Showing no signs of slowing, the subscription economy is booming. A UBS report revealed that subscription business models could grow from a $650 billion market to a $1.5 trillion market by 2025. While subscription billing is a better fit for some business models and verticals than others, we are seeing an increasing number of industries transition from traditional sales to a recurring revenue business model. In general, business models that are built around repeat utilization or that provide regular access to software or services tend to work well with subscription pricing. To help you decide if it’s right for your company, let’s look at some common subscription based business model examples.
Subscription Pricing Models: What They Are and How They Work
Many believe that the subscription business model started in the 17th century by newspaper and magazine publishers. In 1638, England’s King Charles I offered British residents a subscription for fire insurance. People didn’t widely understand the concept, so this first attempt at a subscription pricing model was received poorly and failed miserably.
However, companies recognized the value of offering subscriptions in exchange for goods and services. Within 30 years, many organizations began offering products and services on a subscription basis. This included fire and life insurance companies, trading organizations, financial services, charities and theaters.
Starting in 1881, the theatrophone introduced Europeans and Americans to live streaming of theater performances. From this early subscription based business model example, subscriptions gained traction in both popularity and diversity. Now in the 21st century, the rise in technology and digitization have made this business model popular among traditional pricing organizations.
The subscription business model allows consumers or businesses to pay a set recurring fee in exchange for products or services received on a predetermined basis. This can be weekly, monthly, quarterly, or annually.
Broadly speaking, subscription-based businesses are categorized as business-to-business (B2B) and business-to-consumer (B2C). At a high level, the subscription business model is quite simple. Customers (subscribers) commit to receiving the products or services on a scheduled basis for a fixed price and time.
Let’s explore some of the most popular subscription business models, as well as look at what the future may hold.
Subscription Based Business Model Examples
There’s certainly not a shortage when it comes to examples of subscription-based businesses. Let’s look at a variety of subscription types and the companies that have successfully implemented this pricing model.
Curated subscription boxes
Commonly referred to as ‘subscription’ or curated boxes’, companies in this category use the element of surprise. They deliver boxes to subscribers with an assortment of products they may not purchase on their own. To make sure subscribers receive items they’re interested in, customers typically complete a form that details their preferences.
Over time, this business model enables the company to provide more tailored and personalized boxes. It’s commonly used by beverages (wine, coffee, tea, etc.), clothing retailers, books, toys, beauty and wellness, and home goods verticals – among others. Some companies using this subscription type include HelloFresh, Graze, Decorated, and Shaker and Spoon.
Replenishment
Also known as ‘subscribe and save’, this subscription model offers customers financial benefits for choosing a recurring purchasing plan. These replenishment subscriptions are a natural fit for companies selling to customers purchasing items on an ongoing basis. Think about items such as shaving products (Dollar Shave Club), cleaning products (Blueland), and beauty & personal care (Tamed Wild).
Digital
This refers to eCommerce services that only an online platform can provide. Primarily media-based, Amazon Prime Video, Netflix, AppleTV, YouTube Premium, and Hulu are some of the companies using the model.
Software-as-a-Service (SaaS)
One of the most popular subscription-based business models, SaaS companies sell software licenses to subscribers in exchange for access to their cloud-based software. This subscription type spans numerous software offerings – think Salesforce, Slack, Adobe, HubSpot, Microsoft, Zoom, Shopify, and countless others.
A Subscription Evolution is Knocking at the Door
Even amid current economic uncertainties, customers are increasingly shifting from ‘ownership’ to ‘usage’. To meet these changing needs, the following industries are adopting a subscription-based business model:
Accommodations
With properties across the globe and a price that’s easy on the wallet (starting at $330/month), Selina CoLive offers two subscription plans. These are CoLive (30 nights with the ability to switch locations up to 3x a month) and CoLive Flex (30 nights within a 3 month period and the ability to switch destinations up to 5 times).
On the other end of the financial spectrum is Inspirato. They offer a monthly subscription ($1,300 upon sign up) for access to luxury and boutique resorts and hotels, as well as vacation homes. Other lodging establishments that have joined the subscription ranks include Freehand Hotels, citizenM, Banyan Tree Habitat, and Zoku.
Airlines
Although the subscription model isn’t new to the travel industry, the pandemic provided airlines with a revenue-generating reason to explore (and for some, re-explore) this billing model. Alaska Airlines offers two subscription models – Flight Pass (starting at $49/month) and Flight Pass Pro (starting at $199/month). Frontier Airlines has also joined the subscription economy, offering two plans – Discount Den ($99.00 the first year for new subscribers) and the Go Wild Pass (starting at $299/year, depending on the pass selected).
More recently, Star Flyer, a Japanese airline, launched a subscription plan that provides unlimited travel between two domestic cities for $285/month. What’s next for airlines that are embracing the subscription model? Some airlines may offer subscription flight plans to businesses, expanding this business model to the corporate sector.
Automotive
Expected to reach nearly $12.10 billion (CAGR of 23.1%) by 2027, this traditional business model is actively shifting to a subscription-based approach. Leading the transition are luxury car manufacturers, including Audi, BMW, Cadillac, and Jaguar, as well as rental agencies such as Hertz and Enterprise.
Education
The pandemic, in combination with the increasing cost of education, accelerated the rise of eLearning and this vertical shows no signs of slowing when it comes to offering courses on a subscription basis. In fact, the global market for online learning is expected to exceed $370 billion by 2026.
Healthcare
Healthcare businesses are exploring how this payment model can be mutually beneficial. For example, instead of consumers relying on a healthcare insurance policy or cash to pay for medical services, the healthcare company charges a flat annual fee that covers preventative care, as well as value-added extras such as concierge services, personal fitness and meal plans, and exclusive access to physicians.
It’s not only traditional billing verticals that are expanding the scope of this business model. Subscription-based businesses are exploring how technology can improve their ability to personalize the customer experience and looking for innovative ways to attract and retain customers. This effort is led by three technologies – artificial intelligence (AI), machine learning (ML), and big data.
These technologies enable subscription-based companies to gain a better understanding of their target market’s needs and interests. In turn, the organization creates focused and hyper-personalized offerings, which ultimately help build long-term customer loyalty.
The Pro’s and Con’s of a Subscription Business Model
Like any business model, the subscription model has advantages and disadvantages.
Subscription Business Model Advantages
- Delivers a predictable revenue stream: Its recurring revenue stream provides businesses with a predictable cash flow, making it easier to accurately predict future revenue.
- Expands target market: Given this business model’s low barrier to entry – payments made weekly, monthly, quarterly or annually – subscription-based businesses have the ability to extend their reach and attract more customers.
- Lowers customer acquisition costs: Since this business model receives consistent and regular revenue, subscription-based companies spend less on acquiring new customers.
- Decreases customer retention costs: Not only do subscription-based companies benefit from lower customer acquisition costs but retention costs are also decreased. Customers that pay on an ongoing basis are more committed to a long-term engagement and less likely to churn.
- Increases sales opportunities: Leveraging up-sell and cross-sell initiatives, subscription businesses have the opportunity to sell new features, upgrade plans, non-core products, etc. to existing customers.
- Enhances customer loyalty: Since this business model relies on customer retention, subscription-based businesses benefit from building stronger and more loyal customer relationships. Overtime this can increase customer lifetime value (CLV).
Subscription Business Model Disadvantages
- Competitive landscape: As this business model continues its upwards trend, the playing field gets more crowded.
- Subscriber churn: Whether from subscription fatigue, contract aversion, going to the competition, etc., customer churn can have a dire effect on revenue and profitability.
- Value received: Related to customer churn, subscribers will only stay loyal as long as they are receiving value from the products and services received. This is where keeping offerings fresh by introducing new products, features, services, etc. will help keep customers engaged.
With the pro’s far outweighing the con’s, is a subscription business model right for your organization?
The Hallmarks of a Successful Subscription-Based Business
Although traditional billing model companies are adopting subscription-based business models, some products and services are more suitable than others. Take a look at the following subscription characteristics and the essentials of a successful subscription business. First, ask yourself the following questions.
- Are the products and services you provide purchased on a regular basis?
- Do your products and services fulfill a basic or wishful need, are they in high demand?
- Are the products you sell easy to use and convenient to access?
- Do your products and services provide extra value to the customer?
- Can you monetize the extra value provided?
- Can your products and services be bundled or unbundled to provide a variety of offerings?
- Can your products and services be easily and reliably distributed/accessed?
- Will entering the subscription market disrupt your competitors?
If you answered yes to at least some of these questions, let’s uncover what it takes to be successful in the subscription economy.
How to Run a Successful Subscription Business
Having the right products/services fit is just the first step in running a successful subscription business. Aside from operational considerations, there are two essential, equally important elements – pricing strategy and customer service.
Pricing Strategy
To capture and retain subscribers, your pricing strategy must reflect the value of your products and services. It also has to aline with what customers are willing pay, and deliver profitability. The four most common subscription pricing strategies are – value-based, cost-plus based, competitive-based, and demand-based.
When it comes to billing models, there are many option, but here are some of the most common.
- Subscription billing: Includes pricing models such as freemium, flat-rate, tiered, and per user/per unit.
- Recurring billing: Encompasses billing models such as by skill set, by service, by asset, and any combination of services.
- Usage-based billing: This uses billing models like pay-as-you-go, tiered pricing, and volume pricing. It provides the ability to bill based on any aspect of your product.
- Hybrid billing: Give subscribers the pricing options they want, while maximizing revenue potential with billing models like subscription + one-time fees, subscription + pay-as-you-go, subscription + overage, and multi-part pricing.
- Dynamic billing: Provides exceptional flexibility in developing distinctive pricing models such as formula-based, time-based, demand-based, and event-based.
Customer Service
The other half of the success equation for subscription businesses is providing exceptional customer experiences. To deliver the value customers expect, you need to provide personalization, convenience, and cost-effective products and services. As these relationships develop, you’ll understand customer needs on a deeper level. Then you can adjust your products and services to meet changing requirements.
Are You Ready to Join the Subscription Economy?
Unlike traditional business models, these subscription based billing model examples show how subscription billing offers exceptional growth and revenue opportunities. Despite some of its inherent challenges like creating accurate bills for this diverse business model, subscription businesses continue to make their mark. Experts believe that by the 22nd century, subscribing to products and services will be the norm rather than the exception.
Sending accurate bills, the first time, every time requires a billing solution built for subscription companies. BillingPlatform, a market-leader in the subscription billing industry, provides a cloud-based solution that enables subscription businesses to support any combination of one-time charges – all on a single platform.
Our complete solution delivers the unmatched agility that enables you to run your subscription business with greater efficiency, accuracy, and control. Are you ready to join the subscription economy? Contact our team to learn how we can get you started or begin a free software trial today.
