The subscription business model is based on the idea of selling products or services for recurring revenue that entails a regular monthly or yearly fee. Instead of focusing on acquiring new customers, the aim is to retain existing customers.
A single customer pays multiple payments for a long-term contract for a good or service with subscription models instead of one large upfront price.
Nowadays, more people buy subscriptions instead of buying their cars, software, entertainment, and clothing.
Why is a subscription model important?
Compounding growth of customer relationships is what makes subscription revenue models so powerful. Long-term subscribers become more valuable to your business.
Revenue flows linearly from marketing to sales and finance in a traditional business model. However, subscription businesses have cyclical income.
Subscription models allow businesses to lock customers in for an extended time. In a long-term relationship, companies can modify their products and services to meet customers’ needs and grow with them.
Benefits of a subscription model for your business
Subscriptions will remain a fundamental model in the future. In the past few years, you would be hard-pressed not to find any industry that hasn’t experienced at least one subscription success story.
And according to the latest industry banking numbers, more businesses are adapting subscription billing into their marketing now more than ever. With such a business model in place, this secures a long term supply of incoming revenue.
Here are a few more reasons why nearly all businesses should be using subscription models to grow their recurring revenue.
1. Reduced cost of acquiring new customers
When your customers sign up for subscription services, they are implied to repeat business. It ensures a consistent source of recurring income by allowing you to keep your subscribers happy.
Long-term loyalty, as measured by customer lifetime value, will boost retention rates and increase CLTV. Having a better return on acquisition spending can increase your profit margins dramatically.
2. Lower retention spend
Another benefit of automatic repurchasing is that you don’t need to remarket in great detail to your customers so that you can focus on other things.
The cheaper your marketing is, the less likely your subscribers are to churn. That means you won’t be letting your budget be eaten up by retention marketing.
3. Better financial forecasting
Subscriber-based business models offer the benefit of predicting your revenue stream accurately and reliably.
Customer cancellations are possible, but on the whole, subscription-based financial forecasting is easier. With a solid grasp of your economic forecast, you can make better business decisions.
Budgeting for marketing, for instance, relies on it. Investors may also find a predictable cash flow attractive.
4. Better inventory management
With a traditional eCommerce business model, determining how much inventory to keep can be quite the problem – and a costly one.
Managing inventory in subscription eCommerce is another matter entirely. Fulfillment is, therefore, less likely to be unpredictable.
Thus, you can anticipate demand and supply more accurately, resulting in a more consistent business process.
In advance, merchants can plan and manage a suitable inventory level.
5. Opportunities for better relationships with customers
Subscriber e-commerce enables regular engagement across several channels with customers.
With an in-depth understanding of their customers’ preferences and usage behaviors, subscription retailers can provide customized content to them.
Additionally, when you construct a strong relationship with clients, you can easily promote upsell and cross-sell opportunities.
Since subscribers build up trust over time, they’re often more receptive to additional, complementary services offered to them.
The technology market recently transitioned from a subscription model to hardware and software sales and then back to subscriptions again.
In this manner, customers and service providers will develop deeper relationships, be more flexible, and increase customer loyalty.
Thus, unless somebody decides to return to tactical tactics again, this move to services is expected to raise all boats, improving the ability for both vendors and customers to sustain and manage revenue and costs in the long run.