Other than my local newspaper, the first subscription-based business that I was introduced to was Netflix. I remember going online to pick out movies that I missed in the theaters, then mailing DVDs back and forth as I watched them each month.

Netflix has come a long way since then and 18 years later, I'm still a happy and loyal customer. In fact, I rarely think about my Netflix membership unless there are changes made to my subscription.

Nowadays, subscription models are used in nearly every industry, and growing companies like Netflix, Dollar Shave Club, and Microsoft have been using them for years. Subscription business models are beneficial for many organizations because they encourage customer success and improve buyer retention.

In this post, let's discuss what a subscription business model is, how it works, and the benefits of using this model. Then, we'll list a few examples of subscription models that you can use as inspiration for your business.

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What Is a Subscription Business Model?

A subscription business model is a recurring revenue model that allows you to leverage your customer relationships to create a steady stream of income. Customers are charged on a monthly or annual basis for a product or service and they can renew their subscription after a certain period of time.

As a customer, you have the convenience of automatically repurchasing a product or service that you know you're going to need in the future. As a business, you retain customers for future sales rather than re-engaging them on a more frequent basis. For the right product, brand, and industry, the subscription model can be a very effective and lucrative approach to running your business.

Let's learn a little bit more about how this business model works in the next section.

How a Subscription Model Works

In a subscription model, customers are charged on a recurring basis for a product or service. They choose how long and how often they want to receive each offer, and most subscriptions provide the option to renew or cancel at any time.

Think of a subscription as a contract between you and the customer. The customer agrees to pay for a product or service for a period of time and the business fulfills that offer so long as the customer completes their recurring payments. When the contract is up, the customer has the option to renew or cancel their subscription.

The diagram below illustrates what this looks like.

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A great example is your local newspaper. While you can buy newspapers individually, most who read them have a subscription. That way, every day you get a newspaper delivered to your front door for a fixed rate, rather than having to go to the store to purchase one.

Let's explore more benefits of subscription models in the next section.

1. Subscription models are convenient for customers.

People are busy. And, if they can get a product (that they like) delivered when they need it, with little to no effort on their part — sign them up. Subscriptions save people from having to research new products and shop for them in stores, creating a more seamless customer experience.

2. Customers can discover new products.

Not only do people save money from not having to travel to the store, but they also get to try new items that they may not have purchased on their own.

Take Snack Crate, for example, where you can purchase boxes of snacks from around the world. With this subscription, you might discover a new favorite snack that you never knew existed.

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3. Businesses can accurately predict revenue.

Subscription models make it much easier to predict how much revenue your business will receive each month. Since your customers are paying repeatedly, you know when they're going to make a payment and how much it will be for. When you're factoring budget into your business strategy, this will help you have an accurate representation of your company's resources.

4. Subscriptions can attract more customers.

Sometimes, the price tag on a product or service can be cost-prohibitive for a consumer. Charging weekly, monthly, or annually, allows you to set the price at a more affordable point, and lets consumers budget it into their monthly bills.

Think about buying a car. If you don't purchase it outright, you'll likely be put on a payment plan where you'll play incrementally over time. This allows you to afford the cost of the car, even though you can't afford the total cost of it right away.

5. Subscriptions decrease customer acquisition costs.

Rather than engaging potential customers who don't know or trust your brand, subscription business models allow you to do business with people who already do. This cuts down on marketing costs and allows you to focus more on customer referrals. This word-of-mouth marketing is typically more effective and less expensive than promotional advertising.

6. Businesses build stronger relationships with their customers.

Another benefit of working with the same customers is that you develop stronger relationships with them over time. When your service team is always there providing excellent customer support, customers learn to trust your employees and they become accustomed to working with your brand. This plays an important role when customers have to decide whether or not they'll renew their subscription.

Now that we've highlighted the benefits of subscription business models, let's look at a few companies that use them.

Examples of Subscription Business Models

Subscription Box Business Model

Subscription boxes have become a very popular type of business model. Every month, customers receive a box filled with various products that are sometimes related to each other and sometimes not. The combined cost of these items typically outweighs the overall cost of the box.

Some companies let the customer choose what's in the box, while with others, customers get the element of surprise while experiencing new products they may not have sought out on their own. This is a great way for a brand to familiarize its customer base with all of its products.

Subscription Box Example: Butcher Box

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Butcher Box is a subscription box service that sends customers boxes of meat each month. Each box includes different cuts of meat as well as a few recipes for you to cook them with. This is a great way for carnivores and BBQ enthusiasts alike to try out different types of meat they may not have tasted or cooked before.

Streaming Service Subscription Model

Streaming services grant you access to things like movies, television, and music, for a monthly price. The benefit of this model is that consumers can access all of the entertainment content they need whenever and wherever they want.

Streaming Service Subscription Example: Hulu

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Hulu is a popular streaming service that allows you to stream movies and TV shows from your computer, phone, or smart device. You can also access content on the go, so you can enjoy your favorite shows even when you're not at home. With its flexibility and competitive pricing, Hulu has become a preferred entertainment alternative for cord-cutters looking to move away from cable TV.

Food Service Subscription Model

If you're looking to mix up your dining routine, then you may want to consider a food service subscription. These companies not only deliver food to your doorstep, but they also provide you with recipes to cook with. That way, you're getting both the ingredients and direction needed to make a home-cooked meal — even if you don't have any cooking experience.

Food Service Subscription Example: HelloFresh

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HelloFresh is a food subscription service that delivers all of the ingredients needed to cook a complete meal. Each box includes individually wrapped packages of food — which each one measured out to the exact portion needed in the recipe. HelloFresh saves you time from having to do prep work since all of your ingredients are measured and prepacked when you receive the box.

Health and Wellness Subscription Model

Tired of going to the gym for your daily workout? With a health and wellness subscription, you can get access to classes, trainers, and workout equipment all for a monthly fee.

Health and Wellness Subscription Example: Yoga International

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Yoga International is an online yoga studio where you can attend interactive workout classes from the comfort of your home. Rather than having to adhere to a gym's set schedule, you can choose when and where you want to work out.

Software Subscription Model

Many software companies use subscription models because they often update and improve their products and services regularly. Rather than asking customers to repurchase the product every time a change is made, the subscription model lets them make improvements without hindering the customer experience.

Software Subscription Example: HubSpot

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All of HubSpot's products are offered on a subscription basis. And, this makes sense, too, since HubSpot routinely updates and improves its products daily. If they weren't offered as a subscription, HubSpot would have to update its pricing every day to reflect the changes made to its product. Not only would this be confusing for HubSpot, but its customers would be wondering why different customers are paying different prices for the same products.

This is just a small taste of the industries benefiting from a subscription-based business model. With a little creativity and the right plan, you may find that this approach leads to happier customers and greater retention rates for your business as well.

For more ways to grow your customer base, read these tips for customer acquisition and retention.

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Originally published Dec 30, 2020 8:00:00 AM, updated December 30 2020

Topics:

Customer Acquisition