What is a Subscription Business Model

With a subscription business model, a customer doesn't pay for your product or service all at once. It's a pay-as-you-go relationship, where you can nurture relationships and and enjoy consistent revenue streams, and the growth that follows, over time as customers continue to renew.

That's the vision anyway. The truth is subscription business models don't always succeed. They live and die by whether customers stay or leave. If your customers don't get the value you promised them, they'll leave, and your growth will stall.

So the task before you is to become more customer-centric than ever. How? By delivering more delightful interactions to your customers across the entire buying and paying journey - driving customer retention and, as a result, recurring revenue growth.

Below, we share steps you can take to put subscriptions to work for your business.

Here's what we'll cover:

What is a subscription business model?

Subscription business models are when customers regularly pay for ongoing access to a product or service. Think Netflix, Amazon Prime, or *ahem* Salesforce. Subscription business models can speed up growth because they create recurring revenue, or revenue that occurs again and again over predictable intervals (like every month or year) when customers renew their subscriptions.

What are the advantages of subscription business models?

Subscription business models are a defensive wall against economic uncertainty. They create a stable base of returning customers and create predictable revenue that you can plan for longer into the future. Here are the benefits in more detail:

Accelerated revenue

As your company attracts more subscribers, recurring revenue increases exponentially. "We all know that going through existing customers is just so much more efficient," Gainsight CEO Nick Mehta told McKinsey this year. "So companies with high, natural net retention are just going to grow more efficiently and easily."

Predictable revenue

Stop hitting the revenue reset button every quarter. Companies with subscriptions will often start each quarter with a baseline revenue at or near the previous quarter (depending on churn), then build on top of that.

Business agility

Establishing long-term customer relationships creates valuable ongoing data that you can use to better understand and serve your customers. You can learn from customer behavior - mining platforms like Customer 360 where you can manage all customer data in one place - and respond with new offerings that match. The more you do this, the more efficient product launches will be.

In essence, subscriptions and usage add another dimension to revenue. As shown in the illustration below, revenue from one-time sales goes from a point (a single transaction) to a line of many points (subscriptions).

What are the different kinds of subscription revenue models?

There are many different kinds of subscription revenue models, but what they all represent is a common shift - you're charging for access to products rather than products themselves. Here are the three most important ones:

Pure subscription model

Revenue is fixed for each subscription period. The amount that gets paid (and when) is predetermined. For example: a flat-rate monthly subscription fee for Spotify.

Consumption model (pure usage)

Here, revenue is variable. The amount that gets paid - and when - is determined by use. For example: a service like Uber or DoorDash.

Hybrid model

In this scenario, customers are served a combination of subscription and usage options so revenue has both fixed and variable elements. For example: overage fees tacked on for additional mobile phone minutes on top of a flat-rate monthly bill.

How does a subscription business model work?

A subscription business model works by offering customers ongoing access to a product or service in exchange for a recurring payment. Here's a step-by-step breakdown of how it typically works:

1. Product or service offering

Determine the product or service you want to offer on a subscription basis. This could be anything from software, streaming media, online courses, or physical products like subscription boxes.

2. Pricing and subscription tiers

Establish different subscription tiers, each offering varying features, levels of access, or additional benefits. The pricing strategy should strike a balance between affordability for customers and profitability.

3. Billing and payment

Set up a billing and payment system to process recurring payments. This system securely collects payment information and automatically charges customers at regular intervals, typically monthly or annually.

4. Subscription management

Maintain ongoing communication and support with your subscribers by addressing customer inquiries, providing technical assistance, and ensuring customer satisfaction throughout their subscription period.

5. Subscription renewal

As the subscription period nears its end, you notify customers about the upcoming renewal and charges their payment method for the next billing cycle. Customers have the option to cancel or modify their subscription before the renewal date.

6. Churn management

Churn management identifies the reasons customers leave and implements measures to retain them. Effective churn management involves analyzing customer behavior and feedback to detect early signs of dissatisfaction or disengagement. You can then use this data to develop targeted interventions, such as personalized offers, improved customer support, or product enhancements, to increase customer satisfaction and loyalty.

7. Upselling and cross-selling

You have the opportunity to upsell or cross-sell additional products or services to your existing customer base by analyzing customer preferences and behavior. You can identify whitespace opportunities to offer complementary or upgraded offerings, which increases revenue per customer.

8. Measuring and adapting to data

And, lastly, it's increasingly important to have a foundation of data in place so you can monitor metrics, spot red flags, and intervene to capitalize on white space opportunities before they create churn. You can gather feedback from customers to improve your offerings, identify areas for enhancement, and new features to introduce, and ensure that the product or service remains valuable and relevant over time.

By following these steps, subscription you can build long-term relationships with your customers, generate predictable revenue, and provide ongoing value that keeps subscribers engaged and satisfied.

How can I implement a subscription model in my business?

To implement a subscription model, bring in tools and processes that help you build one consistent buying journey, even as customers cross different channels and make changes to their subscriptions over time. Then, track new metrics to make sure you're on the right path.

Here are the steps to get there:

1. Give customers the power to buy and pay over any channel

With subscription selling, you're interacting with your customers constantly, and they don't always want to pick up the phone. Increasingly, they want to engage with you on their own terms - and in their pajamas.

In the wake of the pandemic, McKinsey found that "more than three quarters of buyers and sellers say they now prefer digital self-serve and remote human engagement over face-to-face interactions."

To give customers the kinds of experiences they want, you need to make it possible for customers to renew, upgrade, and pay instantly on the channels they prefer. That could mean setting up a website or a mobile app, for instance.

Customers don't just want to choose digital channels, though. They also want to cross them. B2B buyers told McKinsey last year that they're using 10 channels to interact with suppliers. That's double what it was in 2016.

How can you make it feel smooth and consistent even as customers cross channels - for example, starting a purchase online, but then being routed to a rep when they balk and hesitate at checkout? Subscription management can help. It combines customer relationship management (CRM) tools with the power of self-service to give every team access to the same data, so you can always pick up customer conversations where they left off.

"We want every touchpoint to be amazing," said Jeff Wechsler, chief orchestration officer at EMyth. "But in order to make that journey exceptional, we need to integrate subscription data for a full view of our customers." He sees subscription management as a way to connect customer data into one seamless journey with great customer experiences at every turn.

2. Focus on customer value

Subscriptions are all about delivering value to your customers. You're regularly asking them to renew and pay. If the value isn't there, customer retention won't be there either - they'll leave and your growth will stall.

Shift your thinking from shipping products to shipping value. How can you continuously deliver value-as-a-service to your customers? For example, Netflix doesn't ship DVDs. They deliver entertainment-as-a-service. Amazon's value isn't in shipping products (although they're darn good at it). It's in delivering exceptional buying experiences-as-a-service.

Value comes into play as customers access and use the product. This puts the spotlight on two teams - service and customer success - who will need to work together to make sure adoption and satisfaction is high.

A CRM that provides data visibility and automation is key here. Visibility helps you monitor and act on adoption and usage behavior - jumping in to help a customer fix a problem early before it becomes a frustration, for example - and automation helps you make it fast and easy for customers to start using new products or services they've bought.

3. Track recurring revenue with new metrics

Move over, customer acquisition. Customer retention and customer value - which lead to recurring revenue - are the star metrics now. You can't grow customer retention, however, if you don't have a way to measure it.

First, let's take a look at customer value metrics. You can measure customer value by monitoring how much your customers are adopting your subscription product or service. An important metric to track is average revenue per user (ARPU), which is calculated by dividing your revenue by your users. As your business matures and you become more effective at targeting customers with the right offerings (while also getting them to stay and renew), you should see your ARPU increase.

To measure top-line revenue growth, track monthly recurring revenue (MRR) and annual recurring revenue (ARR). (More on these metrics here.) These are prized because increasing them means your revenue becomes more predictable and you're able to plan ahead longer-term.

What are some subscription business model examples?

There are tons of successful examples of subscription business models across various industries. Here are a few notable ones:

Salesforce

Salesforce, a leading provider of customer relationship management (CRM) software, utilizes a subscription-based model that allows businesses to purchase cloud-based software on a recurring basis.

In 1999, Salesforce CEO Marc Benioff dreamed of a way to make software easier to purchase, and simpler to use. And so, running Salesforce in the cloud was born, part of a global push toward subscription selling, bringing in the subscription business model. We provide continuous access to a suite of tools and services, which include sales management, customer service, marketing automation, and business analytics - all in the cloud.

Spotify

Spotify is a music streaming platform that offers a subscription-based model. Users can access a vast catalog of music, create playlists, and discover new artists. Spotify offers both free and premium subscription options, with the premium subscription removing ads and providing additional features like offline listening.

Grammarly

Grammarly offers a digital writing assistance tool that utilizes algorithms to check for errors and suggestions in grammar, punctuation, clarity, engagement, and delivery. Subscribers can choose from monthly, quarterly, or annual payment plans, which provide them with continuous access to the tool's premium features. Grammarly maintains a steady revenue stream while continuously improving its services and adding new features to enhance user experience.

Ready to open new paths to revenue growth?

A subscription business can only succeed through authenticity. There's no faking it. Customers only renew when they experience real, ongoing value for their money. That's the challenge and the opportunity. Get close to your customers, know them, and give them what they want and how they want it. In the end, the value will go both ways - and you'll have the resilient revenue stream to show for it.

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