Before the advent of subscription business models, customers bought goods outright, and businesses just needed to be nice to the customer before the sale.
It’s the 21st century now, and the world has had enough of that. Each and every customer wants to have a better customer experience, and subscription business models can guarantee this, as everyone can cancel a subscription if they don’t get the quality they expected.
Apart from the enhanced customer experience, customers want personalized delivery, instant access and lifetime value, which definitely drive the success of subscription models.
It’s no surprise that subscription business models have blossomed in popularity over the past decade. The subscription market “has grown by more than 100% a year, increasing from $57 million in sales in 2011 to $2.6 billion in 2016” (stats courtesy of Stanford’s Graduate School of Business).
So, it’s definitely relevant to talk about the “subscription economy”, as Tien Tzuo, a 1998 graduate from Stanford’s Graduate School of Business calls it – as more and more businesses will start exploring the subscription based business model.
But is converting your current business model to subscription really feasible?
What are the challenges of subscription based business?
What type of goods can you sell with a subscription business?
If you’ve thought about the idea already but still feel unsure as to what this type of business really entails, and you’re still looking for strategies to overcome challenges of the subscription model, we here at Subbly would like nothing more than to give you a boost.
In a nutshell, a subscription pricing model is a payment structure that allows a customer to purchase a product or service for a specific period of time for a set price, most typically, on a monthly, quarterly, or annual basis.
If you want to read more about the essentials of subscription, we’ve already written another article on that – our introduction to subscription services.
Here, however, we’ll focus on illustrating how businesses can capitalize on the advantages of the subscription model through taking a peek into what subscription brands are already doing. We also have another article you can check out that tackles the benefits of the subscription box model.
The logic behind the subscription business model is actually fairly simple: instead of merely hoping that your leads will hit that “add to cart” button to make a one-time purchase and become customers, you’re going for the bigger prize at the very start – both attracting and retaining that customer for a long period of time. The person who thought, hey, “people will love the convenience of subscribing to purchases” truly struck gold.
After all, some subscription businesses center around the idea that customers will likely be open to subscribing to products they consider essential, i.e. products they would buy on a regular basis anyway.
In essence, subscription business models help you take advantage of the compounding value of customer relationships. With that in mind, a recurring revenue model is the perfect way to generate bigger revenue and establish lasting customer relationships.
Take Blacksocks subscription boxes for example. Blacksocks is a subscription service and an online retailer that started by delivering socks to men (their core customer base consists of businessmen) several times a year.
But why does Blacksocks work as a subscription business? After all, it’s not exactly rocket science – socks have been with us for a while now and there are tons of retailers who sell them – including online retailers.
Everybody buys socks regularly, and people usually consider it a chore they want to get out of the way. Nobody looks forward to a shopping trip for socks, especially businessmen, Blacksock’s initial target audience.
So the company takes it up a notch – with Blacksocks, you can take your shopping trip for socks off your calendar because they will deliver them to you. If you subscribe to Blacksocks, you can receive regular shipments of pairs of socks three times a year, four times a year, or once a year – basically whatever interval makes it most convenient for you.
Apart from socks, with time, this company has expanded its scope to underwear, t-shirts, shirts – so, several types of product essentials, always oriented towards the modern, professional, well-dressed man.
With free shipping worldwide, as well as policies that allow for cancelations anytime, customization at will, and a variety of sizing options that can fit almost all types of bodies, Blacksocks have established a pretty healthy subscription business model.
Birchbox is a company founded in 2010, in New York City. It’s a service that sends subscribers a curated box of four or five make-up samples and other beauty products. Instead of spending countless hours in front and around the aisles of beauty shops, why not receive the items you want and need right on your doorstep?
Anyways, the numbers don’t lie. As of 2019, Birchbox has 1 million subscribers, 2.5 active customers, $90 million in funding and a company value of $500 million!
So, how did Birchbox get to become one of the most successful subscription box businesses on the market, among so many similar ones out there?
Well, it turns out that there was a key factor that made it unique. Namely, Birchbox used a somewhat different business model than other companies of its kind. Whereas competitors merely sent customers beauty subscription boxes containing samples, Birchbox also included the option to purchase the full-size product they like on their e-commerce site.
And since 2016, around half of Birchbox’s subscribers have decided to buy the full-size products.
So, your subscription business can be a beauty box, or a clothing essential, but it could also be something really niche – like a subscription box curated for Harry Potter fans…
…or it could be a box filled with treats from Japan.
Basically, the sky’s the limit.
If you have a well-defined target (buyer persona), and a few proven and researched strategies to appeal to your customer, then any idea can work. You just have to pick one of the three types of subscription business models.
In theory, the recurring revenue model could benefit any industry.
You can take the Blacksocks example and apply it to basically any product with an established consumer base. It could be clothing essentials, or it could be beauty products and cosmetics, like Birchbox.
As you already know, subscription services branch out into three main subtypes:
Let’s look at the specifics of each type of recurring revenue model through particular examples.
All of the examples mentioned above fall into the category of curation boxes – one of the most frequent and successful types of subscription services, when a brand sends a selection of goods to the customer on a regular basis for a yearly or monthly fee.
All things considered, this is not that surprising. 21st-century people, with their busy lifestyles and goal-oriented lives, aren’t going to waste time in supermarkets, malls or big chain stores – well, not if there are other options available.
And this is exactly what curation boxes capitalize on.
Access subscription makes your customers feel special. It marks a sub-type of the subscription business model where customers get additional access to your products or services if they subscribe to your brand. The subscription itself usually implies a monthly fee.
Access is most commonly used in apparel and food subscription companies. Plus, this model reflects what is called streaming services: if you create content that educates, informs or entertains your customer, your subscription business will focus on access.
Give Your Customers VIP Access Through Your Subscription Business Model
JustFab is an e-commerce store that sells stylish, fashionable clothes, shoes and handbags for women.
What JustFab have really nailed is their use of personalized data – the company uses style quizzes to learn their customers’ tastes, after which it allows them to make subsequent customizations through their own personalized boutique, and therefore, strengthen customer relationships.
JustFab works as a regular eCommerce site and as a subscription business. It offers a VIP membership subscription which gives you 30% off retail prices for the products offered on their e-commerce site.
The membership itself costs $39.95 each month, and the charge will be made if you don’t buy any products that month – if you do, you will be charged for the products with the discount prices offered by your member access as a subscriber.
The great thing about it is that each credit can be redeemed for JustFab items and it will never expire. Also, you’re able to skip the month between the 1st and the 5th and not get charged for a membership credit.
Give Your Customers Access to Food for Retail Prices
Meet NatureBox, a successful online snack company that uses the access sub-type subscription business model.
NatureBox allows customers to enjoy their beloved snacks for members-only prices. It works by offering a membership subscription to its customers that costs $30 a year. The membership benefits include discounts and special prices for the subscribers, with up to 40% discount on every order, daily. NatureBox also provides its subscribers with a monthly store credit of $5, which amounts to $60 a year.
Their policy is that the first 30 days of membership are free of charge and you can quit anytime – this is a very successful freemium tactic that we’ll talk about more in the section below. After the first month, membership costs $30 per year.
Replenishment is a sub-type of subscription business model that usually offers commodity items to customers with special, retail prices. Here you can find mostly beauty products and cosmetics, baby essentials such as diapers, grooming essentials such as razors and also health essentials such as vitamins. Which brings us to our example brand:
Provide Your Customers With Constant Supply of Vitamins
Ritual is a subscription-based business that delivers a monthly dose of essential vitamins, focusing only on women and the needs of their bodies. Their subscription kits start from $30 a month. They also have kits for women over 50, as well as women who are carrying (prenatal vitamins).
So, as shown by the number of successful brands mentioned above, if you find a niche to cater to, and tailor your offer specifically for them, then you’re looking at a pretty promising subscription model.
After all, the key advantage your business has over a traditional e-commerce store is convenience.
However, that’s not to say that this business model doesn’t have its own brand of challenges. The thing is that when businesses launch their subscription models, they understand that managing a recurring revenue model is way different from selling a one-time product or service. Fair enough, as subscription pricing business models require handling a lot of extra customer data, such as billing periods, renewal dates, pricing tiers, sales channels, payment methods and more. The good news is that we know some tips on how to overcome the major challenges of subscription models and are eager to share. Let’s jump right in.
Half of the job of setting up your subscription business model for success is pricing your services and products just right.
Pricing will affect customer acquisition costs, revenue, and customer relationships, as well as your ability to draw in new customers, increase the value of your current customers and reduce customer churn. Basically, it will either stimulate or stunt your business’ growth.
Instead, tiered pricing models are much more flexible and customizable. SaaS (Software as a Service) models, for example, usually include pricing tiers.
For starters, it’s generally considered best to begin with either two or three pricing tiers, which businesses can adjust after a while, depending on customer behaviour and feedback. For example, you can tailor your subscription business pricing model after usage levels, functionality, and bulk purchases, as well as optimize it to cater to loyal subscribers and customers.
Let’s take Dollar Shave Club, a subscription-based business that delivers razors and other personal care products to customers. The company offers three types of subscription boxes: The Humble Twin (two blades per razor, five razors per month, $4 per month), The 4X (four blades, four razors, $7) and The Executive (six blades, four razors, $10).
In addition, you can set pricing models according to geographic locations or the time of day the service is usually used.
You can even offer virtual coupons, freemium options (free trials and free plans/services), and benefits for early birds.
Extra tip: once you’ve set up a price point that you consider ideal, set up another price that’ll go above. This way the ideal price will definitely gain more attraction.
Don’t forget to change the pricing of your products/services with time, according to the needs of your business and your customers.
Pricing models change all the time – subscription businesses rarely keep the same prices they had when they were starting out. Indeed, markets evolve pretty fast, as do customers’ needs.
However, this can be slippery turf, since businesses also don’t want to alienate their customers when they decide to raise the price of whatever it is that they’re offering.
Remember the king of streaming services Netflix losing 123.000 US subscribers after its price hike?
Although that sounds pretty scary, the full account of their pricing change would be that this was most likely a calculated loss on the side of Netflix. Entrepreneur.com’s report from July 2019 notes that Netflix counts on a subscriber growth of 7 million new subscribers in the third quarter.
It’s likely that as your subscription business grows, the costs will as well – you will have to maintain or improve the quality of your product or service, and everything that it entails: manufacturing, storing, shipping, etc.
A good way to buffer the increase in price is to reward your existing customers whenever you can. And, if possible, raise the prices for future customers, instead of your existing base.
A fully operational and easy-to-use billing system is one of the most important elements in the subscription business model – nobody wants to get stuck in a complex set of processes to get to a desired product or service.
Customers will have a better appreciation of whatever it is that you’re offering or selling if their journey from making the purchasing decision and clicking to “check out” is intuitive and fast.
Customers have all sorts of payment anxiety about trusting you with their credit card information online, so your system has to be both streamlined and utterly reliable.
The simpler and the more secure your billing system is, the more your customers will be able to overcome their fears of giving away their personal data and credit card information.
Fortunately for you, nowadays there are many tools that can help out subscription business owners set up their business for success, and this aspect of the business is no exception.
If you use a subscription platform like Subbly to set up your subscription business, that can also help you set up a reliable billing system, as we offer an option for recurring automated billing.
If you have decided on your pricing tier model and set up a good billing system, you can tweak your pricing system to include a customer acquisition strategy like freemium.
It goes without saying that businesses can’t solely rely on freemium as a way of generating revenue in itself, but that doesn’t mean it’s not an amazing tactic for customer acquisition – as it allows your customers to dip their toes before they commit.
The freemium pricing model can either mean:
Freemium strategies work best in subscription business models that offer software services, aka the SaaS model (software as a service), which can include other types of digital products and services besides software, such as plugins, themes, etc.
In fact, a lot of software companies use freemium as a strategy for acquiring new customers and potential long-term subscribers.
Some of the benefits the freemium model provides are:
Another important thing that the freemium option does is encourage the so-called ‘network effects’. This simply means that the more people use your product or service, the more valuable it becomes.
According to Profitwell.com, net dollar retention is much higher for freemium products.
Also, the more free users you get, the more likely it is that some of them will stick around and subscribe to a premium service.
For example, MailChimp is an internet service provider that managed to increase their profits by 650% and the number of paying customers by 150% within a year just by introducing their free limited plan (Business Insider).
In an overview of Spotify’s 2019 financial growth, Quartz magazine notes that the listening platform has seen a 28% growth in revenue compared to last year, largely thanks to embracing “free trials” and free limited plans. Quartz also reports that their paid user base has so far grown 31% year-over-year.
This is as simple as it gets – you want your business available across all the main online channels for both desktop and mobile devices.
This means that your subscription service must have a solid cross-channel strategy for being present across multiple channels such as email, website, social media, mobile app, printed advertisement, retail location, word of mouth, etc.
We’ll take this opportunity to remind you about the importance of optimizing your website for mobile. Take, for example, BirchBox: 70% of its traffic comes from mobile devices!
As a successful subscription business, you need to provide an easy and fast customer acquisition process that will work on multiple channels equally smoothly.
Here you can read more about multichannel strategies and see examples from successful brands that have implemented them.
On our Subbly blog we also have several articles on marketing strategies for your subscription business. You can read about the refer-a-friend marketing tactic, or how to leverage Instagram influencer marketing, or some more general tips on how to market your subscription box and quickly acquire customers.
Churn rates are a critical indicator of the health of your subscription business, and as such, one of its major challenges. The overall churn rates for subscription businesses are 5.60%, according to Recurly research, but they vary greatly depending on the industry.
So is there some basic checklist you can tick off to reduce them?
The following strategies can surely help you to get a more loyal customer base:
Engaging with your customers is one of the most successful ways of reducing churn rate.
Plus, your subscription business depends on gathering as much data about the preferences and interests of your customers so that you have all the info you need to tailor it to their liking.
That’s why personalized communication with your customers matters so much. When you collect enough data to know the personal tastes of your customers, you’ll be able to send personalized offers and e-mails, as well as other types of information and stop customers from potentially unsubscribing from your services.
According to the same article by CIO.com, this usually happens around the third, sixth or twelfth month of subscription. BirchBox, Dollar Shave Club, and The Honest Company are just some of the subscription services that do a great job in acquiring customer data in order to prevent increasing churn rates.
If you look at the same BirchBox example we’ve used throughout this article, you’ll see that the team behind BirchBox heavily invested in getting data from their customers – data like reviews and preferences. Just to illustrate: up until 2016, subscribers earned points for every review of a product from their BirchBox)
So, the sad fact is that it’s easier for customers to unsubscribe than to subscribe in the first place, so it’s absolutely crucial to make your renewal process super easy. And that basically translates to automatic renewal.
Customer service is an important element of almost every business venture, and subscription businesses are no exception.
When something goes wrong or customers just want to get more informed about a product or a service you’re offering, your customer service should always be there to help them. It’s part of the backbone of your subscription business and of your professional integrity.
Apart from regularly catering to your customers’ needs and answering their questions, as well as giving them quick and on-the-point answers, there are also other things you can do for them.
According to Kat Fulton, founder of MusicTherapyEd.com, making sure that “customer support reps bend over backwards to help your subscribers” has really made a difference for their membership business. (CIO magazine)
Well, we’ve come to the end of our article, although by no means have we exhausted the possible tips and brand examples for a successful subscription business model.
Obviously, beyond ensuring a better customer experience, businesses themselves view implementing subscription models as bringing huge advantages, including predictable revenue, lower customer acquisition costs, flexible monetization models (the ability to match your subscription pricing model to the value you deliver), and finally, less sales friction. Not to mention, recurring revenue models mean higher revenue and stronger customer relationships.
What we tried to do instead is give you some of the essentials. Here you can find the most important information you need to know when starting out to structure the business model that will one day grow into your subscription service.
Cheers to your next subscription business venture!