Subscription revenue models can benefit businesses in many ways. They can turn sporadic sales into reliable monthly revenue, help businesses establish lasting relationships with their customers, and enable businesses to customize their services to better meet customer needs. Recurring subscribers also help businesses automate parts of their operation, and explore opportunities for refining products and experiences based on customer insights.

But first, businesses need to decide which subscription revenue model to choose. The subscription economy has grown by over 435% in the last decade, across industries, and a range of models have emerged to fit a variety of customer use cases.

Below, we’ll discuss what you need to know to inform your decision-making process. This includes explaining the different types of subscription revenue models, how they differ, and how to choose one that fits your needs.

What’s in this article?

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

How do subscription revenue models work?

Subscription revenue models create a steady stream of income by providing ongoing services or products over a period of time. Here’s how they work:

• Recurring payments
  Subscribers agree to pay for a product or service on a recurring basis, such as monthly, annually, or another interval. It’s like a gym membership that auto-renews each month until you cancel. This setup provides companies with a predictable revenue source, allowing for better planning and budgeting.

• Automated billing
  To maintain continuity and reduce administrative tasks, subscriptions typically use automated systems to charge customers. Bills are paid on time without requiring action from the customer.

• Access over ownership
  Customers pay for access to a product or service rather than owning it outright. When you rent a movie online, you can watch it as often as you like within the rental period, but you don’t own the movie in perpetuity.

• Customer relationships
  Subscription models rely on building long-term customer relationships. By providing ongoing value, companies keep customers engaged and subscribed.

• Adjustable services
  Companies can adjust their services based on customer feedback and usage patterns on an ongoing basis, addressing customer preferences and needs.

• Metrics and analytics
  Continuous monitoring of subscriber behavior provides insights for improvements, and companies can adapt based on the data they collect.

• Customer service and support
  Ongoing support ensures customers get the most value out of their subscriptions, addressing any issues.

Focusing on these elements allows businesses to grow their subscriber base, generate steady revenue, and invest in product or service improvements over time.

Types of subscription revenue models

Businesses use a variety of subscription revenue models to generate recurring income from customers in exchange for continued access to a product or service. Here are the different types:

• Flat rate: This model is all about simplicity. Companies charge a single, fixed fee for access to a product or service over a set period of time. It doesn’t matter how much of the service or product a customer consumes—everyone is charged the same rate.

• Tiered usage: In this model, there are tiers of services or products, each with its own price. Think of it as ordering an appetizer, entree, or a full-course meal: the more you want, the more you pay.

• Per user: Each user pays a separate fee in this model, and price scales with the number of accounts. Beyond the number of accounts, how much each person uses the service doesn’t affect the price. This model is often used by software-as-a-service (SaaS) companies.

• Freemium: In this model, the basic service is free, but businesses charge a fee for premium use or service upgrades. It’s like a free app on your phone that requires purchases to unlock features or remove ads.

• Usage-based: This model charges based on consumption. Think of your electric bill: the more you use, the more you pay. It’s common in cloud services, where fees are based on storage or bandwidth used.

• License: Often used by software companies, this model gives customers usage rights for a set term. It’s similar to leasing a car; you pay to use it for a year or two, then you renew or upgrade.

Each model serves a different purpose and caters to varying customer needs and preferences. Businesses often select a model or a combination of multiple models based on the nature of their products or services, market demands, and customer behavior patterns.

What types of businesses use subscription revenue models?

Businesses across different sectors have widely adopted subscription models because of their ability to generate stable revenue and deepen customer relationships. Let’s explore the types of businesses that typically use these models:

• Software-as-a-service (SaaS)
  Companies that provide software on a subscription basis allow users to pay for access rather than purchasing the software outright. This model is a staple in the tech sector, where businesses provide everything from productivity tools to complex enterprise solutions.

• Media and entertainment
  Streaming services for music, movies, and television shows are prime examples of subscription models. They have transformed the way we consume media, moving away from physical or individually purchased digital products to a continuous access model.

• Subscription boxes
  A creative twist on ecommerce, these companies curate and deliver a selection of goods to subscribers on a regular basis. From gourmet foods to cosmetics, the surprise element in a subscription box keeps customers engaged.

• Publishing
  Many publishers have shifted from single-issue sales to subscription models, providing readers with ongoing access to digital content and traditional print subscriptions.

• Fitness and health
  Gyms and personal health programs often use a subscription model, granting members access to facilities, personalized health plans, or coaching.

• Education and training
  Online courses and development platforms offer subscriptions for continuous learning opportunities, catering to individuals who want to upskill and companies that want to invest in employee development.

These are just a few examples of the broad application of subscription models. The recurring nature of this model suits the digital economy and reflects customers’ desire for flexibility and ongoing value.

Pros and cons of each subscription revenue model

Subscription revenue models have reshaped how businesses generate income and interact with customers. Each model has unique advantages and challenges:

Flat rate

• Pros: This model is easily understandable, which is a powerful draw for customers looking for straightforward solutions. It can build strong brand loyalty when matched with consistent value.

• Cons: The lack of flexibility can deter customers with variable usage needs. Businesses also risk losing potential revenue from heavy users who would be willing to pay more for additional features or services.

Tiered usage

• Pros: Tiered models cater to a broad market, from budget-conscious individuals to resource-intensive enterprises. They allow businesses to segment their market and tailor their services to specific needs, which can maximize revenue from each customer segment.

• Cons: It can be challenging to design tiers that differentiate value and prevent choice overload. Businesses must also try to minimize service cannibalization, where lower tiers eat into the profitability of higher ones.

Per user

• Pros: This model ties cost directly with the number of user accounts, particularly in business-to-business (B2B) environments, making it easy to justify the expense. It can also encourage organic growth within customer organizations as the user base expands.

• Cons: It can inadvertently limit growth if customers perceive adding new users to be too expensive.

Freemium

• Pros: The freemium model lowers the barrier to entry and allows potential customers to experience the core value proposition without financial commitment.

• Cons: Converting users to paying customers can be a challenge, and the model requires careful economic balancing to ensure that the cost of servicing free users doesn’t outweigh the revenue from paid conversions.

Usage-based

• Pros: This model provides flexibility and scalability, which can be particularly appealing in industries where usage is unpredictable.

• Cons: Businesses face revenue predictability challenges and must excel at educating customers on how their usage translates to billing.

License

• Pros: Licensing often involves higher up-front payments, which can support a business’s initial growth phase. It reassures customers they won’t face sudden price hikes and can budget over the longer term.

• Cons: The market is moving toward more flexible models, and licenses can be perceived as rigid. Businesses also need to deliver continuous improvements to justify renewals.

Benefits of using subscription revenue models

We’ve mentioned some of the business benefits of using a subscription revenue model, which include strategic advantages beyond the regular inflow of income. Here’s a closer look:

• Revenue predictability with advanced analytics
  Subscription models provide a consistent revenue stream, but the real advantage comes from layering predictive analytics on top of subscriber data. Businesses can model future revenue with sophisticated algorithms, taking into account factors such as renewal rates, churn probabilities, and potential upsell opportunities. This data-driven method allows for fine-tuning of pricing, packaging, and customer engagement strategies in a way that a simple sales forecast cannot.

• Customer lifetime value optimization
  Subscriptions can increase the lifetime value of a customer. Businesses can achieve this by using data to learn about the customer experience and identifying the touchpoints that lead to upsells, cross-sells, and loyalty. By monitoring customer interactions and feedback, businesses can proactively address pain points, reduce churn before it happens, and customize the experience to increase satisfaction and spend over time.

• Dynamic pricing structures
  The subscription model allows for pricing strategies that can adapt to market conditions, usage trends, and individual customer value. This could mean adjusting prices for different customer segments, providing personalized discounts to increase retention, or introducing premium tiers for high-value customers. The goal is to find the optimal pricing structure that maximizes revenue without impeding growth or customer satisfaction.

• Cost efficiency through predictive supply chain management
  With a steady demand signal from subscribers, companies can use predictive supply chain management to optimize inventory, reduce waste, and negotiate better terms with suppliers. This extends beyond the cost of goods to encompass all aspects of the supply chain—including logistics, warehousing, and labor planning.

• Strategic customer acquisition
  The lifetime value that a subscription model provides allows businesses to be more strategic in their customer acquisition efforts. They can afford to invest more in acquiring a customer whose value will accrue over time, targeting high-quality leads that show a tendency for long-term engagement. This acquisition strategy is more sustainable and can lead to a higher-quality customer base.

• Product and service innovation feedback loop
  The continuous relationship with customers provides an ongoing feedback loop that’s invaluable for innovation. Companies can test new features or products with a segment of their subscriber base before launching them, minimizing risk and ensuring that development efforts match customer needs.

• Cash flow for sustained investment
  Businesses can use predictable subscription income to make sustained investments in innovation. They can take a long-term view of their product and service development pipelines, investing in research and development with the confidence that they have the financial backing of their subscribers.

• Brand ecosystem
  Subscription models can transform a customer base into a brand ecosystem. This provides a platform for launching adjacent products and services, building on the trust and loyalty built within the subscription relationship. The business can then provide multiple touchpoints for engagement and spend, expanding its brand footprint.

How to pick the right subscription revenue model

Choosing the right subscription revenue model is a strategic decision that depends on thorough knowledge of your product, market, and customers. Here’s an overview of the process to select the most suitable subscription model for your business:

• Learn customer usage patterns and preferences
  Analyze how your customers are using your product or service. Frequent, consistent usage is suited to a flat-rate model, while variable usage might be better served by a pay-as-you-go structure.

• Evaluate product or service complexity
  Assess the complexity of what you’re providing. A simple, singular product can be effectively monetized through a flat-rate model, while complex services with multiple features may necessitate a tiered strategy that allows customers to select the level that best fits their needs.

• Consider market position and brand perception
  Reflect on your position in the market and how your brand is perceived. If you’re seen as a premium provider, a tiered model that includes a high-end, high-cost option can capitalize on this perception. If you’re aiming to disrupt the market with a low-cost option, a freemium or a low flat-rate model might be the best route.

• Assess customer acquisition and retention costs
  Factor in the costs associated with acquiring and retaining customers. If acquiring new customers is expensive, a model that focuses on long-term retention, such as a license or a higher-tier subscription, could be more economical and provide you with a longer period of time to recoup those costs.

• Analyze financial goals and funding
  Your choice of model should match your financial targets and the nature of your funding. Subscription models that deliver predictable, recurring revenue can appeal to investors and support ambitious growth plans.

• Test and iterate
  Once you’ve made an initial selection, test your model with a subset of your market. Use real customer feedback and conversion data to continuously refine your product and keep up with evolving customer needs and market conditions.

• Make compliance and legal considerations
  Ensure that your subscription model complies with regional and international regulations, including those related to consumer rights and data protection. A model that is flexible enough to adapt to different legal requirements across markets can be a strategic advantage.

Designing your subscription model often requires an iterative strategy that revisits your plans as your business grows, the market fluctuates, and customer expectations change. Implementing a subscription model requires strategic planning and operational adaptability, matching your business goals to what customers really want.

Learn more about how Stripe supports subscription models for businesses.