How Effective is the Subscription Business Model?

subscription model for business

It has become common for many businesses to set up subscription based payment systems in order to charge their customers for the product/service they offer. Huge companies like Netflix have managed to acquire a multitude of subscribers across the world, allowing them to keep money constantly flowing into the company. With the subscription business model becoming increasingly popular, perhaps it is time to start looking at its true effectiveness. Here are some considerations.

What is the Subscription Model?

Having been used for many years, the subscription business model is certainly nothing new in terms of how it works. Instead of a customer paying a one off price for one product/service, they pay a set fee on a regular basis (weekly, monthly, annually), and receive their product as and when it is released, or have access to a service for a stated period of time.

Prior to the advent of the internet, the subscription business model was used most extensively by magazines and newspapers, as they were printed on a regular basis, and it made sense for customers to be able to have their desired print delivered to their door for a monthly fee. Now, however, the subscription model is used by a wealth of both online and regular businesses, as it offers them numerous advantages over other payment models.

Technology

Technological advances have helped to facilitate the widespread adoption of the subscription business model, especially advances in payment options. With the majority of business now offering extremely secure ways to pay online with a credit/debit card, and direct debit becoming increasingly popular, it is now much easier for customers to pay for their desired product or service.

On top of this, it is also easier for businesses to market their offerings and stay in touch with their customers through mediums like email, meaning that customers can always be kept in the loop about new business developments (such as new content or expanded services), and any customer queries can be easily dealt with.

Business Security

One of the main advantages of setting up a subscription payment system is that it brings money in from customers on a regular basis. Most subscriptions are charged monthly, so it is possible to know exactly how much money will be paid into the business accounts and when.

This provides a decent level of security for the business charging the subscription, as it allows it to manage cash flows with greater ease, and know its monthly profits well in advance. Some businesses ask for a month’s notice before cancellation, which allows them to plan for any potential dips in profit.

Lower Profit Potential?

Those businesses which use the subscription model may have plenty of security regarding payments, but they may not generate maximum profits. To attract customers, subscription fees need to be fairly low/competitive (at least in comparison to non-subscription based alternatives), so some profitability usually needs to be sacrificed to achieve the security offered by subscription payments (especially in more competitive industries).

How much to charge for a subscription largely depends on what is being offered by the business, but some businesses do offer different levels of subscriptions, with the most expensive option being the most extensive. This gives customers a decent amount of choice, and ensures those with lower budgets/requirements are not priced out.

Business Types

It is likely that subscription based business models are more suitable for specific business types rather than for all businesses. A courier business such as Whistl, for instance, is likely to be used by a number of different businesses on a regular basis, and so the subscription model would work well (since it allows all the payments to be sped up and automated).

A business which sells a more specialised service, such as a law firm, would almost certainly lose profit with the subscription model, given that most people would only use it sporadically, and thus cancel their subscription once they were finished with the service. As previously mentioned, online businesses like Netflix can particularly benefit from this business model, as they can easily add new content on a regular basis, and use the regular, consistent and ever larger profits from their huge subscriber base to make high quality content.

It is Growing

The amount of business adopting the subscription business model provides a significant incentive for technology developers to innovate in this field, and so it is very likely that the subscription model will continue to grow and evolve as more technology becomes available.

In fact, many investors are piling money into subscription based startups, suggesting that businesses which adopt this model may well have a better chance of receiving funding. As technology continues to revolutionise payment methods and other areas of the subscription model, it may well become accessible to even more business types further down the line.

The subscription model is undoubtedly an effective one which is becoming ever more popular amongst various business types. Whilst it may prove more effective for specific business types, it is likely that new businesses will continue to popularise it by offering at least some form of subscription based payment methods into their own model.

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