How to Run a Subscription Business

According to a recent study conducted byOvum Research, Australians and New Zealanders spend an average of $660 per month on subscription goods and services. This is why 70% of Australian businesses are planning to shift to asubscription business model. If your business is one of them, you may be wondering how to run a subscription business most effectively. Here are our tips to help you enter thesubscription economy.

Reasons to use a subscription business model

There are plentiful reasons to consider using a subscription business model, from predictable income to improved brand loyalty. Key benefits include:

• Improved cash flow due to regular, recurring upfront payments

• Reduced cost of customer acquisition

• Predictable monthly revenue helps improve sales forecasting and inventory planning

• Regular purchases let you fine-tune your products for greater value to customers

• Opens your business to upselling and cross-selling in relation to current subscriptions

Are you sold on the advantages? Here’s how to run a subscription business in three simple steps.

Step 1: Choose a subscription business model.

The first step is to choose the type of subscription service your business will offer. There are three  business models to choose from.

• Curation: The curation model is what most people immediately associated with subscriptions, covering curated collections of things like clothing, accessories, or beauty products. Part of the value of a curated subscription is that they offer an element of surprise, delighting the customer. Examples include Stitch Fix and Birchbox.

• Replenishment: With the replenishment model, you focus on everyday staples like cleaning supplies or vitamins rather than special treats. Examples include Amazon groceries or Scratch pet food delivery. Consumable household goods are delivered on a recurring basis for the subscriber’s convenience.

• Access: The third type is more suited to businesses who offer services rather than physical products. The subscriber is paying each month to access content or a service, like Netflix and Amazon Prime. They may also pay to gain access to special member discounts or free shipping. 

Step 2: Determine the price, terms, and conditions.

Once you’ve determined the type of subscription model that best suits your business’s products or services, the next step is to work out the finer points of the subscription model. Pricing is a key component of this step. You need to price your products at a low enough cost to entice new customers and retain existing ones, while keeping profit margins high enough to make money.

Customer retention is also a piece of this puzzle. For example, some businesses offer discounts for customers who commit to a certain number of months or a full year’s subscription. Others opt for the freemium model, which gives free access to the most basic service. Customers who want more can then elect to pay for a higher tier of subscription service.

Timing is another factor – will you make weekly, monthly, or annual deliveries? Again, this will depend on the nature of your service. Be sure to clearly determine and state your terms and conditions, including cancellation policies.

Step 3: Share your services with existing customers.

Now that you’ve set up the basic structure of your subscription business, the final step is to get the word out. At this stage, you’ll be able to share your subscription details with existing customers. Offer special discounts to those who upgrade to a subscription, with personal touches to add value.

Use social media outreach to engage with both new and existing customers, asking for reviews, and responding to any feedback to improve the quality of your products.

Best practices for subscription-based businesses

Launching a new subscription business is an exciting venture with plenty of growth possibilities, but one problem to overcome is the issue ofcustomer churn. Attracting new customers is only half the battle; you need to retain them as well. Here are a few tips to keep in mind to reduce churn.

• Do your research before launching a new product or service. Is there adequate market demand?

• Add value to your subscription by personalising your products to suit customer needs. Attention to personal detail helps increase brand loyalty.

• Use data analytics to keep on top of customer needs and buyer behaviour for improved retention rates.

• Monitor importantsubscription business metrics on a regular basis to see what’s working – and what isn’t.

• Don’t forget to factor involuntary churn into the equation, such as customers lost to address changes or expired credit cards.

GoCardless helps reduce involuntary churn with tools likeSuccess+, an intelligent retries tool. It automatically retries payments when the first attempt fails, collecting an average of 76% of initial failed payments. GoCardless also offers a Bacs Direct Debit solution, perfect for recurring subscription payments.

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.