Subscription business models are beneficial for many organizations because they encourage customer success and improve buyer retention.
Nowadays, subscription models are used in nearly every industry. Growing companies like Netflix, Dollar Shave Club, and Microsoft have been using a subscription-based revenue model for years with much success. The good news? Your company can, too.
In this post, let's discuss what a subscription business model is, how it works, and the benefits of using this model.
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.
Let's learn a little bit more about how this business model works in the next section.
How a Subscription Model Works
In a subscription model, customers are charged on a recurring basis for a product or service. They choose how long and how often they want to receive each offer, and most subscriptions provide the option to renew or cancel at any time.
Think of a subscription as a contract between you and the customer. The customer agrees to pay for a product or service for a period of time and the business fulfills that offer so long as the customer completes their recurring payments. When the contract is up, the customer has the option to renew or cancel their subscription.
The diagram below illustrates what this looks like.
A great example is your local newspaper. While you can buy newspapers individually, most who read them have a subscription. That way, you get a newspaper delivered to your front door for a fixed rate, rather than having to go to the store to purchase one.
Let's explore more benefits of subscription models in the next section.