Is a subscription-based business model right for your company?
One business strategy that has gained significant traction in recent years is the subscription-based business model. From streaming services to meal kits to software-as-a-service (SaaS) platforms, it’s safe to say that subscriptions have taken over and are transforming the way consumers access products and services. Over the past nine years, the subscription economy has grown by 435% and will continue to grow with projections to reach $1.5 Trillion by 2025!
But is a subscription business model the right fit for your company? Before diving headfirst into this type of recurring payment, it’s crucial to carefully evaluate whether it aligns with your business goals, offerings and target market. In this blog, we’ll explore the key considerations to help you determine whether a subscription model is a strategic fit for your business.
What’s in this article?
- What is a subscription-based business model?
- The benefits of a subscription-based model
- How does subscription billing work?
- How to accept subscription payments
- How to manage subscription billing
- Are subscription payments right for you?
What is a subscription-based business model?
Let’s begin with the basics. A subscription-based business model is a type of recurring revenue model where customers pay a regular fee at set intervals, typically monthly or annually, in exchange for ongoing access to a product or service.
Unlike traditional one-time purchases, these models focus on customer loyalty to keep them around long-term. Thanks to its convenience for customers and predictability for merchants, it has gained popularity in a range of different industries, including e-commerce, entertainment and SaaS.
The benefits of a subscription-based model
There are numerous benefits associated with adopting subscription billing, so before you consider whether it is suitable for your business, let’s see what you’ll get out of it:
- Predictable revenue: This has to be the biggest advantage for any merchant! Subscriptions provide businesses with a steady and predictable stream of revenue, which can enhance financial stability making it much easier to plan for the future. Knowing what funds you have on the way is invaluable!
- Enhanced customer loyalty: Subscriptions are a great way to keep your customers happy. By offering ongoing value, convenience and personalised experiences, subscriptions build stronger relationships, leading to increased loyalty and reduced churn rates.
- Automated payments: To add to the convenience, since subscription payments are a form of recurring payments, they are, of course, automated. Having this billing system in place makes taking payments a breeze, reducing the amount of time and resources needed. And with a comprehensive payment platform, you can easily keep track of your transactions.
- Scalability: Subscription models make it much easier to upsell and cross-sell. If your customers are happy and loyal to your brand, they’re more likely to be interested in additional products or services you offer.
- Improved customer insights: Subscriptions provide valuable data insights into customer behaviour, preferences and usage patterns. This knowledge is really useful to help businesses make informed decisions, product improvements and tailor offerings to meet evolving needs.
- Competitive advantage: In today’s competitive market, staying ahead is getting more and more difficult. Offering subscription-based services can help you beat your competitors, attract new customers and capture market share.
How does subscription billing work?
Subscription billing software automates recurring payments, manages subscriber accounts and tracks billing metrics. It helps businesses set flexible pricing and handle subscription changes like upgrades, payment breaks or cancellations smoothly.
To fully understand how it works, we’ve covered how to accept subscription payments and then how to manage them.
How to accept subscription payments
To accept subscription payments online, you’ll need a subscription payment gateway integrated into your website. A payment gateway suitable for subscriptions will securely process recurring transactions, encrypt sensitive payment information and ensure compliance with industry regulations, such as PCI DSS (Payment Card Industry Data Security Standard).
Here’s how to get started:
- Choose a payment gateway: Select a payment gateway that supports recurring billing and integrates seamlessly with your platform.
- Set up your payment gateway: Configure the payment gateway settings, including account setup, payment methods, currencies and subscription billing options.
- Integrate with your website: Integrate the payment gateway into your website or platform using developer-friendly APIs or plugins.
- Test transactions: This is a very important one! Conduct thorough testing to ensure that the subscription payment process functions smoothly and securely for customers.
- Optimise the checkout experience: Make the payment process easy and mobile-friendly with multiple payment options to maximise conversions.
How to manage subscription billing
Once you’re all set up to accept subscription payments, next is knowing how to manage them to ensure smooth operations and maximise revenue. Here are some best practices for managing subscription billing:
- Choose the right subscription billing software: The right software will start you off in good stead for success. Select a subscription billing platform or software solution that meets your business needs, offers robust features and integrates seamlessly with your existing systems.
- Automate recurring payments: As we’ve already mentioned, automated payments are a great perk. So, it’s important to leverage automation to streamline recurring payment processes, reduce manual intervention and minimise errors.
- Monitor the data: Keep track of key billing metrics, such as churn rate, optimum billing time, payment success rate, average revenue per user (ARPU), etc. to assess the health of your subscription business and identify areas for improvement.
- Remain flexible: Allowing your customers to amend their subscriptions as they need is a great strategy for retention. Providing them with the flexibility to upgrade or downgrade, change billing frequencies or pause subscriptions temporarily will help to avoid losing their custom.
- Utilise reconciliation tools: Missed or late payments may still happen due to lack of funds, stolen or lost cards, etc. This may be out of your control, but how you collect the payments is. Using tools like account updater, multi-card registration and pay by link for gentle reminders, are essential tools to get paid.
- Offer excellent customer support: Be on-hand to provide support to address billing inquiries, resolve issues promptly and enhance the overall subscriber experience.
For more tips, you can check out our blog on managing recurring payments.
Are subscription payments right for you?
Now you have all the information on what a subscription-based business entails and how to take subscription payments, it’s time to evaluate your own business model to see if it could be a beneficial payment model for you.
Understanding your customer base
What do your customers need or want? What keeps them coming back for more? The success of a subscription model hinges on having a loyal customer base that values recurring access to your products or services. Consider whether your offerings lend themselves to ongoing usage, and if they do, whether your customers will benefit from the convenience of subscription-based access.
Product or service viability
Not all products or services necessarily need a subscription model. But if your offerings have sufficient value and relevance to justify recurring payments then it may be right for you. For example, products with high customer lifetime value, consumable goods or services that require ongoing support may be ideal candidates.
Revenue predictability and stability
Subscription models offer the advantage of predictable revenue streams, which can be appealing for businesses seeking stability and steady growth. However, it’s essential to weigh this against the potential challenges of acquiring and retaining subscribers, as well as managing churn rates.
Customer acquisition and retention costs
Although trying to gain new customers can work out more expensive than retaining current ones, building and maintaining a subscriber base can also require investments in marketing, customer acquisition and retention efforts. It’s important to evaluate the upfront costs associated with acquiring subscribers and whether you have strategies in place to minimise churn and maximise customer lifetime value.
Flexibility and scalability
One of the benefits of subscription models is their flexibility and scalability. They allow you to experiment with pricing, packaging and features to optimise value for your customers. Assess whether your business can adapt to changing market demands and scale its subscription offerings accordingly.
Operational considerations
Implementing a subscription model can involve operational adjustments, including billing systems, customer support infrastructure and subscription management processes. Ensure that your business has the resources and capabilities to effectively manage these operational aspects.
Competitive landscape
Are your competitors utilising subscription payments? To remain relevant within your industry, determine whether a subscription model sets you apart and addresses unmet customer needs. Consider how your offerings differentiate from existing subscription services and whether you can carve out a unique value proposition.
Although it’s important to consider whether a subscription billing system is right for your business model, its’ safe to say there are so many benefits in implementing one.
If your business is ready to embrace subscription payments, we have the recurring payment solutions to help. Check out our payment offering, reconciliation tools and reporting dashboard, or have a chat with one of our experts to see what we can do for you.
