Types of Subscription Models Posted on 2014-04-21 16:16:00 by House of Kaizen

The online subscription and recurring bill model is a great opportunity for ecommerce merchants to earn regular and predictable revenue while strengthening relationships with customers.

Subscription–based business models are not a new concept (think magazines, newspapers and clubs such as Wine of the Month) but leveraging the model online has allowed for more creativity and a substantial increase in the ability to sell products and services that have not traditionally been sold via subscriptions.

Here are some subscription models mentioned in our other blog posts:

Fixed: One set price for a predetermined set of goods or a service for a defined period of time.

Unlimited Use: One set price for unlimited use of services or collection of services. The usage can be personal or for a group using the service (such as a family or group).

Pay As You Go: Also known as a convenience model. Users pay only for the usage of a product or service when needed.

Premium Member Subscriptions: Users pay a basic access fee for usage of a services or goods, but are charged additional fees to access other services or gain access to additional or premium content.

Freemium: Basic services are offered free or charge in exchange for a user’s information (email, contact information, etc.).

Businesses Benefits

There are many long-term benefits for merchants who adopt subscription models. Twelve percent of respondents in Economist Intelligence Unit research said subscription services currently represent more than half of their revenue and is expected to rise over the next 2 years.

The following represents benefits of the subscription-based business model

  • Predictable revenue stream: Merchants are able to predict and collect a constant revenue stream from subscribers for the duration of the agreement, which reduces risks and often means payment in advance. For merchants selling tangible goods, this can also mean making inventory purchases with more accuracy and against future sales.
  • Recurring revenue stream: In some instances subscription pricing structure can actually be greater than revenue from one-time purchases. Consumers that are happy with the service are also more likely to renew and over time merchants can predict churn rates to help factor more accurate revenue projections.
  • Increased ability to negotiate with suppliers: Merchants selling goods can maintain more accurate inventory levels and often negotiate better pricing with suppliers.
  • Reduction of customer acquisition costs: Subscription models with high renewal rates help to lower the cost of customer acquisition by helping to maintain a steady base of repeat customers.
  • New markets: Subscription services have become a new channel to reach into diverse markets from the organization's traditional base.
  • Personalized marketing: Subscription marketing combined with a reliable, detailed tracking and management system allows merchants to create personalized offers and segment customers. This offers increased potential for up-selling and cross-selling other products or services.
  • Increased customer engagement/Loyalty: Continued use of a service and repeated interaction with a brand can help build loyalty as a customer becomes attached to the service. This also can increase renewals.
  • Higher lifetime customer value: Greater customer inertia and a more committed customer base as it transitions from purchase to opt-out decisions, combined with lower cost to acquire customers can help increase the value of customers.
  • Investor appeal: Those looking to start a business using a subscription model can gain more interest from potential investors because the revenue is based on active users and not just projections. This greatly reduces the risk for investors and increases the speed of ROI (return on investment).