What is a subscription business model?

A subscription business model involves customers paying a recurring fee for ongoing access to a product or service.

What are the benefits of a subscription model?

The subscription business model promotes customer loyalty, ensures steady predictable revenue, and supports scalability.

What are the challenges of a subscription business model?

Operating a successful subscription business involves creating an accurate pricing strategy, scaling fulfillment, automating repetitive processes, and consistently delighting customers.

What are the different types of subscription models?

The main models are: subscription boxes, subscribe & save (replenishment), access, memberships and systems. But there are more.

What are the main metrics to measure?

When running a subscription model business, the main metrics of concern include MRR (monthly recurring revenue), CAC:LTV (customer acquisition cost to lifetime value ratio), and churn.

The Subscription Business Model: Everything You Need To Know

While subscription models vary across industries, they all share a simple premise: customers make recurring payments at set intervals in exchange for products or services.

Above all, a subscription is an ongoing contract between you and your customers.

For example, instead of offering fitness training sessions as a one-time service, you can offer a contract where your clients receive personalized workout plans every week.

In this scenario, you commit to delivering a regular service and they agree to pay you regularly.

This cycle repeats at predetermined intervals, such as every week or month. Once the contract nears expiry, your customers can renew or cancel their subscription.

This sets the subscription business model apart; it relies on customer loyalty rather than creating a one-off experience.

Have a look at the diagram below to see the contract cycle:

graphic detailing the elements of a successful subscription business model, all based around a strong 3-part core.

A good subscription product is something that a customer is ready, willing, and able to buy on repeat.

There are five models that most subscription businesses are built on:

🎁 Product subscriptions

Product subscriptions are a convenient way for consumers to have items delivered directly to their doorstep.

This model typically focuses on a specific niche, such as gourmet food, craft beer, beauty products, or eco-friendly goods.

However, this also includes themed subscription boxes and collectibles such as those offered by Burn Box, which specializes in offering curated selections of firefighter-themed products and merchandise:

Product subscription box businesses cover both consumable and nonconsumable products.

Here are some popular examples:

Food and beverage

A food service subscription model like HelloFresh delivers meal kits to busy households.

Similarly, Pure Roasters Coffee allows users to subscribe to regular coffee deliveries, such as fortnightly or every six weeks:

Source: Pure Roasters Coffee

Home and lifestyle

Subscription services like Smol address environmental concerns by providing eco-friendly products in sustainable packaging. They offer nine free products to get you started—you just have to pay for postage.

Pets and animals

In the pet industry, subscription models such as Itch have gained traction by offering flea treatment and deworming solutions.

Hobby and collectibles

Subscription boxes like Smugglers Crate offer collectibles for Star Wars, as well as other popular fandoms. Similarly, subscription services like BattlBox capitalize on the outdoor and adventure market, delivering gear and gadgets to outdoor enthusiasts.

💼 Service subscriptions

Unlike tangible products, service subscriptions offer ongoing access to a particular service or set of services.

For example, if you have a nationwide cleaning service, you might offer customers the convenience of regularly scheduled cleanings on a weekly or monthly basis.

MaidPro and Handy are two examples of U.S. cleaning services that depend on subscription models to provide regular cleaning services to customers:

Service subscriptions are popular in various industries, including:

Streaming services

Services like Netflix provide subscribers with unlimited access to a vast library of movies, TV shows, and documentaries for a monthly fee.

Selling software access

Adobe Creative Cloud offers a suite of creative applications for graphic design, video editing, and web development on a subscription basis. Users pay a monthly fee based on how many Adobe apps they use.

Fitness plans

Platforms like FitOn offer workout videos and fitness plans, enabling users to access high-quality fitness content and virtual classes.

🔨 Replenishment subscriptions

This subscription business model revolves around a base product or service that needs regular replenishment with essential items or parts to keep it working effectively.

When your product becomes an essential part of their daily routine, customers are less likely to question the ongoing subscription.

Here are two examples of replenishment subscriptions:

Regular replenishment

Quip sells toothbrushes and offers subscription plans for replacement brush heads at predetermined intervals.

This means that customers are automatically interested in subscribing to the replacement brushes so that they can keep using the base product without interruption.

In this case, if a customer has purchased the base product, they will likely become a long-term subscriber.

Another popular regular replenishment subscription is Nespresso, which sells the main coffee machine and offers subscription-based services for coffee capsules:

The extra convenience of not having to place an order keeps customers hooked and, if they’re happy with your service, they will hang on to their subscriptions for many years.

Automated replenishment

But what if a customer’s base product gets used more frequently during a month and they need to replace add-on products sooner than expected?

In these situations, it’s more convenient for them to automatically trigger a new subscription cycle rather than waiting empty-handed until their next scheduled delivery.

This is exactly what HP Instant Ink does. It detects when you’re running low on ink and automatically ships new cartridges to you.

🤝 Membership subscriptions

While a service subscription provides access to a specific service, a membership subscription offers exclusive benefits, content, or privileges to its members.

For example, in the fitness space, this may include exclusive workout videos, discounts on fitness gear, early registration for classes, and a members-only community forum.

This is different from our previous example, FitOn, which gives users access to a wide range of fitness content without necessarily offering exclusive member benefits or privileges.

Membership subscription subtypes include:

Freemium memberships

This offers a basic level of service for free, often to funnel nonmembers into purchasing your paid content. Think online courses and digital subscriptions such as Medium.

Tiered memberships

These are structured to allow members to pay more to access additional benefits and features. This works for physical and digital products. For example, Crunch+ allows customers to pay more to access more branches.

Loyalty and rewards programs

These normally entail some kind of points system that results in discounts and vouchers. This includes airline perks, such as Delta Sky Club, or even grocery benefits, such as a Costco membership.

Often, membership products or services provide a way for people to achieve a goal, like gaining a skill, indulging in a hobby, or reaping the benefits of access to exclusive content.

For instance, if you launch a membership site featuring courses on digital marketing or web development, you could reserve top-rated courses and exclusive content for paying members, while free members access regular content.

🔀 Hybrid subscriptions

More often than not, you’ll encounter a hybrid subscription business that falls into more than one of the abovementioned categories.

For example, consider Peloton, which is a successful subscription business that offers exercise equipment paired with a subscription-based platform to access workout classes.

If you purchase the Peloton Bike, it comes with an attached screen that allows you to watch their workout videos:

After having made a one-time purchase of the equipment, you continue to subscribe to their workout plans, resulting in two possible subscription models:

Service subscription: Customers subscribe to access Peloton’s platform for live and on-demand workout classes, providing ongoing access to a specific service.
Replenishment subscriptions: The workout videos themselves act as the add-on product since they enhance the base product’s value (the Peloton Bike) by providing the necessary content to use the screen effectively. Without the subscription, the screen would lose a significant portion of its functionality.

Many other subscription businesses also fall into more than one category. Take Amazon Prime, for example:

It offers a membership that gives you free two-day shipping and exclusive discounts. Plus, you can also sign up for recurring deliveries of certain products, making it a blend of both membership and product subscriptions.

Subscription models are a proven method of revenue generation. They nurture customer relationships and decrease the costs associated with single-sale businesses.

Subscription models can be hugely profitable. In a nutshell, you can look forward to:

Building better customer relationships.
Being able to predict your revenue more efficiently.
Make your business more sustainable.
Spending less on customer retention.
Lowering your acquisition costs.
Boosting your customer lifetime value.

🚀 Better customer relationships

Serving the same customers repeatedly means it’s easier to foster strong relationships with them.

As customers frequently engage with your friendly and helpful service team, their trust in your brand grows.

This trust plays a significant role in their decision to renew or cancel their subscription.

🚀 Predictable revenue

Subscription-based business models are reliable sources of recurring revenue.

Instead of worrying about the uncertainty of one-time customers, you can depend on the steady income from your existing subscribers.

This allows you to forecast your monthly or quarterly revenue, giving you the foresight to make long-term business decisions.

As a result, there’s less stress about business finances and more time to focus on other areas, such as improving your subscription products and services.

🚀 More sustainable business

Subscription business models are more likely to provide regular cash flow. This gives you greater financial flexibility and more chance of withstanding financial shocks.

For example, let’s say an unexpected financial crisis occurs in the country you operate. In a one-off purchase business model customers might dry up overnight.

However, subscriptions are more likely to be cancelled at a slower rate. This will ensure you still have some money for your base expenses.

It also gives you time to implement retention measures—for example you might offer subscribers one month free in exchange for not cancelling.

🚀 Lower spending on customer retention

McKinsey’s survey of 500+ U.S. subscribers revealed that 80% were open to keeping new subscriptions they’d signed up for during the pandemic.

This shows that even during difficult financial periods, subscribers are more likely to maintain their subscriptions.

As long as you keep them happy, they will stick around.

🚀 Decreased customer acquisition costs

Traditional business models often require a lot of energy directed toward engaging with potential customers who haven’t interacted with your business before.

A subscription business model, on the other hand, reduces customer acquisition costs by fostering long-term relationships.

This decreases the need for constant marketing efforts.

Instead, you can focus on enhancing the customer experience, making it more likely to acquire new customers through referrals.

🚀 Increased customer lifetime value

Customer lifetime value (CLV) represents the total worth of a customer throughout their relationship with your business.

Subscription businesses naturally extend this relationship by relying on an ongoing commitment from customers, which increases their overall lifetime value to the business.

Now, let’s move on to the challenges.

Despite the popularity of subscription business models, operating a successful subscription service still comes with challenges.

Here’s what you need to pay special attention to:

Your pricing.
Your fulfillment strategy.
Creating sustainable recurring processes.
Creating a framework to delight customers in the long term.

🐢 Creating a pricing strategy

It’s important to accurately price your subscription box or service to reflect the true value that customers receive.

Your pricing strategy should also be set up so that customers pay a recurring fee without any hassle.

If you offer multiple subscription tiers, this may involve drawing up a subscription pricing table that clearly illustrates the differences in the tiers you offer.

🐢 Scaling your fulfillment

Fulfillment is an operational process that includes receiving products from suppliers, packaging them, and dispatching them to customers.

As your subscription business expands, you may find that outsourcing your fulfillment activities enables you to scale your business more effectively.

Your business will benefit from you taking the time to assess potential outsourcing partners to ensure they’re a good fit.

🐢 Creating recurring processes

Subscription business models are all about repetition—and this extends to your business operations—for example, renewing subscriptions and maintaining inventory levels.

With so many repetitive processes, it’s in your best interest to automate as many tasks as possible. Ultimately, this will reduce your labor costs and save you money.

But automation also offers several other benefits. It allows you to:

Keep customers engaged with automated SMS messages.
Build loyalty through automatically generated rewards for high lifetime value customers.
Reduce the instances of failed payments with preconfigured same-day retry renewal, or send “Are you sure?” messages to avoid subscriptions being canceled accidentally.
Set up the sending of automatic coupons when a customer reaches a certain number of orders.
Automate management and operations, such as keeping customers’ user attributes organized and up to date.
Increase your capacity to build more complex business models with sequential subscriptions or different SKUs for different plans.

🐢 Delighting your customers on a long-term basis

The subscription-based business model offers unique opportunities to delight customers.

Unlike one-off purchases, which involve a single interaction, subscriptions rely on building a successful long-term relationship with customers.

For best results, several areas of your business should take priority:

The quality of your product or service: While a customer might purchase a low-quality offering once, they are unlikely to do it again. High-quality items keep existing customers returning and new subscriptions coming in.
The customer experience: Since you have a long-term relationship with your customers, you can gain deeper insights into their preferences and needs. This enables you to create a more personalized experience for them.
Customer care: Your customer service is part of your subscription offering. Subscribers should be able to contact you through easy-to-access channels with any questions or concerns.
Ongoing product value: Your offering should deliver maximum value to your customer. This involves striking the perfect balance between product quality, quantity, frequency, and price point.

By now, the benefits and reasons why you should consider a subscription business model should be clearer.

Whether your business is brand new or already established, here are a few steps to kick off your subscription strategy:

1. Understand your customers

Before you dedicate time and resources to a particular subscription model, you need to make sure that it’s the right fit for your business.

Unfortunately, not every business is suited for the subscription model route. Here are some examples of businesses that should stick to one-off sales:

🚗 Car dealerships: Customers purchase vehicles as a one-time transaction rather than opting for a subscription model.

🏠 Real estate agencies: Buying property usually involves a single transaction rather than ongoing subscription payments.

👰 Wedding planners: Couples usually engage wedding planners for their wedding rather than subscribing to continuous planning services.

These examples show that their respective customer bases simply wouldn’t benefit from subscribing to these businesses.

If you discover that you have high-intent customers who are seeking ongoing services, products, or experiences, then your business may be a good subscription model fit.

2. Perform a competitor analysis

While you may believe your idea is unique, there could be other companies with the same—or a similar—offering.

This doesn’t mean you shouldn’t pursue your idea, but it does mean you need to ask yourself the following questions:

💡 Are your competitors using a subscription model? If none of your competitors are using a subscription model, then there must be a reason for it. Finding out why they don’t have a subscription model can provide valuable insights into the challenges or limitations in your industry.
💡 How can you differentiate your product from theirs? If you’re going to offer the same product or service, then customers have no reason to buy your products. You need to make sure your business is unique so that customers have a compelling reason to choose you over them.
💡 How much traffic does their website get? Invest in an SEO tool, such as SEMrush or Ahrefs, to analyze your competitors’ website traffic. This should help you determine how much website traffic you can expect to get and what the value of this traffic could be.

Once you have the answers to these questions, you should use them to inform your strategy before entering the market.

⏱️ Timing your subscription business debut

If your business is new, then you should build your subscription offering into your core services before you even open your digital doors. On the other hand, if your business is already trading, then the best time to add a subscription offering is right now.

3. Develop your subscription pricing strategy

Setting the right price for your subscription service can be tricky.

That’s why you need to create a realistic pricing strategy that covers all the bases, such as various pricing tiers, annual subscriptions, and free trial options.

Here’s how to do it:

Step 1 – Understand your market: Size up industry norms, customer expectations, product value, and what your competitors are charging to nail down a competitive price point for your subscription offering.
Step 2 – Crunch the numbers: Calculate your product, packaging, shipping, labor, transaction fees, and marketing costs to figure out the best pricing structure for your subscription model.
Step 3 – Aim for profitability: Set your profit margin targets by estimating both gross and net margins against your revenue and subtracting all costs. Initially target a healthy 40-60% profit margin and aim to boost it to 50-70% as your business grows.

For deeper insights into competitive pricing strategies, have a look at our guide to determine your ideal pricing strategy.

4. Consider logistics

How will you deliver your subscription product or service to your customers? This will depend on your business model:

🚛 If you’re managing a product subscription business, this may include shipping, warehousing, inventory management, and fulfillment services.
🚛 On the other hand, if you have a membership subscription business, this may include member communications and membership renewals.

You can take care of logistics in-house or you can outsource these tasks to an external company that specializes in them.

For example, if your business delivers specialty skincare products, you could partner with a logistics company like FedEx.

This will help ensure that your items are delivered with care while giving you more time to focus on sourcing high-quality products and providing excellent customer service.

Have a look at this article to find out whether you should focus on your fulfillment in-house or outsource it.

💪 Top Tip

It’s important to note that the business costs for subscriptions to physical products are higher than for digital products. Digital content can be used and reused forever; it stays evergreen—physical products, however, need restocking and shipping.

5. Prototype your idea

It’s one thing to have an idea and another to see what it looks like in reality.

If it’s feasible, trial run your subscription product, service, or membership to learn what you need to prepare before you formally launch your subscription business.

For example, let’s say you want to launch a subscription box that includes magazines for collectors.

Before you kickstart your business, do a trial run:

💡 Create a prototype box containing a selection of magazines.

💡 Package it in a mock-up of your intended packaging.

💡 Send it to a small group to gather customer feedback and validation.

By doing this, you’ll gain invaluable insights into the appeal of your product, the effectiveness of your packaging, and the overall customer experience.

6. Create a marketing plan

You’ll need to let potential customers know that your subscription service exists and can benefit their lives.

While many businesses use social media ads and other paid media routes, you can use low-cost or even free strategies, like sharing videos of your subscription boxes being opened.

To ensure that all your high-intent customers are aware of your subscription offering, you’ll need to create a proper marketing plan.

Here are five ways to nail your marketing strategy:

📈 Make marketing fun: Spice up your marketing with gamification to engage customers. For example, you could create an interactive quiz related to your product or industry, offering rewards or discounts for participation.
📈 Try before you buy: Attract potential customers with free trials or samples of your subscription offering, giving them a taste before they commit.
📈 Collaborate with influencers: If it’s appropriate for your brand, partnering with influencers can help spread the word about your subscription business.
📈 Start referral programs: Encourage your existing subscribers to refer friends and family by offering incentives or discounts for successful referrals.
📈 Optimize your website: Make sure your website is user-friendly and optimized for conversions, with clear calls to action and compelling messaging.

To learn more about setting up the perfect marketing strategy for your subscription business, read the complete guide here.

7. Conduct a post-launch analysis

The planning doesn’t end when your product reaches the customer—in fact, it often just begins.

Once your product is launched, it’s the ideal time to evaluate its performance and consider its future direction.

You can gauge its success by examining:

🔍 Feedback from customers: Customers’ opinions matter most.

🔍 Sales performance: Sales indicate product success.

🔍 Social media interactions: Social media engagement reflects brand reach.

🔍 Traffic on landing pages: Landing page traffic measures online interest.

By gathering data from these key sources, you can gain valuable insights into your product’s performance and make informed decisions for its future.

The metrics you decide to track will vary based on your business model. However, most subscription-based companies will focus on customer-centric metrics.

Some of the most common metrics that are important to track when leveraging subscription business models include:

1. Monthly recurring revenue (MRR)

The average revenue you earn per subscriber per month, multiplied by your total number of subscribers. Your MRR shows how much revenue you can expect each month and it fluctuates depending on your subscription revenue model.

2. Annual recurring revenue (ARR)

This is similar to MRR but is used for long-term forecasting. Your average monthly revenue per subscriber is multiplied by the total number of subscribers, which is multiplied again by twelve.

3. Average revenue per user (ARPU)

This metric is helpful for a subscription business model that offers multiple tiers. To find your ARPU, divide your MRR by the total number of customers. Note that this is traditionally a SaaS metric rather than a retail subscription one. If you’re looking for the latter, you can swap the “U” for “C” or “S” to represent customer or subscriber, respectively.

4.Customer acquisition cost (CAC)

This is how much money you spend to obtain new customers, and it’s an important part of evaluating your cash flow. CAC is a bit tricky to calculate, so it’s good to gain a comprehensive understanding of it.

5.Churn rate

While subscription businesses should aim to retain every customer that comes to them, it’s inevitable that a portion will decide to cancel their subscriptions at some point. This is your churn rate. A basic churn calculation can be done by dividing the total number of cancellations by the total number of subscribers during a set period and converting it to a percentage. The lower it is, the better.

6. Customer lifetime value (CLV)

The CLV is the average worth of a customer throughout their relationship with the business. For the subscription business model, the higher this number, the more validation you have that your business is working.

7. Payback period (PBP)

The PBP is often used as an alternative to CLV. In summary, this is the average time it takes to earn back your CAC in the form of MRR. It’s particularly important in the early stages when acquiring customers, as you won’t reap the benefits until the MRR they generate surpasses the CAC.

While the subscription business model offers consistent revenue and reduced marketing expenses, it also comes with challenges.

Those looking to seize this opportunity and become a subscription success story should make sure they have a proper understanding of what a successful subscription business model aims to achieve.

At Subbly, we offer an all-in-one subscription-first platform that guides you through the entire process, from setting up your subscription business to scaling it for success.

Right now, you can get a free trial to find out whether it’s the right platform for you and your business.