The subscription business model is here to stay. Of course it's one of the predominant business models for modern software, but you'd be hard-pressed to find an industry that hasn't seen at least one subscription success story in the past few years.
That's what makes this strategy so appealing. Done right, it's a powerful tool for growth.
By understanding how this business model works and what it means to truly nail your pricing strategy, you're building the foundation for success.
What is a subscription business model?
The subscription based business model is a business model that charges customers a recurring fee — typically monthly or yearly — to access a product or service.
Subscription revenue model
A subscription revenue model helps you capitalize on the compounding value of customer relationships. That means that as long as your customers continually see the value your company provides for them, they'll continue to pay you for it.
Recurring revenue models lead to higher revenues and stronger customer relationships.
This compounding growth is what makes customers so powerful here. Through subscription, customers become more valuable the longer they use your product.
The state of subscription business models in 2019
The subscription model continues to grow in popularity. According to our research, customer acquisition costs (CAC) are up more than 50% and willingness to pay for software has declined steadily for the past five years. There's never been a better time to start capitalizing on your customer relationships through subscription.
And it's not going away any time soon. According to a survey by McKinsey & Company, 46% of customers already pay for an online streaming service and 15% have subscribed to an e-commerce service within one year of the survey.
That's why companies such as GoPro and Adobe have pivoted to this business model; it's the most reliable way to continue adding value for customers. They understand how this pricing strategy helps position them for long-term success.
Popular subscription-based businesses
It doesn't matter if you're a SaaS company, streaming service, or a subscription box; the first step to better understanding the model is by looking at some successful subscription companies across industries.
Content streaming services are probably the most well-known examples of the subscription business model. Companies like Netflix and Spotify have built incredibly successful businesses by leveraging the growth potential of subscription.
They do this by monetizing content and showcasing their value through the entertainment experience they provide. Both are great examples of value-based pricing, and Spotify's freemium plan is a great case study for how to boost acquisition.
Monthly subscription boxes
Subscription boxes like Stitch Fix and Dollar Shave Club built their businesses by streamlining the process of shopping for consumer goods, like clothing and personal hygiene products. Their subscription pricing works because it monetizes convenience for their customers.
Their subscription pricing is combined with the strategic use of data and personalization to develop the strong customer relationships that drive their growth. Everything is tied together to create circumstances where customers are willing to pay a premium for the ease of receiving these items right to their door.
Meal-kit services, like Blue Apron and HelloFresh, are another example of companies that use a convenience-based subscription model. They're similar to the subscription boxes in this way, but add value by providing access to niche products like selections catered toward different types of diets.
Supplementing their base subscription price with add-ons and upsells, both Blue Apron and HelloFresh capitalize on a higher willingness to pay among their vegan, paleo, and gluten-free customers. This is a great example of how to boost ARPU through expansion revenue.
5 tips for subscription businesses
Applying this versatile business model is a matter of finding the right tools and strategy. With our comprehensive knowledge of the subscription economy, we've put together five tried-and-true strategies to implement in your own subscription business.
1. Determine your goals early
What exactly do you want to accomplish through subscription? More revenue, faster growth? Adopting this business model requires you to define these goals early on. This helps ensure you're building the best pricing strategy possible for your specific goals. When your recurring revenue is tied directly to the monthly or annual fees, long-term strategic thinking is important.
These goals will then help you define how you build your buyer personas and structure your pricing tiers. Matching the features included in your tiers with the needs of different target customers helps you craft a better overall strategy.
2. Boost acquisition with a better experience
It's a simple equation: more customers = more revenue. That's why signing up for your subscription service needs to be as easy as possible. A great customer experience will improve your acquisition numbers over time. When combined with a great overall onboarding journey, you'll also find a higher average willingness to pay.
The option to sign up should also be available in every channel you use. It's far easier to drive the growth of your company when a steady stream of customers is signing up for the service, regardless of where they're seeing you and your content.
Once you've improved your acquisition numbers, you can better offset the percentage of customers you lose to churn.
3. Streamline the billing process
Don't lose out on revenue because your subscription billing system isn't reliable. Most modern software services have a number of complex processes involved in account billing and you need to nail all of them. Your customers won't suffer a complicated billing process for very long.
This ties into the idea that product experience is an important factor for successful subscription. Your customers must realize the value of your product or service every step of the way, especially when they're actively trying to pay.
4. Develop strong customer relationships
The subscription business model is dependent on strong and lasting customer relationships. If your customers aren't happy, or aren't reminded of the value your service provides on a regular basis, they will cancel. Focus on retaining customers for as long as possible by fostering these relationships.
This is where your buyer personas really shine. With an accurate portrayal of your customer base, it's easier to keep your company in line with their expectations. This not only requires a good experience, but reliable data on feature preference and overall willingness to pay. The more you know about the customer, the better your pricing strategy will be.
5. Plan for growth before it happens
A good subscription business model helps you scale. This steady stream of predictable income, evaluated against churn rates and operating costs, ensures the growth you project is sustainable. Without this knowledge, your growing customer base can quickly overload your infrastructure.
There aren't any other business models that provide this same kind of consistency. When you track MRR, ARR, and churn rates effectively, it's easy to make adjustments as your company grows. That makes your company more agile and free to continue providing the best possible experience for the customer as well as your team.
Nailing your subscription pricing models
Now that you understand the strategies used in building a subscription-based business model, it's time to take it a step further and look into how to manage that model once it's up and running.
Use freemium to acquire customers, not as a pricing model
Freemium pricing is an acquisition tool, not a model for consistent revenue. It widens the top of your funnel considerably and gives you more time to nurture new customer relationships. This boost to acquisition is what drives MRR for companies like Slack and Dropbox, and helps to offset CAC in the long term.
Net dollar retention for freemium products is also much higher.
By allowing customers to experience the value you provide through a freemium plan, you're making it easier to offer them upsells, add-ons, or premium pricing to increase and build on that value.
Change pricing often as you refine your product
Subscription-based pricing models are highly adaptable; it's easy to test and re-evaluate your prices on an ongoing basis. Through direct customer and market research, you'll know when conditions are favorable for a change and can proceed with the knowledge that you've set the company up for success.
Create a process for re-evaluating your pricing every six months. While updates and improvements to your product usually necessitate an update to your pricing structure as well, analysis every other quarter will ensure that you're always thinking about what's best for your business as well as your customers.
Always give customers a choice
A one-size-fits-all price doesn't work for subscription businesses. Give customers the choice of a specific pricing tier based on their individual needs. This helps you appeal to more buyers, which can drive more widespread customer acquisition.
Our research shows that companies with structured pricing tiers consistently have a higher ARPU than those without. You'll base these tiers on relative feature preference and willingness to pay data, which means you'll appeal to a number of different types of customer.
Learn more about subscription businesses at Recur 2019
Join us in December for Recur 2019 to learn more. We'll talk through all things recurring revenue, subscription pricing, and SaaS metrics with some of the brightest minds in the industry. It's the most effective space for you to share knowledge and trade secrets with subscription brands in a variety of industries.