What is the subscription model?
The subscription sales model is a way of marketing services or products in exchange for a fixed amount of money. By paying a fee (monthly or yearly), the right to receive a product or consume a service for a certain period of time is purchased.
To understand how the subscription model works, two key elements must be taken into account: the product we buy and the way in which we pay for it. This way, a business that has a subscription model can offer its products or services for sale to its customers on a regular basis in exchange for a recurring payment for the sale or service provided. Thus, we can see that these two elements come into play in any subscription-based purchase, where a good is exchanged for a form of payment characterized by periodicity.
The subscription model itself is nothing new, it has been present in many businesses such as gyms or magazines for years. However, with the recent digitization of businesses, subscriptions have become a great advantage for many businesses. We find subscriptions mainly in software tools (Saas), but it is also becoming more and more common to do so in other types of platforms such as online schools or even consumer products stores.
How to start managing subscriptions
Starting to manage subscriptions in your business will depend on the type of products or services you market. Depending on the way in which the user consumes it, the sector, the size of your company or the objectives you are pursuing, you will have to adopt one type of subscription model or another. Before, people thought that integrating subscription sales was only feasible for certain types of businesses (those that offer recurring services), but in reality, there are increasingly more strategies that traditional businesses can implement.
To do this, the most important thing is to know what types of subscription models exist and which one best suits your business model, what kind of services you can start monetizing, and how to turn it into a business opportunity.
Types of subscriptions
Next we will go deeper into the types of subscriptions that exist. These subscriptions depend on the sector or industry in which they work, so the field your business is in will influence your decision, if it's one type of subscription or another. Here we will help you to choose the right subscription for your business:
Normally, if a store has physical products with a recurring use or consumption, they will opt for a subscription-based model. For example, there are monthly subscription boxes that are filled with products that customers use daily, contact lenses, dog food, coffee etc. These products are consumed every month and with a subscription box, they can be delivered to your home so that they are available whenever you need.
Software that are distributed as a service (SaaS) are usually sold with a subscription model of the user's choice, either monthly or annually. The digital tools that we generally hire and use, such as marketing (Hubspot), design (Adobe Creative Cloud), communication (Slack) or even cloud storage (iCloud), are a clear example of a monthly subscription in exchange for a service.
This is any type of service that is attended on a recurring basis and, therefore, a fee is paid, such as the gym, training schools or online news. More and more service companies are emerging that include a subscription option as a sales strategy, as is the case with many hotels, which offer advantages if a fixed monthly fee is paid.
The type of subscription model we are most familiar with and consume the most is in the entertainment sector. In order to have unlimited access to content, on-demand streaming services offer this type of subscription. Platforms such as Netflix, Spotify, HBO... are the forerunners of this model, which is also found in other types of platforms such as online video games.
Advantages and disadvantages of a subscription model
Having a subscription model is a great opportunity for any business that has the possibility to expand. It is the most convenient model for both businesses and customers and for this very reason they have found their place in recent years, especially thanks to the digitization of business. We will expand on some of the advantages below:
Advantages of the subscription model for businesses
In order to apply this type of model in a business, it is necessary to know the main benefits of doing so. Among others, these are the most important advantages of using a subscription model in your business.
- Revenue forecasting. Having predicted income thanks to recurring payments is definitely a peace of mind when thinking about the stability of a business, since it is a guarantee that every month you will have a fixed and predefined income. The viability of the business can be better foreseen with the income from subscriptions, even much more in advance.
- Stock control. With a subscription model, businesses can have better and greater control over the stock. By having a forecast of those customers who will receive a product or service, it is easier to calculate how many products will be needed or what resources will be needed to provide a service, which is a great advantage for businesses.
- Risk reduction. If the number of monthly customers is defined in advance thanks to subscription models, better decisions can be made about the purchase of raw materials, resources, payments to suppliers, etc., which is a decisive element in reducing risk in a company's activities and finances.
- Customer loyalty. With a subscription model in your business you can better understand your customers' needs, as well as ensure their loyalty to your services or products. By signing up for a subscription, users find it easier to consume, which increases customer retention and minimizes the abandonment rate.
Advantages of the subscription model for customers
The subscription model will only work if we know how to provide value to our customers. Understanding what type of subscription they need is critical. Here are some examples:
- Secured stock. There are products that are consumed monthly. If a customer subscribes to a product or service every month, it is probably because he needs it. In this sense, the subscription model allows you to ensure availability every month, in addition to saving the time of physically going to pick it up. This option is very convenient because with a subscription, the products arrive at your doorstep every cycle, without having to renew that order. Thus, customers find value in the availability of products and prices, a benefit to consider in your subscription model.
- Latest news by subscription. Making the latest news available to customers is easier when they choose the subscription model for their purchases. In order not to miss out on anything, customers subscribe in advance to clothing and/or cosmetics launches and receive a monthly box with all the new products. More and more companies are offering these personalized experiences for their customers and aim to manage subscription-based shopping for their customers.
- Exclusive benefits. Another benefit of subscription from the consumer's point of view, is the possibility of preferential access to exclusive content. This advantage is particularly prevalent in business models related to entertainment or education. Subscribed customers can have access to exclusive content that they can watch whenever and wherever they want, as well as discounts and personalized offers for the subscriber community.
Disadvantages of the subscription model
Compared to other types of business, the subscription model requires more organization. This means, among other things, having better structured logistics, for example, because products will have to be shipped to our customers on a recurring basis and in the most automated way possible. The same applies to services, which must be offered automatically in the case of SaaS or platforms.
On the other hand, thinking about customers is also different from a more traditional business model. In a subscription model, customers must really perceive the value of the product we are offering in the short term, as they will subscribe to it for a longer period of time than a one-off purchase.
The churn rate will be your star metric to measure if your subscription model is profitable and if customers perceive value (the number of people who unsubscribe or cancel a subscription)
Recurring payment: an opportunity for growth
The difference of the subscription model are the opportunities of growth around it . Some of the techniques that can be used to sell more and generate more value include cross-selling and upselling. For example, in cross-selling, if you sell a subscription to a contact lens business, you can offer your customers other products that complement the main product and have additional value, such as contact lens fluid. On the other hand, with upselling you can think about increasing the quantity of contact lenses delivered monthly for an additional cost or create differentiated plans based on customer needs, with a higher price for higher plans. As we work on our subscription model, we will discover what our customers' real needs are, what role we play and what value we bring.