How to build a successful subscription business model

Jan Tissler Updated on 22.10.2020
9 Min.
Subscription business model
Last updated on 22.10.2020

Subscriptions make it easier to plan your income. You become more independent of other platforms and your business grows out of itself - if you do it right. In this article I'll explain how to create a suitable offer, find the right pricing model and make your subscribers happy.

Subscription business models have many names: club membership, communities (for example with BuddyPress), maintenance contract, subscription concepts (with WooCommerce) or flat rates are just a few examples. Magazines, insurance companies, fitness centers and many more have been relying on them for their business model for a long time. Digitization is now making this an option for numerous other offers, products and companies.

An example: Consumables can be sent to you regularly by Amazon or other providers - and get them cheaper. The graphic design application, on the other hand, no longer costs hundreds or thousands of euros in advance, but a manageable amount per month. Of course, this will add up over time, but the entry hurdle is lower. And the model of the "surprise boxes" is also based on this, with new products on a firmly defined overall theme.

Reasons for the subscription business model

Subscriptions are interesting for companies, agencies and freelancers for various reasons, which makes very different concepts possible:

  1. The income is more predictable due to the recurring payments. Of course, this is not 100 percent true, but it is more than if you have to keep stimulating new purchases.
  2. Often customers spend more than if they had to reorder each time. Because the hurdle between you and the customers is now somewhere else: It is no longer the purchase that is connected with effort, but the non-purchase (i.e. the cancellation of the subscription).
  3. You will become more independent from third party platforms as more and more of your revenue comes from your existing customer base. If you do it right and inspire your customers, they can even attract new customers who in turn contribute to your regular income. For example through commissions, bonuses, free products or Affiliate models.
  4. And last but not least, if this is an option for you: Your company is more interesting for a takeover or sale with such a business model.

In the subscription business, your income does not depend as much on successful marketing measures as it does with other concepts.

Subscription business model: examples

As mentioned at the beginning, subscription business models exist under many names and for many industries. Corresponding platforms can also be implemented quite easily with WordPress orWooCommerce . Here are some practical examples as a suggestion:

Membership website

In this case, a hopefully clearly defined target group will receive an equally clear benefit, for example in the form of training, up-to-date information, forums for exchange, etc. Especially as a B2B offer, this can be very successful, because the price then promises a direct monetary benefit: What the participants learn, they can use to improve their own business.

A variant of this model is the "exclusive club". In this case there are requirements for membership because:

  • The price is particularly high
  • the number of members is limited, or
  • Membership by personal invitation only

The long-term value of such offers comes largely from the members themselves. So you need a certain basic number of members to attract more people to the project.

Access to a content library

Netflix or Spotify are examples here. In order for these to work in the long term, the range of products must grow continuously. Otherwise you get the feeling that you have already seen everything. Even the retrieval of useful information such as databases, e-books or online video courses belongs in this category. A well-known platform for this is Udemy:

Online courses
Online courses from Udemy

Services and Premium Service

This is where the maintenance contract mentioned briefly at the beginning comes into play: You regularly take something off your customers for which they do not have to book you again and again. Or it works similarly to an insurance: Your customers pay a monthly fee, so that they can call on your help if necessary. This can also be support for WordPress orWooCommerce .

Tip: Business models for WordPress

You develop websites or Plugins and Themes for WordPress ? We show you which possibilities and business models are available. Please read our guidebook WooCommerce for freelancers & agenciesor our e-book. WooCommerce for professionals. The tips in it also apply to WordPress .

In the "Premium Service" variant, you offer a higher quality support, for example with fast response times, a personal contact person, etc. The biggest difficulty here is to find the balance: an interesting offer for your customers, which in the end is still worthwhile for you. Here it is often necessary to gain initial experience with a manageable number of beta testers before you launch the offer on a larger scale.

Consumer products

Amazon I already mentioned above, but also the Dollar Shave Club and his many imitators belong in this category. The clientele "subscribes" here to products that they would buy regularly anyway. In return, they receive a discount.

Personalized Product Bundles
Personalized bundles at Dollar Shave Club

To prevail here against the big e-commerce offers, you as a start-up or small business need a strong brand, a good story and an excellent customer retention strategy. Your customers must be so enthusiastic about your products and your service that they don't even think about comparing them with other offers.

Some of the ideas mentioned above can be combined. For example, a consumer product subscription can also provide a community for like-minded people. Or a membership website can attract new customers with a content library.

Finding the right pricing model for the subscription business

All ideas have in common that you as a provider have to communicate the benefits of the subscription crystal clear. The entry hurdle is higher here than with a one-off purchase. The term "subscription" alone can be a deterrent.

That's why you should advertise the benefits above all: The customers save money and/or time on consumer products, they have access to an exclusive library of content, they get to know exciting people from their own subject area and similar things. Here too are some examples of the appropriate subscription business model:

Free samples and Freemium

Some offers of this kind entice with a free trial period to make the advantages directly tangible. Or a "Freemium" model is implemented, where a limited version is available for free. Last but not least, there is a combination of both: First, interested parties use the full range of functions for a trial period, then they are downgraded to the free model. And then they often get used to the premium functions. But remember: "Free of charge" is not a business model, but at most a marketing tactic.

It is also not easy to make such a free variant successful. On the one hand, the interested parties should get a good impression. On the other hand, it should not mean that the free option is already sufficient for most people. At the same time, these customers, too, can already generate expenditure, for example in terms of support.

Basic version

In this respect, a completely free offer sometimes makes no economic sense. Then it is an idea to introduce a "Basic" variant with limited functionality that is subject to a fee. But beware: paying customers are often more demanding, even if they only pay a comparatively small amount.

For some of the business models mentioned above, a free option is generally not possible or only possible to a limited extent. This applies, for example, to physical products. Here, instead, the sales side must be implemented with all means of art, answer all questions and dispel all doubts. This includes things like: money-back guarantee, flexible subscription conditions, shop seal, social proof of customer opinions, FAQs, photos and videos, detailed descriptions and so on.

Additional costs, price increases and other stumbling blocks

When calculating your prices, consider the additional costs. This does not only mean that taxes have to be paid and every transaction has to be posted. More importantly, payment providers such as PayPal or Stripe often charge a minimum fee per payment transaction, which means that small amounts - for example for a "basic" offer - have a worse record.

So it's quite possible that you'll end up earning very little here. But the good news is: Whoever paid you once and hopefully had an excellent experience will do so again with a much higher probability. So you should make sure that you get your Basic customers excited about your more expensive offers. Pricing is important in all this, if only because a later price increase is not easily possible. Customers react to this quickly with allergies. In addition, you may already have raised the expectation that your subscription offer is only worth a certain price.

Working with price levels

Here's a tip, if you get yourself in this situation: Instead, introduce a new, higher-priced offer with a new feature set. Like new options or a new service. If you booked the original version, you keep it at the same time at the old price. You may continue to offer it openly as a savings option. New contents/elements/services may then only be available for the new, more plan expensive .

In general, several price levels with varying degrees of coverage are widely used. Three plan -variants have proven themselves there in many cases.
One last thought on pricing: A subscription model can also function as a mixed costing and bring in follow-up orders. For example, you may have a website maintenance contract with a customer who will book you even if his needs go beyond that.

Important: The first 30 days are crucial

When the offer and prices are ready, then hopefully the first customers will come. The most important phase for a subscription is the first 30 days after the purchase: Here you have to show your subscribers that they have made the right decision. They need to experience a sense of achievement as soon as possible.

You should make sure that they actually use the subscription offer: Depending on the model, your new users may need to change their behaviour and remember that they have taken out a subscription. This is sometimes supported by "gamification", where new subscribers collect points for activities to reach a certain status.

In short, just make sure at the beginning:

  • that every step is clear
  • that subscribers know all their options
  • that the benefits of the offer remain crystal clear and
  • that they are completely satisfied and enthusiastic

This process, called onboarding, is crucial to retaining your customers over the long term. You might even surprise them with an extra that you haven't mentioned before. It doesn't have to cost much. Because even a handwritten thank you note in the first delivery shows that your customers aren't just payment transactions and CRM records to you. Even later on, you should show your appreciation to your loyal subscribers with little things like that.

The dream of the super users

With a bit of luck and effort, you can create a growing number of "super users": customers who love your offer so much that they will stay with you for a long time. And that they also bring you new customers. If you can still do this with a Affiliate program your subscription business will ideally grow by itself. But for this to work, you have to make sure of two things:

  1. The value and benefit of your offer must be maintained in the long term. Depending on the model, you will invest time, effort and money, for example, to add new content or keep the community alive. Because as a warning: If you cancel a subscription, you've usually been dissatisfied for a long time - and can be one of the most disgruntled ex-customers. So always pay attention to such warning signals and always be open to feedback.
  2. Your subscription must work smoothly. This applies especially to the payment process. Every problem, no matter how small, will cost you cash. Because at such a moment, customers question the purpose of their subscription. The hurdle of cancellation is then suddenly very low. But that is exactly what must not happen.

Also important: If someone wants to quit, it should be as simple as possible. First of all, it is possible that this person simply does not match your offer. Secondly, you make it more likely that they will come back at a later date, because they don't feel trapped or cheated.

Key metrics for your subscription business model

In addition, there are various metrics in the subscription business that you should keep an eye on at all times:

- Churn Rate: A very important key figure. It shows you how many subscribers you lose over time. You should optimize your subscription business model from this value and first make sure that you keep your existing customers as long as possible. Otherwise your offer will be a bottomless pit. So look how long your subscribers stay with you on average.
- Lifetime Value: You can calculate how much a subscription customer earns from the time of purchase to the time of cancellation. This value is important to compare with the next one:
- Customer Acquisition Cost: This refers to the costs required to acquire a new customer. Compared to the lifetime value, the value determines how much you can invest in your marketing measures.
- Monthly Recurring Revenue: A general measurement is the monthly recurring revenue. With this you can see the current status of your offer.

My conclusion on subscription models

A subscription business model can fulfil a wide variety of roles. For some companies it is the main source of income. For others, it can help build long-term customer relationships.

As you may have seen from this article, such a business is economically very interesting. Especially the relative predictability of income is very pleasant. At the same time, however, it takes time and effort to find the right offer and pricing model - and to make existing subscribers happy.

It is important to keep in touch with your customers. This can happen personally or through automated tools such as feedback forms. In the end you will hopefully build up something like a personal relationship with your customers. This will not only help you to improve your offer. But the good relationship also makes it less likely that subscribers will cancel your service.

What questions do you have for Jan about subscription models?

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Picture: Alain Pham

Jan is an online journalist and digital publishing specialist with over 20 years of professional experience. Companies book him as an author, consultant or editor-in-chief. He is also the founder and one of the editors of UPLOAD magazine. Photographer Author's picture: Patrick Lux.

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