Over the past decade, subscription services have become incredibly popular. From consumer subscription-based businesses like Spotify and Netflix to B2B subscription business models – employed by many software-as-a-service (SaaS) companies – the subscription economy is having a significant effect on a broad range of industries. In fact, over recent years subscription businesses have seen sales grow around 5 times faster than traditional companies. But is it the right option for every company?
What is a subscription business model?
A subscription model is a business model that charges customers a recurring fee (usually monthly or annually) to access a service or product. While this may seem like a relatively new phenomenon, it’s anything but. Newspaper delivery was one of the earliest subscription commerce models, while satellite television companies with pay television channels, gyms, internet providers, and academic journals have all made use of this type of business model.
How do subscription services make money?
Subscription business models are relatively straightforward; customers simply sign up to rent or purchase a product/service via a recurring payment. From the consumer side of the transaction, that’s all anybody needs to worry about. On the business side of the transaction, however, things are a little more complicated. You’ll need to guarantee a steady production line/availability and establish a price-point that enables you to acquire and retain customers while making a profit.
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Is a subscription model always the right option?
While a subscription commerce model may seem appealing, particularly due to the vast numbers of companies that are making use of this type of structure, it’s worth remembering that it may not be the right choice for every business. Here are some of the best ways that you can make certain that a subscription-based business model is the right option for your company:
Ensure your service/product is appealing to potential subscribers – Beyond anything else, it’s important that you have a product or service that people will want to continue paying for. Aside from the initial service or product offering, there are lots of ways to stand out from the crowd, including “freemium” models, where you offer limited access for free before inviting customers to subscribe for the premium selection.
Settle on the right price-point – It’s important to determine a price-point that doesn’t undercut your margins while remaining attractive to customers. You can tier your pricing strategy according to functionality, and if you have an ideal price-point in mind, set an even higher price-point above it to make your ideal price look more attractive to customers.
Get your metrics right – Analysing key metrics can provide you with excellent insight into the financial health of your B2B subscription business model. Ensure that you’re tracking key KPIs like recurring profit margin and retention rate from day one to stay ahead of customer churn and engagement.
Optimise the billing process – Churn (the rate by which a subscription business loses subscribers) can have a massive effect on the success or failure of your business. There are two key reasons for failed transactions: insufficient funds and cancelled mandates. By optimising the billing process – for example, utilising GoCardless’s automated payment system – you can receive notifications that will enable you to work out why you’re not receiving payment and rectify the situation.
Take local payment cycles into account – Billing failures can occur when regional/local payment cycles aren’t properly considered. In order to maximise your chances of taking payment, it may also be a good idea to automate your billing process with Direct Debit, which allows your customers to select a payment schedule that suits them best.
Enable customers to select their favoured billing frequency – By letting your customers select their billing frequency for themselves, you’re much more likely to avoid failed transactions due to insufficient funds. By taking payment via Direct Debit, you can enable your customers to select monthly, quarterly, or annual billing, giving you the best chance of retaining customers.
Nurture customer relationships – Customer service and subscription commerce models go hand in hand, and while acquiring new customers is important, you should remember that most transactions are likely to be changes to existing accounts, i.e. upgrades, add-ons, and terminations. By providing your customer with plenty of tools to manage their account and staying in touch frequently, you can develop a stable, loyal customer base, which is crucial for growth.
Offer Direct Debit as a payment option – For subscription business models, Direct Debit can be the best way to reduce churn, improve customer lifetime value (LTV), and maximise monthly recurring revenue (MRR). By giving these three key metrics a push in the right direction, you’ll be well placed to take your subscription-based business to new heights.
We can help
Offering seamless, automated billing, GoCardless is an ideal payment service for the subscription economy. Find out more about how GoCardless can help eliminate involuntary churn, boost LTV, and cut transaction fees.