A subscription business model is becoming popular among businesses. Why? A more sustainable route to business expansion than acquiring new clients is recurring revenue. When a business has a consistent source of income, its owners may make more precise decisions.

Subscriptions aren’t limited to magazines. The recurring revenue business model is suitable for almost every type of enterprise. Thus, this post is for you if you’re searching for inspiration for subscription businesses.

What is a Subscription Business Model?

A subscription business model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for your products or services. Customers can renew their subscription after a certain period of time. This model allows you to leverage your customer relationships to create a steady stream of income.

Subscription-based revenue models benefit both the company and the customer. As a customer, you have the convenience of automatically repurchasing a product or service that you know you’re going to need in the future. As a business, you retain customers for future sales rather than needing to re-engage them on a more frequent basis. You secure monthly recurring revenue (MRR), which can keep your business afloat throughout the worst times.

For the right product, brand, and industry, a subscription model can be a very effective and lucrative approach to running your business. For example, you could build a subscription box business that makes millions per year with the right marketing.

To aid with subscription billing, you can leverage tools such as HubSpot’s Payments software. You’ll be able to collect ACH or credit and debit card payments in one CRM.

Customers that use a subscription model are billed repeatedly for a good or service. Customers select the frequency and duration of each deal, and the majority of subscriptions allow them to cancel or renew at any time.

Consider a subscription as an agreement between you and your client. The business extends an offer to the client to pay for a good or service for a set amount of time, and the business complies as long as the customer makes all of their scheduled payments. The consumer can choose to continue with their subscription or end it when the contract expires.

5 benefits of Opting for a Recurring Business Income

Having a stable and predictable income has several benefits.

1. Potential for scalable growth

The recurring revenue model provides data that enables businesses to understand their cash flow, customer acquisition costs, and retention rates. With these insights, you can invest in growth strategies with minimal risk. It also makes it easier to upsell to active customers, increasing profitability.

A great example of this scalability is Netflix. The subscription model enabled the streaming giant to scale from online DVD rentals to on-demand video.

2. Clear visibility

Many investors and venture capitalists prefer investing in subscription and membership business ideas. In fact, generating recurring revenue increases your business’ valuation by up to eight times. Why? Lower risk and consistent ROI. It also signals that the brand has achieved product-market fit, i.e., that customers are willing for the service. 

Monthly recurring revenue (MRR) is the total income generated from active subscriptions (excluding one-time purchases or fees) in a given month. To calculate it, multiply the number of monthly subscribers by the average revenue per user (ARPU). So, if you have 150 users on the $75 per month plan, the MRR is $11,250.

MRR allows you to forecast future earnings accurately and manage expenses accordingly. For example, you can predict income a year in advance. Multiply MRR by 12 and you get your annual recurring revenue (ARR). So, $11,250 x 12 = $135,000.

MRR also helps you identify areas to focus attention. Let’s say cancellations for your coaching business are on the rise. You can use feedback surveys to discover opportunities for improvement and invest in marketing strategies to win back churned customers. 

MRR can change drastically. New subscribers increase monthly revenue, and cancellations decrease it. Upgrades, downgrades, and special offers further complicate the situation. Subscription analytic tools, like Baremetrics, automatically track subscriber activity and predict revenue based on past and current data. 

3. Approachable pricing plans

Price is often an entry barrier to customers. For instance, in the old days, customers had to spend hundreds and thousands of dollars up-front for software, making it difficult for many people to own and use these services. 

Subscription payments allow you to expand your target audience by creating attractive pricing plans, including free versions. Customers are more likely to consider your product at $25 per month versus an up-front charge of $300. Depending on your product, you can create various pricing plans for different customer segments.

Slack has no entry barrier; prospects can start with a free account. Paying plans also catch potential customers’ attention with low pricing. However, note the asterisks on these plans. The price shown is for one active user. The final price depends on the total number of users. 

There are different ways to structure recurring revenue pricing. These include:

• Flat rate pricing – fixed amount regardless of usage and features
• Tiered pricing – variable prices depending on features and benefits
• Usage-based pricing – based on usage (time, volume, or number of transactions)
• Value-based pricing – based on the customer’s perceived value (i.e. outcomes)

Each pricing structure has its advantages and disadvantages. For example, the flat rate is straightforward and reduces churn due to price sensitivity. However, it limits revenue growth because it doesn’t highlight value for different customer segments. 

On the other hand, tiered pricing allows you to segment customers based on needs and willingness to pay. But it’s complex and requires defined value propositions for each tier.

4. Foster strong customer bond

According to the Pareto business principle, 80% of revenue comes from 20% of customers. Recurring business models allow you to identify these VIPs and focus on developing strong bonds with them. 

It’s easier to build relationships with repeat customers than single transaction shoppers. Subscription and membership models enable you to collect and analyze first-party data on customers’ needs, preferences, and behaviors. That allows you to develop relevant marketing strategies to increase customer lifetime value (CLTV). 

For example, if you notice a customer’s usage exceeds their account limits, you can send personalized marketing messages upselling higher plans. Or you can create an online community to share useful content and engage customers.

5. Manage expenses efficiently

When you know how much money you can make in a given timeframe, you can make informed decisions and manage expenses efficiently. 

Read Also: Drop Shipping for E-commerce Income Streams

Recurring business models take the guesswork out of planning with accurate financial forecasting of revenue and costs. For example, a food service company doesn’t have to worry about overstocking or understocking supplies. They know how much stock they need based on the number of subscribers. 

That way, you can increase or decrease expenses to match income, boosting profitability.

How to Build a Subscription Model

1. Figure out if your business would benefit from offering subscriptions.

Before creating subscription packages for your company, figure out whether offering subscriptions makes sense for your products and services. Do you sell products that customers need to continuously access? Examples would include software products, continuous services (such as consulting or content writing), and exclusive media.

Or is the product a physical item that customers will need refills for? Day-to-day products, books, and snacks might qualify here. Once you’ve figured out whether your products and services would benefit from a subscription model, move on to step two.

2. Establish a goal for your subscription-based business.

The right goal will guide your process when you’re creating subscription packages and pricing levels. For instance, are you more interested in attracting high-value clients such as enterprise businesses, or do you want to increase your small-business client base? Or maybe you want to boost sales for a certain product, grow revenue by a certain percentage, or increase customer retention.

Depending on your goals, you’ll choose a pricing structure that can help you attract the clients you want to retain. It will also help determine the right wording for your website copy.

3. Choose a subscription pricing strategy.

Depending on the nature of your product and your goals when creating your subscription model, you might select a certain subscription pricing strategy. For instance, if your goal is to sell more user seats, you might go for a per-user pricing model that provides a subscription discount to businesses that have more users.

Next is the fun part: Creating your subscription packages and levels. If you want to keep it simple, you can start by creating just one package that jumpstarts your subscription-based revenue model. As you gather more feedback from your customers and learn more about their preferences, you can create different packages that serve different segments.

4. Improve the user experience to get more sign-ups.

Signing up for a subscription package should be easy, straightforward, and simple. You don’t want your customers to wonder how they can sign up for a subscription once they get to your website and social channels. Include a call-to-action button on the top right-hand corner of your home page and above the fold, like HubSpot does below:

Once prospects get to the pricing page, they should know which package they should choose based on the language and pricing for each subscription level.

If there’s any confusion, then there should be an option to get in contact with your team via live chat or email. You certainly don’t want confusion to be a barrier to conversion.

5. Create a seamless onboarding experience.

The onboarding process will look different depending on the type of product you’re selling. For instance, if you’re selling software, the onboarding process might happen in-app with cues, like in HubSpot’s service software:

Look at the box that says “Monitor deals & coach reps.” This little box gives a tour of the information you’ll find on the page.

If you sell a physical product, the onboarding experience might be done over email or mail. You might send customers a welcome message with resources or a package with goodies.

6. Make the billing process simple and easy.

With your well-designed packages, excellent onboarding, and strong customer service, you’re sure to have some renewals. So you want to make sure that your billing system is set up to easily accept and process recurring payments.

To do so, you can use HubSpot’s payments tool to easily collect payments, including those that are recurring. No coding knowledge is required to get started. 

You should have a payment gateway right on your website or app so that your customers don’t have to navigate to a wide variety of links to renew their subscription. A renewal is a chance to build an even stronger customer relationship and provide additional value to your customers. You might even consider tossing in extra goodies or exclusive features for customers who’ve been with you for a long time.

Now that you know how to build a successful subscription business model, let’s look at a few companies who’ve launched profitable subscriptions.

Types of Recurring Business Models

Recurring business models come in various forms depending on your subscription product, business strategy, and revenue goals. 

1. SaaS

Software as a service (SaaS) is an online business model where customers pay to access digital services. For instance, a small business could pay a cloud storage company to hold its data instead of owning expensive IT infrastructure such as servers. Other SaaS services include email marketing platforms, project management software, and customer relationship management tools. 

2. Rental

Rental models are commonly applied to tangible goods such as equipment and facilities. The fee is for the use of the item for a fixed period. For example, you pay monthly rent for office space for a five-year term. This is the only recurring revenue business model with a hard contract, meaning there are penalties for breach of terms.

3. Subscription

Subscriptions are the most common recurring revenue model and date back before the digital age. Customers pay a recurring fee to access a product or service.  These include niche magazines, fitness centers, and streaming platforms like Netflix. SaaS is a type of subscription service. While there is overlap between subscription and SaaS, the SaaS model allows for a pay-per-use, one-time, and prorated pay structure. 

4. Usage

The usage business model (also pay-as-you-go) charges customers based on how they utilize the product or service. You can bill customers by how much or how long they use a product. For example, mobile data companies charge users for the amount of data they use. This benefits customers as they only pay for what they consume. However, it offers less income predictability than other models.  

5. Membership

Memberships are similar to subscriptions, but there’s an element of exclusivity. Instead of paying to access a service, members pay to get exclusive benefits, discounts, or content. For example, content creators use Patreon to share exclusive or early-release content with paying subscribers. You should choose this model if your goal is to build customer loyalty.

Summary

Subscription business concepts are growing more prevalent. The value proposition for customers is convenience. For companies, they offer consistent and predictable income. That’s not all. Businesses with recurring income are valued higher than those without, which draws investors.

It gives you the ability to make wise choices about where and how to spend your money when you know how much you will make in a certain amount of time. Effective cost management and the development of pertinent growth and customer satisfaction initiatives are within your reach.

In terms of concepts for recurring revenue businesses, the possibilities are endless. There are choices to fit any product or service, whether it’s novelty treats or industry knowledge. Ideally, you have discovered a recurring revenue model that is effective for your company.