Subscription business models – the basics: Types of model, how they work and how to choose one

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  1. Introduction
  2. How do subscription business models work?
  3. Types of subscription business model
  4. What types of business use subscription business models?
  5. Pros and cons of each subscription business model
    1. Membership subscriptions
    2. SaaS
    3. Box subscriptions
    4. Content subscriptions
    5. Usage-based subscriptions
    6. Freemium subscriptions
    7. Community subscriptions
  6. Benefits of using subscription business models
  7. How to pick the right subscription business model

In recent years, the rise of subscription businesses has expanded to a wider range of sectors. Subscription e-commerce was expected to generate more than US$38 billion in revenue by the end of 2023 – more than double the amount registered in 2019. Businesses that might never have considered using a subscription model before have found a reason to integrate one – and they've gained access to several benefits as a result.

Subscription models offer businesses a steady revenue stream, turning one-off transactions into recurring income. This regularity allows for more accurate forecasting and budgeting, leading to smarter resource allocation. These models also help promote strong customer loyalty because subscribers are more likely to become familiar with a brand and continue their patronage. The data collected from subscribers can also provide insights into customer behaviour and preferences, which can inform product development and marketing strategies. These models also simplify decision-making for customers, reducing the burden of repeat purchases and potentially reducing churn.

As advantageous as these models can be for businesses, they require complicated decisions about which type of subscription model to use and how to tailor one to fit particular needs. Selecting the right subscription model influences a business's ability to build lasting customer relationships and maintain a steady revenue stream. It requires thorough knowledge of your product, your customer base and the specific demands of your market. Below, we'll explain what you need to know about various subscription models, what types of business each is best suited to and how to choose the right one.

What's in this article?

  • How do subscription business models work?
  • Types of subscription business model
  • What types of business use subscription business models?
  • Pros and cons of each subscription business model
  • Benefits of using subscription business models
  • How to pick the right subscription business model

How do subscription business models work?

Subscription models, while diverse in application, share operational characteristics that make them a reliable revenue source and a method to maintain customer relationships. Let's explore how they operate:

  • Recurring payments: At the core of the subscription model is the idea of regular payments. Customers pay repeatedly at set intervals, giving them continued access to a product or service. This could be weekly, monthly or yearly, providing businesses with a predictable income.

  • Automated billing: Businesses usually set up automated billing systems to manage these ongoing payments. This ensures that charges are applied to the customer's payment method without requiring manual entry each cycle, saving time and reducing errors.

  • Customer accounts: Subscribers often have personal accounts where they can manage their subscriptions. This might include updating payment information, pausing or cancelling the subscription, or changing the subscription tier.

  • Tiered access: Many subscription services use tiered structures, in which different levels of investment give different levels of access or features. This allows customers to choose how much they want to invest based on their needs and budgets.

  • Free trials and conversions: Providing free trials is a common strategy to attract subscribers. The goal is to demonstrate the value of the service, so that users are willing to pay once the trial ends.

  • Content and product updates: Businesses must continually update their products or content if they want to keep subscribers engaged. This can mean adding new features, content or products to the service, encouraging ongoing use and reducing churn.

  • Customer service: Subscriptions aren't just transactions; they represent a relationship between the business and the customer. As such, responsive customer service is important for handling any issues, questions and feedback that may arise.

  • Metrics and analysis: Monitoring metrics – such as churn rate, growth rate and lifetime value of a customer – is important for gauging performance. These insights enable businesses to adjust their strategies and improve their services.

  • Legal and compliance: Adhering to legal standards for subscription services, such as transparent terms of service and easy cancellation policies, is good practice – and it's often required by law.

  • Marketing and retention strategies: Keeping subscribers is just as important as acquiring new ones. Effective marketing to existing customers can include personalised deals, loyalty rewards or regular communication about new features and benefits.

A deep understanding of how subscription models operate helps businesses grow their subscription services while giving customers a dependable and satisfying experience.

Types of subscription business model

Subscription services have become part of everyday life for many, with Americans spending an average of US$219 a month on subscriptions. Here's an overview of subscription models:

  • Membership subscriptions: This model grants access to exclusive services or products for a regular fee. Think of your gym memberships or online clubs, where the value is in becoming part of a select group that enjoys certain perks, such as special content or services unavailable to non-members.

  • Software-as-a-service (SaaS): Instead of purchasing software outright, users of this model pay to access it on a subscription basis. This gives them access to software that's always up to date, with the provider handling all the maintenance and updates.

  • Box subscriptions: Customers receive a regularly scheduled box of items. These could include food, beauty products or books. The appeal of this model comes from the surprise element and the curated experience, as well as the convenience of home delivery.

  • Content subscriptions: This model is prevalent among digital media platforms, where users pay for ongoing access to content, such as news, videos or music. Services such as streaming platforms fall under this model, providing a library of content in exchange for a subscription fee.

  • Usage-based subscriptions: The electricity bill is a classic example, where the fee is based on the amount of the service used. This model is being updated in the digital age with cloud services, where you pay for the amount of data storage or bandwidth you use.

  • Freemium subscriptions: Businesses provide a basic service at no cost and charge for advanced features. This is common in apps and online services, where the free version might come with ads or limited capabilities, while the paid version unlocks everything.

  • Community subscriptions: Aimed at creating a network or community around a service or product, this model is often combined with a membership model, where the value lies in the connectivity and network benefits offered to subscribers.

Businesses are finding new ways to maintain customers and keep sales consistent. These new strategies are transforming entire industries by altering the ways in which people get and use products and services. This change is also influencing how businesses think about their long-term success and stability.

What types of business use subscription business models?

We've discussed the trend of more kinds of business embracing subscriptions because they can be customised to fit what the customer and business need. Now let's look at the kinds of business that often choose this strategy:

  • Media and entertainment: Businesses that provide streaming of films, music and digital publications often rely on monthly or yearly subscriptions. These businesses have to continually update their libraries and launch exclusive content to attract and retain subscribers.

  • Software and technology: Many software providers have shifted from one-off purchases to subscription models that grant users access to applications for a recurring fee. This includes productivity tools and design software – products that are often updated with the latest features without the need for a new purchase.

  • Retail and e-commerce: Some retailers provide subscription boxes, whereby customers receive a selection of items regularly. This could be food, clothing or beauty products, often curated to the tastes and preferences of the customer.

  • Health and fitness: Gyms and personal wellness services provide monthly access to their facilities or platforms. They might also sell subscriptions for vitamins and supplements, building on inherent customer interest in health products.

  • Education and learning platforms: Online courses and educational platforms often operate on subscription models, allowing learners to access a range of courses and materials for a regular fee. This makes education more accessible and allows for continual learning.

  • Food and meal kits: Many businesses send out regular boxes of food, snacks or meal kits with recipes and pre-measured ingredients. This combines convenience with the joy of cooking, making it easier for people to enjoy home-cooked meals without the hassle of food shopping.

  • Personal care and hygiene: Businesses provide regular deliveries of personal care items for customers, including shaving razors and sanitary products. These services keep customers stocked up on basic necessities, while allowing them to cancel or pause subscriptions as needed.

  • Pet care: Pet owners can subscribe to receive regular deliveries of pet food, toys and treats. This is beneficial for keeping pet care products always on hand and can be tailored to the pet's size, breed or dietary restrictions.

  • Transport and mobility services: Some car manufacturers and bike-share programmes have subscriptions for the use of their vehicles. Instead of owning a car or bike, customers can pay for access as needed, often including insurance and maintenance.

  • Speciality services: This includes niche markets, such as access to premium research reports, specialised databases, or industry-specific tools and resources. These services provide value by delivering specialised content that's regularly updated and maintained.

These businesses use subscriptions to consistently deliver what their customers need, making things more convenient and often adding a personal touch to make the experience better. Their flexibility means that almost any business can use these models to build solid customer ties and steady sales.

Pros and cons of each subscription business model

Each subscription type comes with benefits and challenges. Let's explore the upsides and downsides:

Membership subscriptions

  • Pros: These create an exclusive club atmosphere that can make members feel special, which helps with retention. They can be paired with a variety of services or products, making them adaptable.

  • Cons: The challenge is in maintaining the value that justifies the membership cost over time. If the perceived value drops, so can the membership numbers.

SaaS

  • Pros: For businesses, the recurring revenue is great for stability. Customers can also get continual updates and support, which means the software improves over time without additional purchases.

  • Cons: The onus is on the provider to deliver constant improvements and security updates, which can be resource intensive. Users might also dislike paying indefinitely for software.

Box subscriptions

  • Pros: Customers love the convenience and surprise element of these subscriptions. They can be personalised, which can make customers feel valued and increase loyalty.

  • Cons: Logistical challenges, such as shipping and handling, can be complex and costly. Creating a consistently appealing box can also be tough, leading to subscription fatigue.

Content subscriptions

  • Pros: They allow content creators monetise their work while giving subscribers access to a wide range of content. It's also a way to aggregate content and provide a one-stop shop for customers.

  • Cons: The abundance of free content makes it difficult to persuade customers to pay. Content must be continually refreshed to keep subscribers engaged, which requires labour and resources.

Usage-based subscriptions

  • Pros: This model ties cost to use, which can be more fair from a customer's perspective and can scale with a business customer's growth.

  • Cons: Unpredictable costs can be a downside for customers, and businesses might find it harder to predict revenue compared with flat-rate models.

Freemium subscriptions

  • Pros: They're a great way to entice users to try a service with no commitment, potentially leading to paid upgrades if they find value in the service.

  • Cons: Converting free users to paid subscribers can be challenging, and there's always a balance between providing enough value for free and holding enough back for paid tiers.

Community subscriptions

  • Pros: Building a community around a product or service can improve loyalty and provide a platform for feedback and development.

  • Cons: It requires substantial effort to nurture and maintain an active community, and subscribers might not see the value if they feel that there isn't proper engagement.

Benefits of using subscription business models

Embracing a subscription-based strategy can give businesses a tool with which to expand and evolve. Subscription models can allow for predictable revenue streams, increased customer engagement and other benefits.

Here's an overview of each of the key benefits:

  • Predictable revenue: A subscription model establishes a regular revenue stream. This allows businesses to forecast with a higher degree of accuracy, which in turn supports more informed decision-making regarding budgeting, investing in growth and resource allocation.

  • Customer retention: By locking in a customer for a set time, businesses can shift their focus from the short-term transactional mentality to building long-term relationships. This can lead to reduced marketing costs and a more stable customer base.

  • Data-driven insights: The frequent interaction with customers provides a wealth of data on their preferences and behaviour. This information is valuable for tailoring marketing efforts, improving products and customising user experiences. In fact, studies show that organisations that generate insights from their customer data outperform peers in sales growth by up to 85%.

  • Scalability: Subscription models can be more readily scaled than traditional business models. As the subscriber base grows, the infrastructure to support more customers typically grows in a more linear manner, avoiding the need for massive capital expenditure.

  • Increased customer lifetime value: With the opportunity to sell repeatedly to the same customer, the lifetime value of a customer in a subscription model can far exceed that of one-off transactions.

  • Flexibility in offering: Subscriptions allow for the testing and development of new products or services, with immediate customer feedback. This agility enables businesses to adapt and evolve without major overhauls or sunk costs.

  • Cross-selling opportunities: Studies show that 71% of customers expect businesses to deliver personalised interactions, which can entail offering targeted promotions or relevant product recommendations. This means that subscribers engaged in a long-term relationship are more receptive to additional upgrades and add-ons, increasing the average revenue per user.

  • Community building: Beyond individual subscriptions, businesses can create communities around what they're selling, leading to greater brand loyalty and a self-sustaining environment that can provide valuable feedback and drive organic growth through word of mouth.

  • Reduced uncertainty: The commitment of a subscription reduces uncertainty around demand, allowing for better inventory management, staffing and resource planning.

How to pick the right subscription business model

Subscription business models have become a mainstay of the market, largely because of their ability to adapt to various industries and customer needs. The flexibility of payments technology – coupled with shifting customer habits – means that there's a viable subscription strategy for far more businesses than before.

However, this doesn't mean that every model is a perfect fit for every business. Each type adapts to specific market demands and customer preferences, providing recurring revenue and building a solid base for growth. Below is an overview of the process by which you can work out which model is the best fit for your business:

  • Assess your product or service: Look closely at what you're offering. Is it a physical product that people need regularly, such as toiletries or food? Or is it a service that provides ongoing value, such as software or entertainment? The nature of your product or service will often suggest the type of subscription model that could work best.

  • Understand your customers: Who are they and what do they value? Do they seek convenience, exclusivity or flexibility? The more you know about your customers, the better you can tailor a subscription model to their habits and preferences.

  • Analyse your market: What are your competitors doing and what are the market trends? A saturated market might require a subscription model that sticks out, while a less competitive market might give you more room to experiment with different models.

  • Financial modelling: Map out different subscription structures and project their financial outcomes. Consider the price points, cost of goods sold, customer acquisition costs and the lifetime value of a customer. This will help you learn about the financial sustainability of each model.

  • Test and learn: Before rolling out a full-scale subscription model, conduct a pilot test. Bring your subscription to a small, controlled group of customers, and gather feedback. This test phase can reveal potential operational challenges and customer preferences.

  • Scalability and logistics: Can your current operations handle a subscription model? If you have a box subscription, do you have the means to package and dispatch products regularly? The logistical side of your business model must be able to scale with your customer base.

  • Regulatory compliance: Subscriptions are often subject to specific regulations, especially around customer data protection and auto-renewal policies. Make sure your model complies with all applicable laws.

  • Technology infrastructure: Do you have the right technology to support a subscription model? This includes customer relationship management systems, billing and payment processing, and data analytics tools.

  • Customer support: Subscribers expect a higher level of service. You'll need a capable customer support system to handle enquiries, changes in subscription details and troubleshooting.

  • Feedback loops: Once your subscription model is operational, establish feedback loops to continually improve. Collect and analyse customer feedback, and monitor key performance indicators to refine your product.

  • Plan for evolution: The market will change, and your subscription model should be flexible enough to adapt. Stay attuned to customer needs, and be ready to adjust your model as those needs change.

Picking the right subscription model isn't just a one-off decision – because your business is ever-evolving, it's a good idea to routinely revisit your business model to make sure it's still relevant. It's about striking a balance between what's working and what could work better. Keep adjusting your strategy, gathering customer feedback and adapting to industry trends. With the right subscription model, businesses can create a stable foundation for growth and a loyal customer base that's engaged for the long haul.

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