Last editedFeb 20233 min read
Although the subscription revenue model has been around for decades, it’s really taken flight over the past few years with the growth of home delivery services. In addition to the traditional print media industry, you’ll now find the subscription model used across all sectors from travel to groceries to fashion. If you’re thinking about using the subscription-based revenue model in your own business, here’s what to consider first.
What is a subscription revenue model?
The subscription revenue model definition describes a system where customers pay recurring fees to access a business’s products or services over time. For example, the customer might pay an annual fee to access software or pay a monthly fee to receive a grocery delivery box each week.
These recurring fees are taken at regular, predefined intervals to maintain access to the product or service. As such, it’s important for businesses to maintain good long-term relationships with their customers. It’s well worth cultivating these relationships, as returning customers spend an average of 67% more than new customers.
What types of businesses use a recurring revenue subscription model?
The subscription revenue model is used across nearly all industries today. You can subscribe to any number of product types and services. These tend to fall into three main categories.
1. Access to media content
Companies like Netflix, Now TV, and Disney Plus charge a monthly subscription fee in exchange for access to their unique streaming content. There are other companies that provide access to audio content, like Spotify and Tidal, or traditional print media like magazines and newspapers.
2. Access to services
The second category of subscription businesses include those that charge a recurring fee for access to their services. This includes software as a service (SaaS) as well as utility companies or insurance providers. The customer makes regular payments to maintain access to the services they need.
3. Access to products
The third type of subscription revenue business concerns any company selling physical products. This category includes all the subscription boxes you might be familiar with, like Blue Apron, Stitch Fix, Birch Box, or Hello Fresh.
What are the advantages of a recurring revenue subscription model?
We’ve already noted that customers spend more over time in comparison to new customers. There are many other advantages associated with the subscription-based revenue model.
Steady revenue stream due to regular, recurring payments
Higher customer lifetime value and reduced churn
Engaged, satisfied customers improving your brand reputation
What are the challenges of a subscription-based revenue model?
On the other hand, there are a few drawbacks to consider at the same time. To ensure success, subscription businesses need to make sure that they’re dedicating sufficient time and effort to innovation. Customers will grow bored of the same products and services, so you need to retain interest with fresh features and special perks.
Churn, both voluntary and involuntary, can also be an issue. Even when you have engaged customers, budget constraints and increased competition can lead to cancellations. It’s also important to make sure that payment details on file are kept up-to-date, or you’ll run the risk of involuntary cancellation due to payment failure.
Is a subscription revenue model right for your business?
This type of model is used by businesses in most industries, but it won’t be right for everyone. To get started, think about the products and services you offer. Will customers want to pay over time to retain access to these services?
You’ll also need to carefully think about your price point, comparing it to competitors to ensure your recurring fees are viable enough to add value. It’s important to do some market research before launch to get a sense of what your target demographic is looking for – and willing to pay.
Finally, don’t forget about payments. Make sure you use a billing system like GoCardless that’s designed for recurring payment collection. While card payments are expensive and prone to failure, GoCardless uses bank payments instead to cut down on unnecessary fees. It also means fewer failures for subscription businesses. In fact, businesses can collect over 97% of automated recurring payments on the try. When failures do occur, Success+ uses an intelligent retries system to take payment at the most optimal time –reducing involuntary churn. All of this reduces the risk involved with the subscription revenue model, for on-time payments, every time.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.