Subscription or Membership Business Model: Which Is For You?
The subscription business model might be relatively new, but it’s hardly a niche. It isn’t surprising that an increasing number of traditional companies are choosing to offer subscription options, while new companies are springing up around the subscription model from the start.
Digital services like Netflix and Spotify are obvious examples. Microsoft has two versions of its Office suite, with the subscription product offering more benefits. In gaming, you can still buy individual titles for a one-time payment, or you can choose to subscribe to a service like the Xbox Game Pass, which gives access to over one hundred games for a $10 monthly subscription.
And subscription businesses are not limited to digital services. In fact, some of the earliest subscription innovators were businesses offering everyday things like razor blades and groceries. Now you can get everything from coffee to luxury cars through a subscription plan.
Yet, the subscription model has its drawbacks. With the boom of the growth in subscription services, it’s often no longer enough just to offer a product at a low monthly cost and expect customers to sign up. Subscription fatigue is another challenge facing subscription businesses. These drawbacks have led to the growth of membership services, which offer a higher level of customer engagement as a way of retaining subscribers.
In this article, we’ll look at the subscription and membership models and define what they mean for you if you’re thinking of starting, growing, or transitioning an e-commerce business.
What Is a Subscription Business?
At its core, a subscription business relies on your customer choosing to make a recurring, regular payment for whatever product or service you offer. As a business, you benefit from a more stable, recurring revenue while your customer benefits from a continued, regular service or delivery.
Tien Tzuo, founder and CEO of Zuora, a cloud-based subscription management platform, was an early player in the subscription economy, a term he says he coined.
“We are witnessing a once-in-a-century shift away from the product era and the end of ownership — and it is a global phenomenon,” Tzuo told The Economist. “They’re all designed to keep customers consistently engaged in long-term relationships — think Netflix, Amazon Prime, Uber, Spotify, Salesforce, Zendesk, Box.”
For Tzuo, consistent engagement is key to the success of the subscription business model. This engagement can be achieved in several ways.
For most customers, the convenience of a subscription model makes sense when it is combined with personalized services. Take groceries, for example. A customer who works out and is following a specific diet will appreciate a subscription box that meets these requirements. You might even be able to charge a small premium to provide such personalization.
Value is another way of ensuring engagement. A long-term customer relationship and recurring revenue are dependent on your ability to provide value over and over again. A customer must feel the need to stay subscribed.
In addition, the role of technology cannot be dismissed. From payment solutions to e-commerce platforms, a subscription business is reliant on the right technology to provide a seamless browsing, purchasing, and billing experience.
Finally, user experience is becoming a key differentiator as more and more businesses choose the subscription model. An obvious example is the streaming market. The likes of Netflix and Amazon consider themselves to be technology companies rather than production studios. The emphasis is on using data to improve customer experiences across devices.
As another example, Dollar Shave Club, the granddaddy of subscription boxes, also spent considerable time on user experience to develop their customer base. Their website stood out, and the products were packaged to give the feel and impression of a premium product.
When done right and when long-term relationships are established, the subscription business model presents several desirable benefits.
Advantages of the subscription business model
- Predictable, recurring revenue: This has to be the most obvious advantage of a subscription business. If your business has stabilized and has a loyal customer base, you can count on a predictable revenue stream.
This opens up a number of options as a business. You can invest in growth and innovation. It’s also easier to find investors and funding, especially now that the subscription model has proven itself in the past few years.
- Better customer engagement: In the “product era,” companies put great effort into after-sales services to differentiate themselves. In the digital era, subscription businesses have the means to be engaged more directly with customers.
Subscriptions represent convenience and personalization. Customers have more control of the data they can share with businesses, and they expect tailored experiences in return. Subscription businesses can take advantage of this, listening to and engaging with customers through a model that requires regular contact.
This could mean something as simple as offering tiered plans. Or using surveys and data analytics to find the products and options that are most relevant to each user.
- Lower retention budgets: Once you’ve got a customer on board, it would usually take a pretty unpopular business move to get someone to proactively cancel their subscription. If you’re doing what you’re supposed to be doing, subscribers will almost automatically buy from you. Services that offer long-term plans, such as for one year or longer, can save you from spending extra on retaining customers.
- Expansion opportunities: A subscription business offers the chance to earn additional revenue from existing customers. The cost of acquisition is usually a big marketing and sales expense.
Upselling is an essential part of the subscription model. Once a customer has subscribed, you then need to prove to them that paying a little extra is worth the extra benefits. In addition, you can expand through cross-selling. This means adding related products or services that can be added to the subscription for an additional cost.
With all these benefits as a given, it’s unsurprising that a Gartner report estimates that by 2023, 75% of organizations selling direct to consumers will offer subscription services. But the report also has a warning for new businesses looking to benefit from the subscription economy — only 20% of businesses will succeed in increasing customer retention.
Enter the membership business model: a model that puts greater importance on communities and targeted, personalized products as a way of improving retention rates.
So, What Is the Membership Business Model?
A membership-based business can be considered to be a form of subscription business, rather than the choice being membership vs subscription. A membership business has all the advantages of the subscription model, but places a greater focus on customer retention using strategies such as membership privileges, premium positioning, product development, and building online communities.
Let’s look at what these mean in a bit more detail.
In a membership business, customers pay a recurring fee and you provide exclusive membership benefits in return.
For example, you might have a website that offers courses on digital marketing or web development. You could then offer the top-rated courses to paying members of your website, while the rest have access to regular content. It could also be that you bundle some parts of your services for your members, while others can choose to pay for individual products. This is just one way of implementing the membership model. Another example would be a membership ecommerce business offering early access to premium products.
If you’re a subscription box merchant, membership-only privileges could be things such as free shipping, early access, community chat boards, and discounted prices. Essentially, you’re willing to offer more — premium content to discounts — in return for a recurring revenue stream.
Another important aspect of a membership business model is positioning the product or service as an offer to become part of something premium. This is also the hardest part about building a successful membership business. You might be providing value, but the market needs to have a similar perception of it.
If you’re looking to implement this model, you need to invest in building the value of the membership. This would mean finding that particular incentive that will push customers to maintain a long-term relationship, similar to a subscription business. For example, in the case of a subscription box, it could be about the use of premium materials, sustainably-sourced products, or faster or free delivery — a value proposition that makes the cost of membership worth it.
Product and service development
A customer’s membership subscription payment is just the start of the sales process. You need to focus on retaining this revenue. Practically, this could translate to sacrificing short-term gains for improving the perceived value of the membership among customers.
You need to provide something that justifies each recurring purchase of the membership. If you’re in a sector with tough competition, it could mean considerable investment in product development. The success of Dollar Shave Club was followed by a number of similar services. But the company kept innovating, and now offers much more than the basic shaving kit with which they started.
One thing that membership businesses must do more than subscription businesses is build online communities. An interactive community adds an element of loyalty that is essential for the membership model.
It’s more common than you think. One of the most popular examples would be Duolingo, the app that helps you learn languages. One of the features that sets apart Duolingo’s services is the active community that lets you get in touch with other users learning the same language. In fact, it was so successful that the community ended up creating content for the company.
It’s an organic way to stay engaged with your customers, and can save at some investment in marketing efforts. Successful communities also help in customer retention.
Adding Membership to Your E-commerce Business
The nuances involved in the subscription business model means that there are multiple ways in which the membership model is implemented by platforms. For instance, at Subbly, the membership model is meant to be used for non-physical services, such as digital courses, access to downloadable or cloud-stored files, maintenance fees for a service — basically anything that doesn’t require shipping.
A Platform Built For You
Whether you’re building a subscription business or a membership model, you need a platform that’s optimized for your unique business needs and to keep track of what matters.
Subbly is an all-in-one solution for running your subscription or membership business. From building your website through marketing and analytics to shipping and logistics, we make it simpler and easier to start and grow a company that’s focused on long-term customer engagement.
Register now to start your 14-day free trial and see how Subbly can help your business grow.