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Subscription model: what it is and how it works

Lately, the subscription model is taking the online world by storm, and it’s normal, since it’s a business model that offers enormous advantages both for the businesses that use it and for their customers.

Netflix, Spotify and HBO are just some of the companies that have chosen to include the subscription and thanks to it they are revolutionizing their sectors .

What is the subscription model?

The subscription model consists of selling products, services or content to a portfolio of clients on a recurring basis, in exchange for the payment of periodic installments, which are normally monthly. 

The subscription is not something new, it is a business model that has always existed, and a good example of this is the press. However, lately it is having a great growth in the digital world and also in the B2B .

Today the vast majority of companies are subscribed to software companies , which is commonly known as SAAS ( software as a service ), since they need CRM tools, platforms to manage social networks, marketing automation tools , platforms for email marketing, etc. 

With that said, it’s important to know that there are several types of Undertaking models . Below we explain what they are and what each one consists of.

Subscription types

physical products

This is the case of the contact lenses offered by the Loopas brand . Customers who subscribe to Loopas receive the daily contact lenses they need every month. 

digital products

Let’s take Adobe applications as an example. Customers who subscribe to Adobe have the ability to use creative programs and services for a monthly fee.

content

A good example is Netflix. Subscribed customers have unlimited access to the content available on the platform. Other examples of content subscription are Spotify , HBO and Storytel.

Services

For example the gym. Clients pay monthly fees to be able to train and enjoy the facilities. Another example of subscription services is Mr Jeff, who offers his clients a weekly laundry or dry cleaning service. 

The Prime service offered by Amazon is also an example of a service subscription, since customers pay a monthly fee in exchange for enjoying a service that offers certain advantages compared to what other Amazon customers receive. 

Advantages of the subscription model

The subscription is a business model that provides great value both to the businesses that use it and to the clients that contract it . That is why in recent years it has managed to revolutionize so many sectors. 

Below we explain what are the advantages that this business model offers to the companies that use it.

Advantages for the business

recurring income

This is without a doubt the most important advantage of all . Think about it: if your business has recurring and stable income, you have the great advantage of ensuring a fixed amount of billing each month. 

This allows you to know approximately what your monthly income will be (you simply have to take into account the customer base that contracts your subscription to calculate it).

Increase CLTV

Another of the great advantages offered by the subscription model is that it allows you to increase the customer lifetime value .

In case you have never heard this term, the customer lifetime value is the value that you get from each of your customers throughout their lives . 

In this definition, ‘throughout their life’ refers to the period of time in which those customers pay you recurring fees, that is, the period of time in which they are actually your customers.

Think about it, if you have a client who is paying you a subscription every month, the lifetime value of that client is greater than what you would get if your business were a normal online store.

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To understand it better, let’s give an example. Consider C21BeBrave, which is an online store that sells watches and glasses. C21BeBrave customers are likely to buy one or two watches per year, not many more.

But if those customers bought a watch and also received a new strap every month for being signed up for a subscription model, the value that C21BeBrave would get from those customers would be much higher. 

Forecast on your stock

This is another great advantage that the subscription model offers, since it allows you to calculate the amount of stock that your business has to have each month .

By having a fixed monthly client portfolio, you have a forecast of the stock you need. This reduces the economic risk of your business since you will not have to invest more than necessary. 

Think about it: knowing how many customers you have each month will help you avoid being understocked or overstocked.

Upselling and cross-selling opportunities

The subscription model allows you to get more value from your customers , since you can use upselling and cross-selling techniques to offer them service improvements, sell extra products that are related to their subscription, etc.

To understand it better, imagine that you offer a monthly subscription of coffee capsules. If you suddenly come out with a limited edition of capsules, you can offer it to your customers to buy. Or if at any given time you release a new coffee maker, you can also let them know. 

The good thing is that there are many opportunities for you to get extra value from your customers throughout their lifetime value .

Now that you know what are the most important advantages that the subscription model offers to businesses, it is important that you also know what are the benefits that it offers to customers.

Advantages for the client

The advantages that this business model offers customers depend on the type of subscription they contract. Keep in mind that there are three different types of subscription :

Replacement

This is the subscription in which customers receive a product that serves to replace another that they already had but that they have spent . A clear example of this type of subscription would be the Loopas daily contact lenses.

The advantages of contracting the Loopas monthly contact lens subscription service for customers are that, on the one hand, they save time , since they do not have to go to the optician or the pharmacy to buy their contact lenses. Also, they don’t have to worry that they might forget to buy them.

On the other hand, it also has benefits at the price level , since by consuming a product on a recurring basis, customers receive discounts and special prices. 

Novelty

Customers have the possibility of receiving new products selected for them based on their tastes and preferences . Thanks to this, they have the opportunity to discover new brands and products that they did not know about.

An example of a brand that offers novelty benefit is Birchbox. Birchbox has a monthly subscription model for boxes that contain products selected especially for its customers. 

Every month, Birchbox customers discover new products and new brands through the boxes they receive.

Access

In this case, the benefit is that customers can access exclusive content or special discounts . An example of a company that offers this type of benefit is Orbyt. 

Orbyt is a platform in which subscribed clients have daily access to the newspapers of their choice. They can subscribe to the ones they like the most and have access to the full content. 

Now that you know all the advantages that the subscription model offers both to the company that uses it and to its customers, it is time for you to know what disadvantages exist in this business model.

Disadvantages of the subscription model 

It is important that you keep in mind that to create a subscription business you have to have an adequate structure and logistics , since every month you will have to send products automatically to your customers.

It is also important that you calculate the churn rate , that is, the percentage of people who unsubscribe from your subscription. In this way you can calculate the profitability and value of your customers. 

Finally, you need to make sure that your potential customers really see value in the product or service that you are going to offer in the subscription.

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