A subscription business model can effectively transform one-time buyers into repeat customers who generate steady, long-term cash flow. Subscription business models are attractive to many entrepreneurs because they offer several benefits, such as reduced barriers to purchase, a less risky revenue stream, and a more predictable income. Netflix, Microsoft Office, Adobe Creative Cloud, and Stitch Fix are just a few examples of popular monthly subscription services. Although most businesses that utilize the subscription model are internet based businesses, this is not always the case as we will see later.
But a subscription model is not without drawbacks. Some major drawbacks include competition with other companies, customer service issues, and disputes.
When considering whether a Subscription business model is right for you, carefully weigh the pros and cons. (You can also learn more about what makes up a subscription business model here.) Here are a few things to consider when choosing a subscription business model.
Types of Subscription
In this model, some company curates customer items based on what the customer likes. Some examples include BarkBox, a monthly delivery of dog toys, treats, and well-curated goodies for your pet, and Birchbox, which sends out curated samples from beauty brands such as Benefit and NARS every month. You can also get discounts on full-size versions of items in their shop if you love something from your sample box! Customers can usually take a quiz to help the company choose the best things.
A replenishment model is an order-based subscription that requires customers to reorder products before or at a specific time. This model is common for consumer goods like toilet paper, diapers, pet food, and other household items. Examples include the Dollar Shave Club, which sends new razor blades to customers; the company Blueland will send you tablets for soap or detergent. You pay a monthly fee, and they automatically ship you fresh supplies when they run out. This model is great if you want something shipped regularly without having to think about it, but it can get expensive if you need only one item per shipment or don’t use all of what they send every month.
The user is granted access to a product or service for an agreed-upon period. This could be a website, app, video game, or music streaming service that requires payment. Users are not charged additional fees unless they exceed their allotted number of uses or exceed their allotted bandwidth. Examples include Netflix, which offers basic, standard, and premium plans. The basic plan starts with access to one screen and increases with each subscription. And Skillshare, an online learning community for creators. It provides classes and other learning experiences in various fields, including design, photography, technology, and more. Members pay a monthly or annual membership fee for access.
Subscription business models are popular in today’s market. They allow businesses to charge a recurring fee for their services, making it easier for customers to access the products or services they want and less expensive for the company to provide them.
Pros of the Subscription Business Model
1. Subscription businesses offer reduced barriers to purchase.
Customers are more likely to sign up for a subscription if they already use your product or service. Users can choose to pay a monthly fee for subscription-based businesses and receive the product at no additional cost or for a yearly fee (which usually has a discount). This model is budget friendly because it removes the need for users to make significant investments. This can be helpful for start-up business owners before they start using a given product because people may be on a tight budget or are unsure if they will use a product long enough to justify purchasing it outright.
2. It offers more predictable outcome, with a less risky stream of revenue.
Subscriptions produce recurring revenue through direct billing or automated payments, which means there’s less risk involved. This also means that marketing costs don’t need to be as high. You’re getting paid regularly, without worrying about what sale or promotion is going on when the customer makes a purchase.
3. There’s quick business growth.
With the subscription business model, you will be able to grow your company much faster than if you sold products and/or services that people buy once, then never return for more. If you keep your customers satisfied with the service they receive from your company, they will continue renewing their subscriptions year after year.
Cons of a Subscription Business Model
Subscription business models are great for certain types of companies, but they may not be right for everyone. They can be risky and challenging to manage. Here are some of the cons of the subscription business model.
1. Subscription models often see competition from companies that offer the same product or service.
If you want to get customers to switch from their existing product, you need to make sure your product does something better than others do. For example, suppose someone is already using another streaming service. You’ll need to convince them that your streaming service offers a better user experience than what they already have—or at least better streaming offerings.
2. Customer service and product maintenance can be time consuming.
If you’re not okay with dealing with customer service issues or other complications, you might not be interested in having monthly customers. Additionally, regular product attention or updates, and maintenance checks every month, might not be feasible for you.
3.You might experience a greater loss in revenue.
Some products do better as one-time purchases than subscriptions (for example, video games). If someone buys your product once, then cancels their recurring payments, this could result in lost revenue for your company.
On the other hand, having a subscription model can be helpful if you have a product that people regularly use (such as the examples mentioned above). It ensures a constant stream of income. If you’re selling something with a low cost per item, it may be worthwhile not to have a subscription model so as to not spend more than you are earning.
4. Consider the amount of time you’ll lose brainstorming the right product or service.
You will need to consider the time you will have to spend determining the right product for a subscription service. This will play a big part in how much money you make. If you are unsure of how much time to spend on creating a product, you should look at other subscription services that do similar things and see what they offer.
There are plenty of advantages and disadvantages to using a Subscription business model. The key is to decide if this type of business model fits your plan and your goals, or if another model might be better. (Find out which business model is best for you in this article.) It’s not a one-size-fits-all solution, but it can be beneficial for companies who want to build relationships with their customers over a long period of time, rather than selling monthly products or services similar to Netflix. It’s important to first do your homework to decide your business’s niche, and to run the numbers, before making any resolute decisions.