Nowadays, it’s not uncommon for a person to have up to five subscriptions going at once. Since the first subscription was introduced over 160 years ago, the subscription business model has grown in popularity in nearly all industries. Meal kits, online courses, streaming services, and more are benefiting from this unique business model that strays from the traditional model we all know - purchasing a product or service for a single, upfront payment. As more consumers opt for access to their purchase over ownership, we’re here to ask and answer the question of why offering a subscription model is right for a business’s success.
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But first, let’s cover the basics - what is a subscription business model?
What is a Subscription Business Model, and How Does it Work?
Subscription business models, a type of recurring revenue model, sell a service or product in a way that the seller receives a steady stream of income, and the consumer generally has unlimited access to the product. Essentially, a subscription model requires customers to make multiple smaller payments for a good or service rather than a single sum upfront. Differing from the standard business revenue model, subscriptions focus more on customer retention than customer acquisition.
Here’s a simple breakdown of how subscriptions tend to work:
- A consumer identifies a subscription they’re interested in.
- The consumer then signs up, sometimes choosing how long or often they want to receive the service or product.
- While signing up, the subscriber’s payment information is captured, which will be billed on a monthly or annual basis, or another frequency decided on by the business.
- Once the subscriber has set up the subscription, they will receive the service as long as they make recurring payments or up until they cancel the subscription.
It’s important to note that subscription specifics vary from business to business, but this outline is generally how most subscriptions function.
Benefits of Subscription Business Models
Throughout the pandemic, the subscription business model kept many businesses afloat, even generating extra revenue. Recurly reports that in the weeks after the pandemic shutdowns in March 2020, subscription growth ranged from 20%-40% higher than pre-COVID.
But well before the financial hardship brought on by Covid-19, businesses were discovering the benefits of using a subscription model. The Subscription Economy Index (SEI) reports 437% growth since January 2012. Looking forward to the future, UnivDatos Market Insights expects the subscription e-commerce market to grow at a compound annual growth rate of 72.9% between 2021 and 2028.
We’ll explore several of those benefits below:
Retention and New Customer Acquisition
One advantage of subscriptions is that they are a more effective way to drive revenue than one time transactions. Harvard Business Review reports that it costs between five to 25 times more to acquire a new customer than it does to keep an existing one, depending on the industry. Research published by the consulting firm Bain & Company found that in the financial services industry, increasing customer retention by 5% generates a 25% increase in profit.
So, with a subscription model, you’re setting yourself up for success because you can continue to make money from the customers you’ve already won over.
You’ll still want to focus on acquiring new customers. But with a subscription model compared to a one time transaction model, you may find you can get a better return on your marketing budget and efforts in the long run.
Predictable revenue, also known as recurring revenue, is one of the top benefits of this model. In a traditional business model based on one-time sales, revenue is prone to market-based or seasonal fluctuations. But with subscription models and other recurring revenue models, like membership sites, businesses are guaranteed a certain amount of revenue at scheduled intervals. This can help with both budgeting expenses and investing in company growth.
Looking to keep your customers around longer? The subscription model achieves this by building a stronger relationship with your customers over time. As they interact with your product on a regular basis and work with customer support (which might just be you), customers will learn to trust your brand. Plus, it’s more expensive to acquire new customers through paid marketing efforts than it is to keep existing customers.
Attract a Larger Customer Base
It’s well known that a product’s large price tag can inhibit a customer’s decision to purchase it. The beauty of a subscription is that it allows you to set your product at a more affordable price point, lowering the price barrier for many consumers and making it easier for them to budget into their monthly bills. Naturally, this makes products or services more accessible, and thus, can expand your customer base.
Challenges of a Subscription Model
Convinced the subscription model is right for your business? While subscriptions offer excellent benefits, they do not come without their faults. Some of the most common challenges businesses face with the subscription model aren’t obvious, which is why it’s best to be prepared.
As you may know, there’s a subscription for everything, which can cause consumers to end up with multiple subscriptions. This can easily result in subscription fatigue, a feeling of being overwhelmed and tired of signing up for subscriptions. This feeling has the power to deter some consumers from signing up for yet another subscription, and instead, they may opt for a one-time purchase.
Another part of subscription fatigue relates to the total amount a potential customer is spending on subscriptions. One 2021 study found that the average participant in the U.S. spent $273 per month on subscriptions, an increase of 15% from their 2018 survey. So, this demonstrates that consumers are willing to pay for things on a subscription basis. However, the study also found that survey participants underestimated how much they were actually spending on subscriptions.
So, subscription sellers should keep in mind that while consumers are willing to spend money on subscriptions, the sellers are competing with all of the other services that their potential customers are paying for on a subscription basis.
Managing churn, the percentage of customers who leave or stop paying over a given period of time, is something all business models deal with, but it’s a different beast for subscription models. Consumers may churn voluntarily due to dissatisfaction with product, service, pricing or simply when their short-term needs are met - the standard of all businesses. But with subscriptions, customers may churn for involuntary reasons as well, including outdated card information, non-payment due to network issues and other technical glitches. Or, related to subscription fatigue, they may realize the full amount they are spending on memberships and decide to cut back.
Types of Subscriptions
Since the boom of subscriptions, certain types have grown increasingly popular. Those types include:
One of the more popular subscription types is auto-renewal subscriptions, also known as evergreen subscriptions. In this model, businesses collect revenue automatically up until the customer cancels their subscription. Examples of this type of subscription include Netflix, a streaming service, and Ipsy, a subscription box business.
Just like it sounds, the pricing structure of the tiered-billing subscription model includes multiple tiers or levels of use. Generally, once the subscriber’s needs exceed the quantity allowed in one tier, they move to the next tier, which offers additional functionality or more units of usage. The tiered billing model is great for both online courses, membership sites and other SaaS products because it allows them to adapt their content to different consumer needs and budgets, meaning the product has the potential to reach a larger audience.
Also called the per-seat billing model, user-based billing subscriptions bill customers based on the number of users accessing the product each month or year. Basically, as more users use the product, the bill increases linearly. Salesforce and Slack, two software products that are widely used, use this type of subscription model.
Kajabi Insights about Membership
To illustrate the power of membership subscriptions, we looked into our own data about the earnings of Kajabi users with and without memberships. We analyzed people who are processing their payments through Kajabi’s checkout pages and looked back to March of 2016.
Average GMV by Transaction Type
First, we looked at the average gross merchandise value (the total amount of sales) across all different payment types for all Kajabi Heroes between Q2 of 2016 and Q4 of 2021. We eliminated outlier customers which skewed the numbers higher.
“All payment types” refers to a Kajabi Hero who offers one-time transactions, subscriptions, or multiple payments. We define multiple payments as dividing the cost of a one-time transaction over installments.
We found that Kajabi customers that offer all payment types have the highest average GMV, earning nearly three times more than those who offer one-time transactions as their only transaction type.
Kajabi customers who only offer one transaction type - whether it be multiple payments, one time transactions, or subscriptions - earn less on average than those who offer two or more transaction types. Notably, subscription transactions had the highest average GMV among the Kajabi customers that only offered one type - nearly $500 more than those who opted for one-time transactions only.
Average Revenue per Transaction by Transaction Type
We also looked at the Average Revenue per Transaction from March 1, 2016 to March 7, 2022. We can see that the subscription transaction type comes in the lowest, at $38. But remember, that renews.
The average transaction value for one-time transactions is $108. So, if someone offers a monthly subscription at $38 and stays on for three months, that will earn more than the average one-time transaction cost.
Ultimately, the power of offering different transaction types is in reframing the purchase decision from “yes or no?” to a product to “which option works best?”. When customers have freedom of choice, they can feel more confident purchasing.
So, offering a subscription could be a factor in earning more money from an online business compared to only offering products on a one-time transaction basis.
4 Tips For Building a Successful Subscription
Utilizing this versatile model for your own business is a matter of finding the right strategy, and mainly, being prepared. With tried-and-true strategies supporting the implementation of a subscription model, like the ones found below, your subscription business will be set up for success:
- Determine goals early on. Well before you move from a traditional business model to a subscription, consider the goals you want to accomplish through the new model. More revenue and faster growth? Stronger relationships with your customers? Defining your goals will help ensure you’re building the best pricing strategy possible for your customers - such as using an auto-renewal subscription over tiered billing.
- Gain customers with a great experience. It’s a no-brainer: more customers equals more revenue - which is why signing up for your subscription needs to be as frictionless as possible. Establishing a great customer experience from the start will ensure your acquisition numbers steadily rise over time. Plus, a seamless experience will help battle subscription fatigue.
- Streamline the billing process. Unreliable subscription billing systems lead to lost revenue as well as a poor customer experience (refer to #2). Ensure that you’re using a dependable online payment system that won’t cause you, and more importantly, the customer, any issues. If customers want or need invoices for their records, make sure you have a good tool to create PDF invoices.
- Build strong customer relationships. As we previously established, the subscription model is all about customer retention over acquisition. This means the model relies on strong, lasting customer relationships. Keeping your customers happy and reminded of the value of your service is crucial. Otherwise, they will hit the cancel button without a second thought. A great way to foster lasting relationships is through a membership site that establishes authority, builds loyalty among followers, and helps you stay connected to your audience.
Subscriptions have the power to bring in a steady stream of recurring revenue and create strong, lasting customer relationships. As long as the model is implemented correctly and with goals in mind, businesses can easily manage associated challenges like involuntary churn and subscription fatigue. Whether you sell tangible goods or digital goods, if you’re looking to expand your market, retain more customers, forecast revenue, and best of all, increase your profits, consider the subscription model for your business.
Check out this clip from a Kajabi University course hosted by Graham Cochrane, an entrepreneur and membership site owner. He'll break down why it's critical to add a membership site for your business.
If you're a Kajabi member, check out the free Membership Marketing Formula course!
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