of monthly recurring revenue (MRR). This MRR, the predictable income from subscriptions, helps keep their business uninterrupted.

In other words, recurring revenue is the lifeblood of a subscription business, providing a stable financial foundation. 

Running a subscription business model can be lucrative, especially with the right industry, brand, product, and marketing. 

A good example is the subscription box business, which offers monthly deliveries of niche products. 

But how exactly does a subscription business model work? Let’s dive a little deeper to find out. 

How a Subscription Business Model Works

If you own an e-commerce business, consider it a contract between you and your customers. In this model, you charge customers a recurring fee for products or services they receive regularly. 

Customers can choose the subscription duration and how often they receive the deliveries. Additionally, most businesses allow customers to renew or cancel their subscriptions anytime.

By subscribing, a customer agrees to pay a certain amount for a certain period. On the other hand, the business agrees to offer the said products or services as long as the payments are current.

This agreement can be renewed at the end of the subscription period, or the customer can cancel it. Renewals and cancellations are critical aspects of the subscription business model, as they determine the continuity of the business’s revenue stream. 

Benefits of a Subscription Business Model

What makes this a great business model? Why should you opt for a subscription business model? 

It Offers Predictable Income for Businesses

With a subscription business model, customers pay for the products or services in advance. 

Their payments are recurrent, and as a business owner, you can predict the monthly amount with certainty, providing a stable and secure financial outlook for your business. 

This helps you to plan for your business growth. Since you already know what you are earning, you can easily plan, budget, or reinvest. 

More Cash at Hand

While the subscriptions are payable weekly, monthly, or yearly, most businesses require full payment upfront. Even better, some ask for up to a year of upfront fees. 

This gives you a lot of cash in hand as the business owner. And with it, you can operate your business without worrying about the ever-changing economic times. 

More cash flow is especially essential for startups who need money to keep their business afloat. It also provides peace of mind. 

Less Costs in Acquiring New Customers

Businesses have to spend regularly in search of new customers. However, while a subscription business model needs new customers, it already has recurrent ones. 

This means that it can spend money to acquire new customers every month. 

This reduces marketing costs, increasing your business’s revenue every month. This is quite beneficial for a startup as you can get constant customers for the next several months or even a year.

Subscriptions Attract More Customers

Usually, subscription prices for products and services are lower than the actual price for one-time purchases. Businesses can earn more upfront cash, which makes them ready to offer discounted prices. 

The lower prices make the products and services affordable, which attracts more customers. With more customers, it means even more revenue for the business. 

Easy to Get Loyal Customers

Subscription business models allow businesses to learn more and understand customers’ behavior and needs. This will enable companies to continually improve their products and services to better suit their customers’ needs. 

If customers are continually satisfied, they will come back for more purchases. This means you have an excellent opportunity to grow a loyal customer base for your products or services. 

How to Unlock Recurring Revenue with a Subscription Business Model

Adopting a subscription business model is an excellent option to achieve recurring revenue for your business. Check out this guide on how to go about it: 

Determine if it Can Work for Your Business.

The first step is determining if your business is eligible for a subscription business model. Would subscriptions make sense for the products or services you offer? 

Subscriptions work best for products or services that customers need regularly. They help sell software products or continuous services like consulting or streaming. 

Also, day-to-day products that customers require can work here. Books, snacks, make-up, dog toys, or fresh vegetables also qualify for subscription models. 

Therefore, determine if your offering is eligible for this business model before taking other steps. 

Pick Your Subscription Idea

The next step is to decide on your subscription idea. You should determine the type of subscription model to adopt and the products or services to offer. 

For example, you can start a subscription box business or offer subscription options for your software or clothing products—endless possibilities exist. 

You must formulate a good plan for how your subscription model will work. For instance, how often will your deliveries be, and how much will they cost? 

Some great subscription business ideas you can pick include:

  • Online courses
  • Software as a Service
  • Digital marketing services
  • Subscription boxes
  • Virtual Services
  • Pet toys 
  • Clothes 

Your choice will depend on your line of business, your passion, and the viability of the business option. 

Choose the Subscription Products

The products you offer determine the type of clients you attract and the number of subscribers you get. It’s like carving your niche. 

For instance, if you sell pet toys, your customer base will revolve around people with pets. If you offer clothes subscriptions, fashion enthusiasts will be your primary customers. 

Choosing your products also takes you to the next level – looking for reliable partners like brands or manufacturers. 

Since you’ll be offering products regularly to customers, you need a reliable source of products that also allows discounted prices. But if you provide your products, there is no need to worry about this. 

If your idea involves a subscription box, this is the best time to make a prototype. This sample box includes the products or goodies you intend to offer. It might not be exact, but it has to be close. 

Choose a Pricing Strategy 

You cannot evade a pricing strategy. So, take time to develop the best approach, as it will determine how well your business takes off. 

A pricing strategy involves deciding how to charge your customers for the products or services. It will depend on your goals and the type of offerings you offer. 

For instance, you can opt for a per-user pricing plan to sell more user seats for software or streaming products. This usually involves discounts for customers who choose more seats. The model is more prevalent in B2B products or services. 

Setting subscription plans is the next step. It would help to devise a one-size-fits-all or several plans to cater to your customers. In most cases, startups create one plan first to kickstart their subscription model and then make more plans as the business grows.

Others will develop several plans, including a free version or a lower-priced and more expensive one. Each plan includes several features, with higher plans containing more features. 

Build your Website 

If it’s a new business, you need to create a website. But you need to tweak it slightly if it’s a business with an existing website.

A website allows you to post photos of your subscription products or services, giving customers a chance to subscribe or sign up. 

The customers can also share details about their deliveries on that website. 

Creating a website is easy. For instance, you can use website builders like WordPress, GoDaddy, or BlueHost to create one and then integrate your e-commerce store.

You can also create your e-commerce store on e-commerce platforms like Shopify or Woocommerce, which makes it even easier. 

Now that your e-commerce business is up and running initiate your subscription-based model and inform customers about it. 

Check your Sites User Experience

If you want more subscriptions for your products or services, ensure the use experience is top-notch. Your website should be easy to navigate, and everything should be visible and accessible. 

For instance, how quickly does a customer find the signup button for your subscriptions once they visit your website? It should be easy to locate. However, customers are never patient and may decide to look for alternatives. 

You should include a call to action at a strategic place on your website.

 The top right-hand corner always works best. The CTA should redirect the user to the pricing page. 

On the pricing page, things should be straightforward. The pricing plans should be clear, with their prices and features. 

Note: If a prospect needs clarification at this stage, they might quickly abandon the subscription. Therefore, make sure to include a recourse. For example, ensure they can contact your customer support for clarification or any other query. 

Integrate your e-commerce store with EcommerceBot for the best customer support features. Its Omnichannel Chatbot offers instant AI responses to customers’ queries, ensuring that your customers are never stranded. And if they want live human support, the option is also there. 

Market your Business

Your target audience can only know about the new offering once you market it. Therefore, have a budget and a plan for marketing your new subscription business. With the proper marketing, you can expect to see new signups quickly.

Some great marketing tips for your new business include:

  • Creating a social media presence for your subscription business. This could include a Facebook page, Instagram, TikTok, and YouTube channels.
  • Ensure you have professional snaps to showcase your products on your website and social media platforms. Great images are your business’s first point of attraction. 
  • Build an email list. This will help you send subscribers personalized emails and newsletters about promotions or new products.  
  • Publish press releases to create more awareness about your products and services.
  • Run promotions for the offerings to attract more signups.
  • Try influencer or affiliate marketing strategies to get the word out to a larger audience.

With the right products and effective marketing strategies, things will start picking up sooner than you think. However, don’t be in a rush. Sometimes, it takes longer than anticipated for businesses to start paying off.

Simplify Onboarding Processes

The onboarding and billing processes are crucial steps in a business. Onboarding helps a customer understand how the products work depending on the type of offering. 

For instance, if it’s a software product, this can be done through cues on the website or app. It can involve giving information using pop-up boxes explaining different features or how they work.

For physical products, onboarding is usually done by email or mail. You can send an email or even a package with products.

Best Examples of Subscription Models

The primary examples of subscription business models include:

Subscription Boxes

Subscription boxes have become quite popular over time. This business model involves sending customers monthly subscription boxes filled with products. The box’s contents could be related products, but sometimes they are not. 

Subscription Business Model

Usually, the price of the boxes is the combined price of the products inside. However, the discounted price encourages customers to subscribe to the weekly monthly delivery. It has to make sense for the customer both economically and quality-wise.

Streaming Services

Streaming services are also an example of a subscription business model. These companies give users access to streaming options, including movies, TV shows, and music. The subscriber pays a monthly fee based on the service or package chosen. 

Examples here include Netflix, Hulu, and DSTV. Depending on the package, customers enjoy unlimited access to these benefits anytime.

Food Stuff Subscription

Even the food industry is included. That’s right! You can subscribe to have your best meals delivered to your doorstep regularly. 

Companies in food service subscriptions do more than deliver food. They also offer recipes for tasty homemade meals. Examples here include Butcher Box, HelloFresh, Amazing Club, etc. 

Software as a Service (SaaS)

This is among the most common subscription business models. Software companies usually offer subscription prices for their software. 

Once you are subscribed to a particular package, you can enjoy access to all the features of that software based on the package you’re subscribed to. 

There are so many software companies using this mode that you know about. For example, companies like Microsoft, Ahrefs, Google Workspace, Hubspot, Slack, BlueHost, EcommerceBot, etc. 

Conclusion 

Like any other business, subscription business models can be lucrative. However, you must find the best way to go about it. 

For starters, you must have a product or service that customers need and are willing to subscribe to. Second, you must ensure you provide quality products to keep customers coming back for more. 

Lastly, your website must offer a seamless customer experience and support. This is essential in maintaining customers and attracting new ones.

You can try Ecommercebot for free; no credit card is required. You agree to turn your E-commerce business into a success story by clicking the image below. 

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Integrating e-commerce automation AI tools like EcommerceBot is the best way to maintain excellent customer service and engagement. 

With features like an omnichannel chatbot, you can respond to customer inquiries any time, any day. You can also improve your marketing activities through features like AI ad automation and social media manager.  

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