The Subscription Business Model Is Having a Moment

From Spotify and Planet Fitness to Blue Apron and Apple News, subscription models are one of the most successful revenue structures of the digital age. The idea isn’t new; subscription-based shopping started with British milk sellers in the 1880s. What’s changed? Today, brands use subscription pricing to deliver core products and services, or to augment their primary revenue.

So, What Is a Subscription Business Model?

By charging customers weekly, monthly or annually in exchange for products or services, a subscription-based model focuses on recurring revenue. Most subscription-based businesses offer different subscription tiers based on the number of users, the size of the organization, access to additional features or elimination of advertisements (looking at you, Netflix’s ad-supported tier and YouTube Premium).

The most obvious example of a subscription-based product is your local newspaper. You pay a monthly or annual fee for daily or weekly delivery of your paper – well, at least your parents or grandparents did.  

Other Types of Subscription Businesses

This business model goes by many names and operates in nearly every conceivable industry. Here are a few examples of subscription businesses you may – o or may not – have realized are, in fact, subscriptions:

You’ll note that most of the digital companies derive most of their revenue from subscriptions, but many have other revenue streams. For example,  Apple makes about $20 billion annually from subscription services like Apple+, Apple News and iCloud. That’s about the same as what it brings in from its combined sales of the MacBook, iPad, AirPod and Apple Watch. Its services also operate on a 71% gross margin, more than double the margin of its hardware sales.

Companies like Apple, Amazon and digital players like Spotify know the subscription revenue model offers several advantages, especially for brands that need cash on hand – and who doesn’t like cash?

The Benefits of Subscription Models for Consumers and Businesses

If subscriptions only made sense for businesses, they wouldn’t be as popular as they are. It’s important to note that brands and consumers alike benefit from the low-friction, value-based structure of a subscription or membership.

3 Reasons Why Consumers Love Subscriptions

1. Convenience

In business, anything that makes a transaction more difficult is called friction. The point of sale is often considered the biggest source of friction. Historically, it required actually leaving your home to acquire a good or service. Technology improved, and some point of sale simply required a phone call (still too much work for most of us). Finally, the internet and mobile apps have made transactions nearly frictionless – we can spend money anytime from virtually anywhere.

Digital subscriptions take that even further, requiring a single transaction and selecting auto-renewal to charge customers for the rest of their lives, or at least until they cancel or their credit card expires. That’s about as low-friction as it gets!

2. Product discovery

Access to an initial store or service allows brands to introduce additional subscription tiers, products or services. The best example of product discovery is Amazon Prime. Prime members get access to tens of thousands of products, two-day delivery and deals on additional Amazon services like Prime TV and Kindle Unlimited. Access to one product eventually leads to wider adoption and increased spending – you know, it’s almost like Bezos planned it that way all along.

3. Flexible pricing

To appeal to a wider audience, most successful subscription business models offer multiple pricing tiers. Take streaming services: most have an ad-supported tier and a more expensive ad-free price. Some also have family plans, which offer additional price breaks based on the number of users.

There are also potential savings in paying annually compared to monthly. Users who know they’ll use the product or service for 12 months can save a little money by paying it all up front, while paying month-by-month is easier for cash-strapped folks or those unsure whether they’ll use the service enough to justify the cost.

And to be clear, consumers love subscriptions. The average American spends $273 per month on subscriptions and memberships, and despite numerous claims of “subscription fatigue, that number is expected to rise over the next several years.

3 Reasons Why Businesses Love Subscription Models

The subscription and membership model make a lot of sense for brands. While the specifics vary by brand, market and industry, subscriptions address a few key variables that businesses prioritize:

1. Recurring revenue

Often called monthly recurring revenue (MRR), recurring revenue is the amount of money a brand is relatively sure is coming every month or any other period. This makes forecasting profits, making business investments and keeping adequate capital reserves easier.

2. Reduced churn

Subscriber churn rate is the average percentage of users who cancel or choose not to renew their subscriptions. A low churn rate means that most users keep their subscriptions or memberships, which keeps that MRR nice and steady.

3. Lower customer acquisition costs

A lower churn rate has an additional benefit; it reduces the need to replace lost subscribers, which is inherently expensive. Businesses can spend millions of dollars every year on customer acquisition, which includes sales and marketing expenses over a set period and gets calculated with the following formula:

CAC = (Cost of sales + cost of marketing) / number of new customers

Average CAC varies widely by industry, the brand’s maturation and even seasonally – it’s often harder to sell new gym memberships in sunny June than in October when the weather is starting to turn.

The global subscription economy, which includes everything from streaming services to subscription boxes, is expected to gross $996 billion by 2028. That’s up from $650 billion in 2020 when more traditional retailers and service businesses added subscriptions to existing offerings.

The 4 Subscription Marketing Basics

As companies initiate or expand their subscription and membership offerings, they have to learn how to market their subscriptions efficiently.

Many core principles of effective digital marketing apply here, but there are four important facets to focus on …

1. Quality over quantity. One long-term subscriber is better than 10 short-term subscribers. Companies tend to spend a lot of money – and we mean a lot of money – acquiring new customers as they try to scale. It’s just as important to win the right customers who will stick around for a long, long time. Use market research, customer surveys and other data to build a profile of your stickiest customers and target that audience!
2. Bundle. Take a page from Amazon’s playbook by offering subscription products or services at a discount to existing customers. This can be valuable for service providers, too; offer better rates for subscription customers committed to longer agreements than one-off projects. Yep, that’s exactly how marketing retainers work.
3. Customer service counts. Subscriptions are based on trust and value, and customer service contributes to both. It’s often far less expensive to keep existing customers happy, so invest in your customer support resources.
4. Ability to test features. Who better to test your service or product’s newest features than experienced, dedicated users? Most subscription businesses offer beta testing to users and invite feedback to improve performance or relevance. This input is invaluable to long-term product development!

Starting a Subscription Business? Start with Oneupweb

Subscription marketing poses plenty of curveballs for aspiring and established brands alike. With over 25 years of experience, we’ve learned a thing or two about meeting today’s challenges without losing sight of long-term goals. No matter what your organization ships or sells, we can help. Get in touch or call (231) 922-9977 today to get started!