What is a subscription business model, and how does it work?

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Date: 26 July 2022

A customer signs up to a subscription package

If you've been in business for a while, you may have come across the term "subscription business model." But what does that mean? And more importantly, how can it work for your company?

This blog post will explain the basics of the subscription business model and how to decide if this format is right for you. We'll also examine some of the pros and cons of this type of business model. So read on to learn more.

What is a subscription business model?

A subscription business model is a type of business where customers pay a recurring fee to access products or services. This model has become increasingly popular in recent years, offering several advantages for businesses and consumers.

It works like this: a customer signs up for a service and pays a monthly or annual fee. In return, they receive access to that service for their subscription. This can be anything from streaming video content to software-as-a-service (SaaS) products.

Benefits of using a subscription business model

A steadier stream of revenue

Because customers pay regularly, businesses can rely on a more predictable income stream . This can be helpful when you are planning and budgeting for the future.

Higher customer lifetime value

Customers subscribed to your service are likely to stick around for longer, resulting in a higher customer lifetime value.

More engaged customers

Customers paying for your service regularly are more likely to be engaged with your brand and less likely to churn.

Pitfalls of using a subscription business model

Of course, there are also some drawbacks to using a subscription business model. These include:

The need for constant innovation

To keep customers subscribed to your service, you must continually offer new and exciting features. This can be a challenge, especially for small businesses with limited resources.

The risk of churn

Even if you have engaged and loyal customers, there is always the risk that they will cancel their subscription at some point. This is something that all businesses need to be prepared for.

So, how do you decide if a subscription business model is right for your company? There is no one-size-fits-all answer to this question, but there are a few things you can consider.

Key subscription model considerations

The type of product or service you offer

A subscription model could work well if you have a product or service that people will want to use regularly. For example, if you offer software tools or an online course.

The price of your product or service

For a subscription business model to be viable, you need to charge a recurring fee that is affordable for your customers.

Your target market

If you're targeting businesses or consumers willing and able to pay for a subscription service, this model could work well for you.

Taking payments

To start a subscription business model, you will need to be able handle recurring customer payments. Billing software like exactly.com can handle the billing and payments for you so you can focus on running your business.

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