Last editedMar 20233 min read
The subscription market has seen a significant increase in the years following the pandemic with the global subscription market currently valued at around $120 billion. While the pandemic arguably catalysed this success, it’s a trend that has been steadily rising for years now, with every industry from healthcare to entertainment getting in on the action.
With the flexibility and success of the subscription-based model, it’s understandable that so many businesses are clamouring to invest in their own subscription services. The benefits of a subscription model are obvious and plentiful – you get a constant and reliable revenue stream, more insight into your customer’s behaviours and a much easier time forecasting thanks to the predictability of the process.
But if you’re wondering if a subscription business model is right for your business, you’ll want to know the basics and what options are available to you.
What is a subscription model?
A subscription business model relies on an up-front fee, usually paid monthly or annually, that gives the customer access to a service. This could be anything from a streaming service like Netflix to a monthly box of curated products. The purpose of a subscription is to build a reliable revenue stream and retain customers for longer, making them more valuable and hopefully turning them into ambassadors for your brand.
There is no singular subscription model to adhere to. In essence, there are dozens, with many companies starting with a flat-rate subscription model, before realising this leads to revenues levelling off and adapting to a more flexible ‘pay for what you use’ service. Some even opt to start with a freemium model, before realising not enough users are choosing to upgrade to premium status and are shifting lanes entirely.
Types of subscription business models
There are four basic subscription models that most businesses choose to operate under:
This is the type of model exemplified by e-commerce subscription box services like the Dollar Shave Club. In this model, the customer pays a monthly fee for a regular item to be replenished. The main selling point here is convenience, as signing a deal with a business on this basis means the customer has one less thing to remember to buy every month. This is arguably the sector of the market that took off with the most gusto during the pandemic, as people were unable to leave their homes and replenish their regular items. These businesses also often find a way of making more typically banal and uninteresting things a little more exciting.
This is the subscription service we’re probably all the most familiar with, as Netflix operates on an access subscription model. This is a service that generally charges multiple pricing models for access to different tiers of a service. This is a more flexible and accessible model and has been used by many SaaS providers.
For customers that like to give themselves little gifts occasionally, a curated ‘gift box’ is a great idea. Popularised by companies like Birchbox and Beer Cartel, these are monthly subscriptions with items that have been carefully picked and packaged, and are often curated based on the customer’s selected likes and dislikes. The appeal here is for discovering new products, and the businesses are often able to foster strong communities based around the mutual interests of their users.
Finally, this service relates to a model where a business offers products or services as one-off purchases but then offers the option for customers to add-on a subscription to their purchase, often with a cost-saving incentive. Amazon’s ‘Subscribe and Save’ programme is a perfect example of an add-on subscription model.
Paying for subscription services
As for how revenue is generated, there are several flexible pricing models to consider, and the most common pricing strategies are as follows:
A freemium model relies on customers exchanging their basic contact information for limited access to a product or service. There is generally a more fully featured version of the same offering available for a price, with the free tier acting as an introduction.
This is the simplest version of the subscription model that charges a recurring flat fee for the product or service. The problem with this model, however, is that the one-size-fits-all pricing structure is rarely a financially viable fit for most businesses.
Pay-as-you-go or usage-based pricing means charging a customer for what they use. This can be based on anything from how many accounts they can hold to how many messages they can send or what level of products they are allowed access to. Many telecommunication service subscriptions operate on this model.
Tiered pricing is how businesses like Netflix and most SaaS services operate – offering multiple levels of service for various prices. This is a great option for businesses that want to set a clear path for upselling, as it allows users to become more valuable if they choose to upgrade to the next tier.
In a similar manner to the tiered model, this model charges more depending on how many users or customers are operating from within a single account. This is a great subscription model for businesses, as they can decide how many employees will be using the services and choose their price accordingly. In this model, shared bundles or ‘family plans’ can also be offered, and this is currently used by companies such as Apple and Nintendo.
We can help
GoCardless is the perfect solution for collecting recurring subscription payments. Using Becs Direct Debit through GoCardless allows businesses to receive payments on time, every time, while connecting to their existing financial software (such as Xero).
By adding on PayTo instant payments, it’s also easy to request payment for one-off and add-on costs, like account top-ups or additional features.