How to build a successful subscription business model

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

With subscriptions, you can plan your income better. You make yourself less dependent on other platforms, and your business grows on its own - 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 (such as 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 long relied on this in their business models. Digitalization is now making this an option for numerous other offers, products and companies.

For example, you can have consumables sent to you regularly by Amazon or other providers - and get them cheaper that way. The graphic design application, on the other hand, no longer costs hundreds or thousands of euros up front, but a manageable amount per month. This adds up over time, of course, but the barrier to entry is lower. And the "surprise boxes" model is also based on this, with ever 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 allows for very different concepts:

  1. The income is more predictable due to the recurring payments. Of course, this is not 100% true, but it is more than if you always have to stimulate new purchases.
  2. Customers often spend more than if they had to order again each time. Because the hurdle between you and the customer is now somewhere else: it is no longer the purchase that is associated with effort, but the non-purchase (i.e. cancelling the subscription).
  3. You become less dependent on third-party platforms because more and more of your income comes from your existing customer base. If you do it right and inspire your customers, they can even recruit new customers who then 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 a salewith such a business model.

Because with the subscription business, your income does not depend as much on successful marketing measures as is the case with other concepts.

Subscription business model: examples

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

Membership website

In this case, a hopefully clearly defined target group receives 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". With this there are requirements for membership, because:

  • The price is particularly high
  • The number of members is limited or
  • Membership only works via personal invitations

The long-term value of such offers comes essentially from the members themselves. So you need a certain basic quantity of members here, so that the project attracts further interested parties at all.

Access to a content library

Netflix and Spotify are examples of this. In order for these to work in the long term, the offer must grow continuously. Otherwise, you get the feeling that you've already seen everything. The retrieval of useful information such as databases, e-books or online video courses also 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 of this article comes into play: You take something off your customers' hands on a regular basis, for which they don't have to book you over and over again. Or it works similar to an insurance policy: Your customers pay a monthly fee in order to be able to use your help if the worst comes to the worst. This can also be support for WordPress or WooCommerce .

Tip: Business models for WordPress

You develop websites or Plugins and Themes for WordPress ? We show you which possibilities and business models there are. Read our guide WooCommerce for freelancers & agencies, or our e-book WooCommerce for professionals. The tips in it also apply to WordPress .

In the "premium service" variant, you offer 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 that is still profitable for you in the end. Here it is often important to gain initial experience with a manageable number of beta testers before you launch the offer on a larger scale.

Consumables

I already mentioned Amazon above, but the Dollar Shave Club and its many imitators also belong in this category. Here, customers "subscribe" to products that they would buy regularly anyway. In return, they get a discount.

Personalized product bundles
Personalized Bundles at Dollar Shave Club

To compete with the big e-commerce players, you need a strong brand, a good story and an excellent customer retention strategy. Your customers need to be so excited about your products and services that they don't even think about comparing them to other offerings.

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

Finding the right pricing model for your subscription business

All ideas have in common that you as a provider must make the benefits of the subscription crystal clear. Because the barrier to entry is initially higher here than with a one-off purchase. The term "subscription" alone can have a deterrent effect.

That's why you should advertise the benefits above all else: Customers save money and/or time on consumer products, they have access to an exclusive library of content, they get to meet exciting people from their own topic area, and the like. Again, here are some examples of the right subscription business model:

Free samples and freemium

Some offers of this type entice users with a free trial period in order to experience the benefits directly. Or a "freemium" model is implemented, in which a limited version is available free of charge. Last but not least, there are both in combination: First, prospective customers use the full range of functions for a trial period, then they are downgraded to the free model. And then often get used to the premium features. Keep in mind, though: "Free" is not a business model, but at best a marketing tactic.

Moreover, it is not that easy to make such a freebie successful. On the one hand, the prospective customers should get a good impression. On the other hand, it should not come down to the fact that the free option is already sufficient for most. At the same time, it is true that even these customers can already generate effort, for example in terms of support.

Basic version

In this respect, a completely free offer sometimes does not make economic sense. Then it is an idea to introduce a paid "basic" variant with a limited range of functions instead. 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 to physical products, for example. Here, instead, the sales page must be implemented with all the means of art, answer all questions and remove all doubts. This includes things like: Money-back guarantee, flexible subscription conditions, shop seal, social proof via customer opinions, FAQs, photos and videos, detailed descriptions and so on.

Service charges, price increases and other stumbling blocks

When calculating your prices, consider the additional costs. This doesn't just include the fact that taxes are deducted and each transaction has to be booked. More importantly, payment providers like PayPal or Stripe often charge a minimum fee per transaction, making small amounts - for example, for a "basic" offer - a worse deal.

So you may well end up earning very little here. The good news, however, is that those who have paid you once and had a hopefully excellent experience are much more likely to do so again. So you should look to ultimately get your basic customers excited about your more expensive offerings. Pricing is important in all of this if only because it's not so easy to raise prices later. Customers quickly react allergic to this. In addition, you may have already created the expectation that your subscription offer is only worth a certain price.

Working with price levels

Here's a tip if you run into this situation: Instead, introduce a new, higher-priced offering that has a new feature set. For example, new options or a new service. Those who booked the original version keep it at the same time at the old price. You may also continue to offer it openly as an economy version. However, new content/elements/services may then only be available for the new, more expensive plan .

In general, several price levels with different scopes are widely used. Three plan variants have proven themselves there in many cases.
A final thought on pricing: A subscription model can also work as a mixed calculation and bring in follow-up orders. So you might have a website maintenance contract with a client who then also books you when their needs go beyond that.

Important: The first 30 days are decisive

Once the offer and the prices are in place, 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 feel 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 will eventually have to change their behaviors and keep in mind that they've signed up for your subscription. This is sometimes supported through gamification, where new subscribers earn points for activities to reach a certain status.

In short, make sure, especially in 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 onboarding process is crucial to keeping your customers loyal for the long term. Maybe even surprise them with something extra that you haven't mentioned before. It doesn't have to cost much. After all, even a handwritten thank you note in the first delivery shows that your customers aren't just payment transactions and CRM entries to you. Even later on, you should show your appreciation to your loyal subscribers every now and then with little things like this.

The dream of the superusers

With a little luck and effort, you'll create a growing number of "super users": customers who love your offer so much that they'll stay with you for a long time. And that they also refer new customers to you. If you support this with an affiliate program, your subscription business will ideally grow on its own. But for this to work, you have to make sure of two things:

  1. The value and benefits of your offering must be maintained over time. Depending on the model, you'll invest time, effort and money to add new content or keep the community alive, for example. Because as a warning, if you cancel a subscription, you've usually been dissatisfied for a while - and can be one of the most disgruntled ex-customers. So always watch out for such warning signals and always be open for feedback.
  2. Your subscription must work smoothly. This is especially true for the payment process. Every little problem will cost you money. 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 does want to quit, it should be as simple as possible. First of all, this person may not be a good fit for your offer. Secondly, you make it more likely that they will return at a later date, because they don't feel locked in or taken advantage of.

Key metrics for your subscription business model

In addition, there are several metrics in the subscription business that you should keep track of on an ongoing basis:

- Churn Rate: A very important metric. It shows you how many subscribers you lose over time. You should optimize your subscription business model from this metric and first make sure that your existing customers stay with you as long as possible. Otherwise, your offer is a bottomless pit. So look at how long your subscribers stay with you on average.
- Lifetime Value: You can calculate what a subscriber brings you from signing up to cancelling. This value is important to compare with the next one:
- Customer Acquisition Cost: This is the cost it takes to acquire a new customer. The value, compared to the Lifetime Value, determines how much you can invest in your marketing efforts.
- Monthly Recurring Revenue: A general measurement is the monthly recurring revenue. This shows you the current status of your offer.

My conclusion on subscription models

A subscription business model can serve a variety of roles. For some businesses, it's the main source of revenue. For others, it can help build long-term customer relationships.

As you may have seen from this post, such a business is very interesting economically. Especially the relative predictability of the 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 the existing subscribers happy.

The important thing here is to keep in touch with your clientele. This can happen in person or through automated tools like feedback forms. Hopefully, you'll end up building something like a personal relationship with your customers. Not only does this help you to keep improving your offering. 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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Contributing photo: 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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