Last editedApr 20222 min read
Subscription-based businesses come in many forms, from software-as-a-service (SaaS) and e-commerce to fitness memberships and subscription boxes. There are many advantages to running a company along these lines, not least because they offer a regular revenue and help to improve customer retention.
In this post, we’ll discuss how a subscription model works and outline some of the advantages of subscription business models.
What is a subscription business model?
A subscription business model is a recurring revenue model, whereby customers pay a fee on a weekly, monthly, or yearly basis in exchange for services or products. Customers generally have the option to renew their subscription after a specified period of time. A subscription model allows companies to create a regular stream of income based on their long-term relationship with customers.
Customers are charged on a recurring basis, and the business provides a customer with a good or service as long as the customer continues with their payments.
The advantages of subscription business model
Subscription business models require little effort from customers, especially if they pay for their subscriptions via direct debit. Once they’ve set up the direct debit agreement, payments are automatically taken from their account on the same day every month.
2. Accurate revenue predictions
Businesses that run on a subscription basis will find it easier to predict how much revenue they will receive each month. Since customers have a regular payment schedule, it’s possible to know in advance how much they will pay and how much it will be for.
This can help companies with budgeting, keeping track of other important business metrics and makes it easier to get an accurate representation of how much money a business has available.
3. Better inventory management
In a traditional business model, it’s difficult to know how much inventory will be needed in order to maximise profits and minimise waste. When it comes to a subscription business model, however, it’s easier to see how many items have been ordered which helps when it comes to keeping track of inventory and restocking. Vendors can often order in advance from suppliers and take advantage of ‘early bird’ discounts.
By using a recurring billing software like GoCardless, it’s also possible to reduce any gaps between billing cycles to help plug revenue leaks.
4. Helps to build a customer base
Subscription based products and services can attract more customers, with the option to set various price points to make the subscription affordable to more people.
5. Reduction in customer acquisition costs
Subscription businesses allow companies to upscale existing customers to more expensive packages, cutting down on marketing costs. These types of models also rely on word-of-mouth marketing, which is generally more effective and cheaper than traditional advertising.
6. Stronger customer relationships
Since customers are paying over a long term, a business has more opportunities to build closer relationships with them. If they’re provided with great customer support, customers will learn to trust a brand, which can play a big role in their decision as to whether to renew or not.
Businesses can also tailor their messages to customers to personalise their experience, and deliver different recommendations or ads to subscribers to increase loyalty and engagement.
Subscription-based business models are increasingly popular
There are multiple advantages of subscription business models, which is why they are becoming a popular way for companies to deliver their goods and services. By switching to a recurring billing model, many businesses are beginning to reap the rewards in terms of sustained growth and higher revenues.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.