A subscription business model is when customers pay a recurring fee, typically on a regular basis (e.g., monthly or annually), to access a product or service, fostering long-term customer relationships and predictable revenue for the business.
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The definition of a subscription business model is essentially a recurring revenue stream where customers make consistent, repeated payments in exchange for products or services. This payment could be weekly, monthly, yearly, or whatever fits the type of product or service your business provides.
Customers use a subscription business model to receive your products or services regularly without having to repurchase them over and over manually. The business usually chooses several options of frequency for the customer to choose from.
If you have a consumable product such as vitamins or coffee, the customer may want to receive a refill on their product bi-weekly or monthly, depending on how often they use it. Companies that provide a service such as a mobile app may offer different options to retain customers.
As long as the customer continues to pay the recurring charge, the company continues to provide the product or service.
Many consumer goods and services can be sold under a recurring subscription model. Some subscription business model examples include:
There are many benefits to using a subscription business model. Rather than having to continually put marketing dollars toward customer acquisition and retention, the customer doesn’t have to be reminded to repurchase. This is also beneficial for sales projections. You can count on a certain number of sales based on the number of subscriptions. Here are some other subscription business model advantages:
A well-organized subscription business model can provide many benefits to both the consumer and the business. Ensure easy access to information about the service and options for customers who want to change the frequency of deliveries or cancel.
One subscription model disadvantage is that it may be difficult to obtain customer commitment to a product in the initial phase. Some companies may offer both standard purchasing and subscription options to allow customers to try out their product or service before committing to a subscription. The disadvantage of providing this option is that they may never choose to fully commit to a subscription. Offering the product or service at a discounted price for subscribers is a common way to incentivize subscription purchases.
Another disadvantage could be a high unsubscribe rate. This could throw off sales projections and cause cash flow concerns. With a product subscription, your company may want to consider incentivizing a free product after a certain number of automatic subscription purchases.
In most cases, you’ll need to keep the customer’s payment information on file. Make security a priority to prevent this information from getting into the wrong hands and prevent liability for card theft.
Now that you understand the subscription business model definition, there are countless ways to execute a successful subscription business model. One of the first things to take into consideration is choosing the best technical implementation. For online businesses or apps, there are a number of software companies with subscription capabilities. You need to make sure this software integrates with your website platform and payment processor for a seamless user experience. Not all software has the same capabilities, so consider requesting a demo before purchasing.
If you’re manually taking subscriptions, prioritize the security of payment information and adhere to all Federal Trade Commission (FTC) standards and regulations.
A subscription business model is founded on the idea of selling a product or service to receive automatic recurring revenue.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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