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What Is a Subscription Business Model?
Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue. They focus on customer retention over customer acquisition. In essence, subscription business models focus on the way revenue is made so that a single customer pays multiple payments for prolonged access to a good or service instead of a large upfront one-time price. Now, the economy is trending toward more subscriptions instead of ownership for cars, software, entertainment, and shopping. This increases the lifetime value (LTV) of the customer.
Key Takeaways
- Subscription businesses involve selling a product or service and collecting recurring revenue for continuing to provide that service or product.
- Most subscription businesses charge either monthly or yearly.
- One of the first and easiest to understand subscription business models is magazine subscriptions.
- Thanks to the rise of technology, many businesses are moving from one-time purchases to subscription models.
How Subscription Business Models Work
Subscription business models were first introduced in the 1600s by newspaper and book publishers. With the rise of technology and software as a service (SaaS) products, many companies are moving from a business revenue model where revenue is made from a customer’s one-time purchase to a subscription model where revenue is made on a recurring basis in return for consistent access to the delivery of a good or service.
The subscriptions are generally renewed and activated automatically with a pre-authorized credit card or checking account. The benefit of subscription business models is the recurring revenue, which also helps create strong customer relationships.
Types of Subscription Business Models
Subscription business models can include a variety of companies and industries. Those industries include cable television, satellite radio, websites, gyms, lawn care, storage units, and many more.
In addition, there are newer-aged businesses that operate subscription models, such as subscription boxes. Subscription box businesses include meal delivery services and meal delivery kits. As well, there are subscription business models for accessing online storage for documents and photos, such as the Apple iCloud.
Beyond that, there are products that are shipped directly to your home, such as personal care products. Companies in this area include Dollar Shave Club and Birchbox.
Example of a Subscription Business Model
The easiest subscription business model to understand is that of a magazine company. Instead of selling a magazine as a standalone product where a customer makes a one-time purchase, magazine companies offer a subscription service for the delivery of a weekly or monthly magazine. In this model, instead of having customers make single purchases, magazine companies offer monthly payments for a yearly subscription to access their monthly magazines.
If a magazine company offers a monthly magazine service, instead of as a single magazine purchase, it offers its service as a 12-month service comprising 12 purchases. This makes the revenue model of the company stronger because it guarantees itself sales over a 12-month period rather than a single purchase. This makes revenue forecasting and business planning easier since a company can project its sales farther out with more accuracy.
Magazine companies are not the only model that uses a subscription business model. With technology, almost any product or service can now be a subscription model.