With a subscription business model, customers pay a recurring price at regular intervals to access a product or service, in contrast to a one-time payment model. This business model provides predictable and consistent revenue for companies and allows customers to enjoy continuous access to services or products.

Subscription-based businesses are common in industries including media (such as newspapers and streaming services), software (such as cloud-based applications), and physical goods (such as meal kits or monthly gift boxes). The global digital subscription market is projected to rise from $650 billion in 2020 to $1.5 trillion in 2025.

In this guide, we’ll explain what subscription businesses are, how they work, how a subscription model could benefit your business, and how to create one.

What’s in this article?

• How do subscription businesses work?
  
• Benefits of a subscription business model
  
• Key considerations for subscription-based businesses
  
• How to start a subscription business: A step-by-step guide
  
• Best practices for subscription businesses
  

How do subscription businesses work?

Subscription businesses provide products or services on a recurring basis in exchange for regular payments. Businesses benefit from a steady stream of revenue, which can improve financial planning. For customers, subscriptions offer convenience, personalization, and ongoing value. Here’s an overview of how these businesses function.

• Sign-up process: Customers sign up, often through an online platform, and provide their payment information to initiate recurring charges.

• Continuous delivery: The company consistently delivers the product or service as promised. This could be access to digital content, regular shipments of goods, or an ongoing service.

• Payment processing: The business automatically charges the customer at pre-established intervals. The business also handles payment processing, renewals, and cancellations.

• Customer retention: The subscription business model relies on long-term customer relationships. These businesses try to keep customers satisfied and engaged to minimize churn, or the rate at which customers cancel their subscriptions. Companies rely on regular feedback from subscribers to refine and improve their offerings and make sure they remain valuable to customers.

Benefits of a subscription business model

Subscription models provide a range of benefits for businesses, including reliable revenue streams and the ability to build long-term relationships with customers. Here are some of the potential benefits of subscription models.

• Predictable revenue: Subscription models provide businesses with steady, predictable income.

• Increased cash reserves: Consistent revenue helps businesses maintain healthier cash balances and keep more cash in reserve.

• Easier financial planning: Regular, recurring payments from subscribers mean companies can more accurately forecast their revenue, which informs budgeting and financial planning.

• Lower customer acquisition costs: Once a subscription business has acquired a customer, the cost to retain them is generally lower than the cost to acquire new customers. Over time, the customer lifetime value (CLTV) tends to increase, potentially outweighing the initial acquisition cost.

• Better customer relationships: The subscription model relies on ongoing customer engagement and relationships. This allows businesses to craft more personalized communications and offerings, which helps build customer loyalty.

• Upselling and cross-selling opportunities: Businesses can approach their customer base with additional relevant products or services over time, increasing the customer’s overall value.

• More efficient inventory management: For businesses that sell physical goods, subscriptions can make demand more predictable, reducing waste or the chances of running out of stock.

• Customer insights: Regularly engaging with customers allows businesses to collect valuable long-term data on preferences and behavior. They can use this information to customize products and services, improve the customer experience, and drive innovation.

Key considerations for subscription-based businesses

From market research to strategic partnerships, here are the key considerations for subscription businesses.

• Market research: Conduct thorough market research to understand market demand, the competitive landscape, and customer pain points and preferences. Identify market segments where your subscription service could gain traction by meeting unmet demand.

• Financial modeling: Develop a detailed financial model that incorporates churn rates, lifetime value (LTV) calculations, customer acquisition costs (CAC), and a break-even analysis.

• Data analytics: Plan for advanced data analytics from the start. How will you track user behavior, segment customers, predict churn, and personalize the customer experience? Invest in analytics tools that can provide actionable insights, not just descriptive data.

• Technological infrastructure: Assess the technology stack needed to support your subscription business, including billing systems, customer relationship management (CRM) systems, data analytics platforms, and potentially machine learning tools for predictive analytics and personalization.

• Pricing strategy: Explore advanced pricing strategies like decoy pricing or bundling to increase revenue and customer acquisition. Consider how you can structure your pricing tiers to encourage customer upgrades or influence perceptions of value.

• Content and product strategy: Plan for a dynamic content or product roadmap that evolves based on customer feedback and data insights. How will you make sure your product remains fresh and engaging over time? This could involve a schedule for releasing new features, content, or products, as well as mechanisms for incorporating user feedback.

• Customer retention and engagement: Develop sophisticated retention strategies that go beyond basic customer service. This could include loyalty programs, community-building, personalized content or recommendations, or proactive efforts to reduce churn.

• Compliance: Be prepared to navigate all legal and regulatory requirements, especially around data privacy, subscription cancellations, and auto-renewals. Requirements can be complex and vary by region, so consider consulting with legal advisors.

• Strategic partnerships: Consider potential partnerships or collaborations to enhance your offerings, expand your market reach, or add value for your subscribers. Strategic alliances can spur growth and differentiation.

• Customer journey: Develop a detailed map of the customer journey, identifying all touchpoints, opportunities for engagement, and potential friction points. Use this journey map to create simple, engaging customer experiences to boost customer satisfaction and retention.

How to start a subscription business: A step-by-step guide

Starting a subscription business requires careful planning and execution. Here’s a step-by-step guide to help you get started.

Step 1: Market research

• Conduct thorough market research to identify a niche that your subscription service can fill. Understand your potential customers and your competitors.

• Use surveys, focus groups, or a minimum viable product (MVP) to test your subscription concept with your target audience.

Step 2: Business planning

• Develop a detailed business plan outlining your business model, market strategy, financial projections, and goals.

• Choose a type of subscription model (e.g., fixed, pay-as-you-go, tiered) and determine pricing, billing frequency, and customer engagement strategies.

Step 3: Legal and financial setup

• Choose the appropriate business structure (e.g., LLC, corporation), considering tax implications, liability, and business needs.

• Ensure compliance with all legal requirements including contracts, terms of service, privacy policies, and any industry-specific regulations.

• Set up a business bank account, accounting system, and financial tracking. Meticulously plan how you will manage cash flow.

Step 4: Ecommerce platform and technology stack

• Select an ecommerce platform that supports subscription management (e.g., Shopify, WooCommerce with subscription plugins).

• Design and develop a user-friendly, mobile-responsive, conversion-optimized website.

• Integrate subscription management software to handle recurring billing, customer management, and subscription adjustments.

Step 5: Product development and fulfillment

• Finalize your product or service, designing it to meet customer needs and expectations.

• Set up a reliable supply chain and fulfillment process. Make sure your business can scale to meet demand.

Step 6: Marketing and customer acquisition

• Develop a comprehensive marketing strategy that includes digital marketing, content marketing, social media, and email campaigns to attract subscribers.

• Plan a launch campaign to generate buzz and attract initial subscribers. Consider promotions or special discounts to encourage sign-ups.

Step 7: Customer service and engagement

• Establish a customer service framework to effectively handle inquiries, complaints, and feedback.

• Develop strategies to keep subscribers engaged over time, build a loyal customer base, and reduce churn.

Step 8: Analytics and continuous improvement

• Track key performance indicators (KPIs) such as churn rate, customer lifetime value (CLTV), and acquisition costs to gauge your business’s health.

• Use customer feedback and data analytics to refine your product, pricing, and marketing plans.

Step 9: Scaling and growth

• Consider expanding your product line or adding new features based on customer feedback and market trends.

• Explore new markets, marketing channels, or partnership opportunities to scale your business.

Best practices for subscription businesses

Once your subscription business is up and running, you’ll need to maintain its operations. Here are some best practices to keep in mind for operating and growing your business.

Maintaining your subscription business

• Signup: Make your sign-up process easy and straightforward. A complicated sign-up process can turn potential customers away.

• Customer feedback: Regularly gather customer feedback and use this information to make improvements. This can be as simple as sending a survey or asking for reviews.

• Customer communication: Regularly communicate any updates or changes in your service so customers aren’t surprised.

• Customer service: Address issues promptly and effectively. Excellent service can turn an unhappy subscriber into a loyal customer.

• Cancellation: Make it easy for customers to cancel. A positive cancellation experience can encourage them to return.

Growing your subscription business

• New offerings: Add new products or services to keep your subscription interesting. These don’t have to be complex; even small additions can renew interest.

• New markets: Consider who else might benefit from your subscription. There might be groups you haven’t targeted yet.

• Implementing feedback: Use the feedback you’ve collected from customers to make meaningful changes and show that you’re listening and adapting to your customers’ needs.

• Word of mouth: Encourage your subscribers to tell others about your product, whether that’s through a simple referral program or by offering incentives for sharing your service.

• Financial planning: Regularly assess where your money is coming from and where it’s going. Use this information to make informed decisions about pricing and investments in the business.