You’ve most likely engaged with a subscription-based business in one way or another—from your music streaming subscriptions to listen to your favorite music, video-on-demand subscriptions to watch your favorite shows, or even the bookkeeping systems you use to maintain your business book of accounts.
Today, subscriptions are more profitable than ever as a business model because of their innovation, flexibility, and scalability. Subscriptions also give businesses a competitive edge and allow them to build their brand with long-term clients, which results in increased customer retention and a constant revenue stream.
What is a subscription-based business model?
A subscription-based business model involves recurring customer payments in exchange for products or services. Depending on your business’s subscription renewal method, customers can renew their subscriptions monthly, quarterly, bi-annually, or annually.
Murtaza Oklu, Owner of OMO Transfer, says, “Just as a subscription-based business model benefits a business in terms of constant revenue stream, you must implement a robust customer service strategy, whether for quick problem resolution or subscription modification. This helps ensure that your customers receive their money’s worth more than just the product and service—ensuring customer loyalty and retention.”
How does a subscription-based business model work?
If you’re planning to pivot to a subscription-based business model, here are some questions you need to ask yourself:
- What unique products can I offer in the subscription industry?
- Who is my market, and why must they subscribe to my product or service?
- What is the most optimal price I can offer for a subscription that would generate a certain percentage of profit?
In a subscription-based model, customers pay a monthly, quarterly, bi-annual, or annual fee for a particular product or service. Once this payment is made, the business must faithfully deliver the product or service for the duration of the payment.
Generally, subscription models are automatically renewed. For example, if a customer has chosen a monthly subscription to a streaming service, the subscription will automatically renew upon expiration unless the customer explicitly cancels it.
Pros and cons of a subscription-based business model
Pros
- Recurring revenue stream: One primary reason businesses transition to a subscription-based model is to take advantage of a recurring and predictable revenue stream.
Companies that can predict their revenue streams can better manage their cash flows, which can provide more opportunities for growth investments, measure and predict profitability, and improve budgeting.
- Customer loyalty and retention: Building customer loyalty and reducing retention are among the most challenging aspects of any business. However, establishing these two concepts can significantly reduce customer acquisition costs, which could be avoided by developing effective, long-term customer relationships.
A subscription-based model helps businesses achieve this more easily and effectively. When customers are accustomed to the quality of your products and service, this reduces the chances of cancellations, generating more long-term customers.
- Opportunities to upsell and cross-sell: A subscription model allows customers to control what they pay for your services, especially with a tiered pricing model. Even with customers opting for the basic plans, consistent marketing efforts and continuous value-added offerings will entice them to upgrade to a higher-tiered plan (upselling) or purchase an add-on to their current plan (cross-selling).
When implemented effectively, these strategies increase revenue and improve overall brand value because customers are convinced that any subscription to your product or service is worth their investment.
Cons
- Market competition: The subscription model industry has grown by 437% in the last nine years and is poised to be valued at $1.5 trillion in 2025. With consumers constantly looking for convenience, value, and predictability, subscription-based services are undoubtedly becoming competitive today.
Businesses seeking to take advantage of this model must deliver a unique value proposition that will distinguish them from their competitors and provide value to their target market.
- The constant pressure to provide something new: There is greater pressure for subscription-model businesses to offer better product and service value. As fast as you generate revenue from ongoing subscriptions, customers who don’t find value in your products and services can just as quickly unsubscribe with a single click.
Chris Aubeeluck, Head of Sales and Marketing at Osbornes Law, states, “The Federal Trade Commission legally requires all businesses offering subscriptions to provide links for their customers to unsubscribe.” He adds, “Just as easy as you make it to subscribe, the same should go for when your customers need to opt out of your services, especially when they don’t find value in what you offer anymore.”
- Finding the right balance between pricing, value, and competition: With the subscription business model at an all-time high, new entrants to the market need to carefully study the right balance between flexible pricing while delivering value, gaining profit, and standing above your competition.
“This can be tricky for new businesses that have yet to build their brand a loyal customer base and prove the value of their products and services, as customers are most likely to switch to subscriptions with lower prices or those that are well-established in their niche,” says Peter Čuček, Owner at Tuuli.
Final thoughts
There are hundreds, if not thousands, of subscription-based businesses in the industry, ranging from streaming and video-on-demand subscriptions to Software-as-a-System (SaaS) businesses, beauty boxes, food boxes, and news and magazine subscriptions. This is not surprising because, in this day and age, this type of business model provides just what consumers need—convenience.
Ultimately, despite this model’s monetary benefits, entering this market is still challenging without the right tools and strategies and a deep study of your niche market. Business owners looking to adopt this model should carefully weigh its pros and cons, from its product offerings to its impact on their finances.
