Subscription revenue 101: How it works and how businesses can make the most of it

Last updated March 6, 2024
  1. Introduction
  2. What is subscription revenue?
  3. Types of subscription revenue models
    1. Subscription model
    2. Usage-based model
    3. Freemium model
    4. Membership model
    5. Retainer model
  4. What types of businesses use subscription revenue models?
  5. Benefits of subscription revenue for businesses
    1. Predictable revenue and cash flow
    2. Advanced customer insights
    3. Customer relationship dynamics
    4. Business model scalability
    5. Operational efficiency and innovation
    6. Revenue diversification
    7. Industry-specific insights
  6. Challenges with subscription revenue for businesses
    1. Acquisition and activation
    2. Retention and churn
    3. Operational and product challenges
    4. Data and analytics
    5. External factors
  7. Subscription revenue best practices
    1. Value proposition and customer acquisition
    2. Customer onboarding and activation
    3. Customer retention and churn management
    4. Pricing optimization and revenue growth
    5. Data-driven insights and continuous improvement
    6. Bonus best practices
  8. How Stripe can help

Subscription revenue—also known as recurring revenue—can offer businesses advantages such as more reliable financial forecasting and valuable insights from customer data. But subscription revenue requires maintaining a continuous cycle of billing and engagement, which comes with considerable complexity and upkeep. Overall, though, the benefits outweigh the challenges in this quickly expanding market: Gartner projected global software-as-a-service (SaaS) spending would reach nearly $200 billion by the end of 2023 and spending on the broader cloud services industry would total over $590 billion.

Below, we’ll cover what you need to know about subscription revenue: how it works, what it looks like for different types of businesses, its challenges and benefits, and how to improve it.

What’s in this article?

  • What is subscription revenue?
  • Types of subscription revenue models
  • What types of businesses use subscription revenue models?
  • Benefits of subscription revenue for businesses
  • Challenges with subscription revenue for businesses
  • Subscription revenue best practices
  • How Stripe can help

What is subscription revenue?

Subscription revenue is a business model that generates consistent income at regular intervals, typically through ongoing customer payments. This model is common in a variety of sectors, including technology, media, utilities, and subscription-based services. The structure lets businesses predict income streams with greater accuracy compared to one-time transactions.

Types of subscription revenue models

Recurring revenue can work in several ways. Here are the most common ones and the pros and cons of each:

Subscription model

Pros

  • Predictable income: Regular recurring fees provide stability and enable accurate financial planning.

  • High customer lifetime value (CLTV): Loyal subscribers contribute significantly to overall revenue over time.

  • Strong engagement: Ongoing value delivery keeps customers engaged and minimizes churn.

  • Data-driven insights: Customer behavior data helps businesses personalize experiences and improve products and services.

Cons

  • Continuous value creation: This model requires constant innovation and feature updates to retain subscribers.

  • High acquisition costs: Attracting customers can be expensive, especially in competitive markets.

  • Churn risk: Losing subscribers can negatively affect revenue and business growth.

  • Price sensitivity: Subscribers are sensitive to price changes, so businesses must employ pricing strategies with care and precision.

Considerations

  • Product/service suitability: Is the service or product your business provides well suited for ongoing use and value delivery?

  • Pricing strategy: Determine the right pricing tiers and monetization methods.

  • Churn management: Implement strategies to retain subscribers and combat churn.

  • Customer acquisition: Focus on effective marketing and customer acquisition channels.

Usage-based model

Pros

  • Transparent pricing: Customers pay only for what they use.

  • Scalability: Revenue scales with usage, making it adaptable to varying customer needs.

  • Reduced churn: Customers feel satisfied they are getting their money’s worth, which has the potential to reduce churn.

  • Market reach: Can attract cost-conscious customers and expand market penetration.

Cons

  • Fluctuating revenue: Income depends on usage patterns and is difficult to predict.

  • Complex tracking systems: Requires usage tracking and metering infrastructure.

  • Low CLTV: Customers who use your service only occasionally will have a limited overall value.

  • Competition: The availability of free or alternative solutions may make it difficult for businesses to attract customers.

Considerations

  • Usage patterns: Analyze potential usage patterns and design pricing accordingly.

  • Tracking infrastructure: Invest in reliable usage tracking and billing systems.

  • Minimum usage thresholds: Implement minimum usage fees to mitigate low-usage scenarios.

  • Competitive landscape: Understand and address potential competition from free alternatives.

Freemium model

Pros

  • Low barrier to entry: Free tier attracts a large user base, which facilitates acquisition.

  • Upselling potential: Convert free users to paid plans with premium features and benefits.

  • Brand awareness: Widespread adoption increases brand awareness and market reach.

  • Data collection: Free users provide valuable data for improving the paid version.

Cons

  • Low conversion rates: Converting free users to paying customers can be challenging.

  • Maintaining value balance: Strike a balance between free and premium features.

  • High marketing costs: Acquiring users at scale can be expensive.

Considerations

  • Clear value differentiation: Define the clear value proposition of free and paid tiers.

  • Effective user segmentation: Identify and target potential upsell segments within the free base.

  • Simple upgrade process: Make the process of upgrading to paid plans easy and user-friendly.

  • Retention strategies: Implement strategies to keep free users engaged and interested in upgrading.

Membership model

Pros

  • Strong community: Creates a loyal and engaged community around your brand or niche.

  • Recurring revenue: Provides a steady stream of income from membership fees.

  • Cross-selling opportunities: Sell members additional products or services.

  • High customer satisfaction: Exclusive content and benefits can lead to high customer satisfaction.

Cons

  • Niche focus: Requires a well-defined target audience and niche market.

  • High acquisition costs: Attracting members can be expensive, especially in competitive niches.

  • Content creation: Creating exclusive content and providing ongoing value can be resource-intensive.

  • Churn risk: Members may leave if there are substantive changes or if they believe they are not getting enough value.

Considerations

  • Niche market analysis: Define your target audience and its needs and desires.

  • Value proposition design: Craft a compelling value proposition that resonates with your target audience.

  • Content strategy: Develop a consistent and valuable content strategy for your members.

  • Retention programs: Implement strategies to keep members engaged and prevent churn.

Retainer model

Pros

  • Predictable income: Fixed monthly fees provide predictable revenue and cash flow stability.

  • High CLTV: Long-term contracts create strong bonds with clients and produce recurring revenue.

  • Deep client relationships: Ongoing engagement fosters trust and loyalty, leading to referrals and repeat business.

  • Reduced churn: Predictable income and strong relationships minimize client turnover.

Cons

  • High delivery expectations: Clients expect consistent value and exceptional service.

  • Scalability limitations: Expanding the client base may require additional resources and expertise.

  • Contractual dependency: Revenue is tied to individual contracts, making the business vulnerable to client churn.

  • Scope creep: Define and manage project scope effectively to avoid underdelivering or spreading your staff too thin.

Considerations

  • Value proposition clarity: Clearly define the scope of service and expected deliverables within the contract.

  • Performance metrics: Establish clear performance metrics to track progress and demonstrate value to clients.

  • Client communication: Maintain open and regular communication to build trust and manage expectations.

  • Scalability strategies: Develop strategies to efficiently handle increased client workload without compromising quality.

What types of businesses use subscription revenue models?

Recurring (or subscription) revenue models are used widely across a variety of industries. Customers pay a recurring fee, typically monthly or annually, to access a product or service. Recurring revenue models are popular for their ability to generate steady, predictable income and build customer loyalty. Types of businesses that use this model include:

  • Streaming services: Businesses such as Netflix, Hulu, and Disney+ have monthly or annual subscriptions for access to movies, TV shows, and original content. Music streaming platforms such as Spotify and Apple Music also fall under this category.

  • SaaS: Software providers such as Microsoft, Adobe, and Salesforce license their products on a subscription basis, replacing the traditional one-time purchase model. This lets subscribers benefit from regular updates, cloud-based collaboration, and flexible pricing models.

  • Subscription boxes: These services deliver curated items to subscribers regularly. Examples include meal kit services such as HelloFresh, beauty product boxes such as Birchbox, and clothing subscriptions such as Stitch Fix.

  • Digital news and magazines: Historically, newspapers and magazines have used a subscription model to sell their physical publications, and most have similar versions for online content. Examples include the New York Times, the Wall Street Journal, and the Atlantic.

  • Fitness and wellness: Gyms such as 24 Hour Fitness use subscription models, and online fitness platforms that provide virtual classes have adopted this model.

  • Cloud computing and data storage: Providers such as Amazon Web Services (AWS), Google Cloud, and Dropbox provide cloud storage and computing services on a subscription basis.

  • Educational platforms: Online learning platforms such as Coursera, LinkedIn Learning, and MasterClass offer subscriptions, which lets customers access a wide range of courses and educational content.

  • Gaming services: Services such as Xbox Game Pass and PlayStation Now provide access to a library of games for a monthly fee.

  • Professional tools and services: Tools for industries such as graphic design, project management, and coding—such as Canva, Asana, and GitHub—often operate on a subscription model.

  • Home and lifestyle services: Services such as home security monitoring (for example, ADT) and smart home technology subscriptions (for example, Nest) are also popular.

Benefits of subscription revenue for businesses

Predictable revenue and cash flow

  • Cash flow precision: Subscription models allow for more precise financial forecasting, which is important for decisions such as staffing, inventory management, and capital investments.

  • Mitigation of market volatility: This model buffers businesses against market fluctuations, providing a more stable revenue stream during economic downturns.

  • Efficient resource allocation: With predictable income, businesses can allocate resources more effectively, optimizing operational costs and investment in growth initiatives.

Advanced customer insights

  • Data-driven product development: Ongoing customer interaction provides a wealth of data that lets businesses develop better products and services that meet evolving market needs.

  • Dynamic pricing strategies: Access to detailed customer usage patterns supports the development of more sophisticated pricing strategies, potentially increasing profitability.

  • Targeted marketing campaigns: Insights from customer data help create more effective, targeted marketing campaigns, which can improve conversion rates and reduce marketing waste.

Customer relationship dynamics

  • Proactive customer service: Regular interactions help businesses anticipate and address customer needs proactively, reducing churn.

  • Customized customer experiences: Subscription models provide the framework for more personalized products or services, which can lead to increased customer retention.

  • Feedback loops: Continuous customer feedback helps refine products or services, leading to improvements that are more aligned with customer needs.

Business model scalability

  • Scalability with lower incremental costs: Once the infrastructure for a subscription service is established, scaling up often involves lower incremental costs compared with those of traditional sales models.

  • Reduced customer acquisition cost over time: As the brand grows and its popularity spreads via word of mouth, the cost of acquiring customers typically decreases.

  • Global market reach: The digital nature of many subscription services lets businesses expand their reach globally with relatively low overhead.

Operational efficiency and innovation

  • Automated processes: Businesses can manage subscriptions through automated systems, leading to substantial operational efficiencies.

  • Focus on innovation: The stability of revenue streams lets businesses focus more attention on innovation and less on short-term sales targets.

  • Continuous improvement cycle: The subscription model facilitates a continuous improvement cycle, where ongoing customer feedback directly informs product or service enhancements.

Revenue diversification

  • Diversified revenue streams: By creating different tiers and additional services, businesses can diversify their revenue streams, reducing dependency on a single product line or market segment.

  • Cross-selling opportunities: The subscription model fosters an ongoing customer relationship that opens opportunities for cross-selling complementary products and services.

Industry-specific insights

  • Software and digital services: For SaaS and digital service providers, the subscription model aligns with the continuous delivery of software updates and new features, keeping the product relevant and competitive.

  • Content and media services: Media businesses can provide subscribers with fresh content consistently, keeping them engaged and reducing churn.

Challenges with subscription revenue for businesses

Though the subscription revenue model has key benefits, it comes with challenges, including:

Acquisition and activation

  • Customer acquisition cost (CAC): In competitive markets, the expense of attracting subscribers can be high. Developing targeted strategies that emphasize unique value propositions is a key part of persuading customers to sign up—and to justify ongoing payments.

  • Onboarding difficulties: A cumbersome onboarding process can result in early churn. Streamlining the journey from sign-up to full engagement is important to retaining new subscribers.

  • Predicting demand: Forecasting subscriber growth is complex and affects decisions related to inventory, resource allocation, and potential risks of over- or underprovisioning services or products.

Retention and churn

  • Churn management: Maintaining subscriber engagement requires ongoing effort. Businesses must identify factors that lead to churn and implement effective retention strategies.

  • Price sensitivity: Establishing a pricing strategy that balances perceived value with affordability is challenging. Subscribers are sensitive to price changes, which can be a big churn catalyst.

  • Subscription fatigue: Offering customers too many subscription options or features can lead to confusion and dissatisfaction, which can result in cancellations.

Operational and product challenges

  • Delivery and fulfillment: Ensuring consistent and reliable delivery of physical goods is important for customer satisfaction and brand perception. For digital services, maintaining uptime and service quality is just as important.

  • Content creation and value delivery: Creating valuable content and experiences regularly to justify recurring fees requires substantial investment in innovation and content production.

  • Scalability and automation: Scaling infrastructure and processes to accommodate growing subscriber bases while maintaining quality and efficiency is a major operational challenge.

Data and analytics

  • Churn prediction and modeling: Developing accurate predictive models for churn based on customer data is a complex yet necessary task for proactive churn management.

  • Customer segmentation and personalization: Segmenting large subscriber bases and personalizing sales options pose challenges for businesses and require sophisticated data analysis tools and techniques.

  • Attribution and measurement: Determining the impact of specific marketing efforts and product features on revenue and growth within a subscription model involves intricate data analysis and attribution models.

External factors

  • Market competition: Retaining subscribers and attracting more hinges on differentiating your business in a competitive landscape—continuously.

  • Economic downturns: Changes in customer spending during economic downturns can substantially affect subscription revenues, calling for adaptive business strategies.

  • Technological disruption: Adapting to new technologies and evolving customer preferences is key to the sustainability of a subscription model. Often, this requires agility and a willingness to switch business strategies.

Subscription revenue best practices

Value proposition and customer acquisition

  • Define and communicate your value proposition clearly: What distinct value do you provide that justifies recurring payments? Confirm that it resonates with your target audience and addresses customer challenges.

  • Craft targeted acquisition strategies: To reach your ideal customers, go beyond traditional marketing and explore content marketing, influencer partnerships, and referral programs.

  • Offer free trials and freemium models: Lowering the barrier to entry can attract potential customers and let them experience the value of your product firsthand.

Customer onboarding and activation

  • Streamline the onboarding process: Make it easy for customers to sign up for a subscription, understand your product, and start using it. Straightforward onboarding sets the stage for long-term engagement.

  • Personalize the experience: Tailor onboarding based on individual customer needs and preferences. This fosters a sense of connection and value from Day 1.

  • Actively engage new subscribers: Provide educational resources, support channels, and targeted communication to help customers maximize value from the start.

Customer retention and churn management

  • Continuously deliver value: Regularly introduce new features, content, or updates to keep customers engaged and to incentivize ongoing subscriptions.

  • Monitor churn metrics and identify at-risk customers: Proactively reach out to customers who are likely to churn, and address their concerns or offer incentives for renewal.

  • Personalize retention strategies: Use data insights to tailor your approach to individual customers. For example, consider offering relevant recommendations or exclusive benefits.

Pricing optimization and revenue growth

  • Implement a flexible pricing strategy: Create different tiers or subscription options to cater to diverse customer needs and budgets.

  • Experiment with dynamic pricing models: Consider usage-based pricing, personalized tiers, or limited-time promotions to boost revenue potential.

  • Upsell and cross-sell effectively: Identify opportunities to introduce complementary products or services to existing customers, maximizing the lifetime value of each subscriber.

Data-driven insights and continuous improvement

  • Use data analytics to understand your customers: Track usage patterns, engagement metrics, and churn data to gain valuable insights into customer behavior and preferences.

  • Improve your product or service based on data: Use customer feedback and data analysis to inform product improvements, feature additions, and content development.

  • Embrace a culture of continuous learning and adaptation: Be willing to experiment, improve, and adapt your subscription model based on data-driven insights and market demands.

Bonus best practices

  • Invest in customer service: Responsive and helpful customer support fosters loyalty and reduces churn.

  • Build a strong community: Create a sense of belonging and engagement among your subscribers through forums, social media groups, or exclusive events.

  • Embrace technology and automation: Automate billing, renewals, and customer communication to streamline operations and free up resources for key tasks.

How Stripe can help

Stripe has a comprehensive suite of features and capabilities that support and enhance subscription revenue models across a variety of businesses and industries, engineered to meet the diverse needs of businesses. Stripe Billing simplifies managing subscriptions and recurring payments, and its flexibility and scalability make it ideal for businesses of different stages and sizes. Key features include:

  • Subscription management: Stripe Billing lets businesses create and manage different types of subscriptions, including one-time payments, fixed recurring payments, and usage-based billing. It supports multiple billing cycles and manages changes such as upgrades, downgrades, and cancellations.

  • Payment processing: Stripe supports a wide range of payment methods, including all major credit and debit cards and digital wallets. It also supports payments in more than 135 currencies, which makes it a suitable choice for businesses that operate internationally.

  • Dunning management and smart retry logic: Stripe uses machine learning to determine the optimal time to retry failed payments, reducing payment failures and increasing revenue. Stripe sends customers personalized emails asking them to update their payment information, helping reduce involuntary churn.

  • Invoicing and reporting: Stripe includes a customizable invoicing system and provides detailed reports and analytics to help businesses gain insights into their revenue, churn, and other key metrics.

  • Application programming interfaces (APIs) and integration: APIs make Stripe’s solutions highly customizable and easy to integrate with different types of business tools and systems.

  • Support for different business models and industries: Stripe’s solutions cater to a wide range of businesses, including business-to-business (B2B) SaaS businesses, digital service providers, and those that sell physical product subscriptions. The flexibility of Stripe Billing accommodates a variety of subscription billing models, including fixed and variable pricing models, which makes it suitable for different industry requirements.

  • Adaptability and international scalability: More than half of the subscription businesses Stripe surveyed in 2023 are planning international expansion within the next year, which emphasizes the importance of Stripe’s increasing capabilities in managing recurring payments in international markets. Additionally, many subscription businesses are turning toward flexible pricing strategies that include usage-based models and premium plans, which Stripe also supports.

  • Benefits for businesses: Stripe’s subscription management software benefits users in important ways, including by minimizing churn, reducing operational costs, and providing more dynamic subscription options. Stripe Billing’s ability to handle the complexities of different subscription tiers lets businesses manage a range of customer segments and needs effectively. The system streamlines important tasks, saving businesses time, resources, and money—and letting them focus on growth and customer experience​​.

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