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What is a Subscription Business Model?
Keeping the focus on customer retention rather than on customer acquisition, the Subscription Business Model is based on the idea of making fixed revenues by selling a product or service along with a recurring subscription profit. The entire model is carefully drafted in a way so that individual customers can make repetitive multiple payments to enjoy a service instead of paying a huge amount at once. This model effectively increases Customer Lifetime Value and has seen to be adopted by multiple businesses to offer premium services and benefits like Netflix or Amazon Prime
With massive digitization and growth of SAAS (Software as a Service) products, most brands are introducing the Subscription Business Model that ensures repetitive deposits and additional benefits like free shipping, early arrivals, premium content, etc. Before brands changed to Subscription Business Models they mostly abided by the Business Revenue Model where the entire revenue was collected with one time purchase. Businesses like nutrition and supplements, grocery, laundry etc are able to offer their customers the option of placing scheduled auto-delivery orders which means customers no longer need to place orders manually anymore every time and are charged automatically periodically.
The key to building a successful business is to prioritize customer retention vs acquisition. With large-scale digitization and the rise of ecommerce stores, most brands are finding new ways to retain their customer base, boost retention and increase engagement. Considering the constant revenue flow and the identification of the total number of subscribers, your online business can easily devote their precious time towards the acquisition of new customers without having to think about ways to replenish and incentivize the inventory.
The Advantages of a Subscription Pricing Model
- Entices more Customers– Customers find paying one lump sum amount in one go repulsive, no matter how exclusively brilliant the product or service is. It is considered more attractive as observed in years of several adaptations of schemes in the marketing domain that charging customers with $30 per month is far better than changing them $500 in one shot. When the price of entering a program or enrolling for a scheme is low, it attracts more potential loyal customers to enjoy your product and set their mind to enjoying it for even a longer period of time. If the Subscription Business Model is effectively implemented it gradually increases the Monthly Recurring Revenue(MRR).
- Subscription Business Model offers better cash flow and gives an oversight to future Revenues- Unlike pay-once-model that demands brands to constantly look for ways to bring more customers back to the business, Subscription Based Model guarantees fixed revenue for each month until or unless the subscription expires. Since the price that the customers have to recurrently pay is predetermined, this model helps to predict revenues of the upcoming months till the date of expiry. This takes the load of the brand in aspects to several things, like coming up with alternative incentives, keeping a track of revenues drawn from individual customers.
- Increases CLV and return on Customer Acquisition cost- As Subscription Business Model spares the brand from putting extra effort on customer retention, adapting to this model can help businesses devote more time to customer acquisition. As payments are made before exclusive services are granted, with this model customers stay loyal to the business for a longer period of time efficiently increasing the Customer Lifetime Value(CLV). While the Customer Acquisition Rate depends on your marketing strategies, the lifetime value of customers will depend on how long the customers stay subscribed to your program.
- Allows Up and Cross-Selling-Since your customers have prepaid to enjoy a service without interruption, they are already familiar with your brand and the trust is secured. Drawing benefit from this scenario, businesses can come up with market additions and other complementary services. Exclusively for Subscription Business Models, brands can benefit a lot through upselling as the customers have a prior relationship with the brand and are more likely to buy other products/services.
- Time to build trust on the brand- With one time payment schemes, there are no trial periods offered. If your customers find your service enticing, it is a hard earned profit for the brand otherwise an extensive loss. Brands that follow the subscription business model allows customers to enjoy free versions, gradually enticing them into being a subscribed member. This is though a lengthy process, still comes with many benefits. Even if the customer isn’t willing to buy the product or service after the free trial period, essential customer details can be used to send in frequent notifications and newsletter continuing to persuade them to be a subscribed member.
Tips for the ideal Subscription Business Model
Customer Churn Rate is certainly the biggest area of concern when adapting to the Subscription Business Model. But keeping that in check, it is usually observed that customers who are part of a subscription business model are more loyal, tied and true to the brand. Below mentioned are few tips that will help your brand successfully establish and implement the Subscription Business Model:
- Understand if the product or service that you are planning to bring under the Subscription Business Model is viable or not. It is considered imperative to not to introduce products or services that already have an oversaturated market.
- The most critical aspect to choosing and adapting a new business model is to keep the goals clear and distinctive in mind.
- Be careful and calculated while granting free trial periods immediately after your product or service enters the market. Overinvesting in free gifts and exclusive offers eventually run in loss when a clear payback isn’t ensured.
- Personalization will always effectively impress your customer base. Study and research states that customers expect better personalized content over the period of time.
- Though the Subscription Business Model is extremely potent when it comes to customer retention, an alternative retention strategy should always be kept as a backup plan. Initially focusing more on customer acquisition, the goal always has to be drawing maximum benefit from a loyal customer base.
- Expand and diversify your marketing channels. Pace up and keep upgrading from old, traditional marketing channels to new and enticing ones. Influencer Marketing can be extremely efficient when proposing the idea and structure of a Subscription Business Model.