Advantages and Disadvantages of Subscription Model for Businesses

The subscription business model has taken centre stage in industries ranging from streaming services to SaaS (Software as a Service) platforms.

This approach allows customers to pay a recurring fee for access to a product or service, offering stability and convenience for both businesses and customers.

However, while significant advantages exist, the model also presents unique challenges. For example, managing the customer acquisition cost, which can be higher compared to other business models.

Below, we’ll explore the key advantages and disadvantages of subscription model to help a business decide whether it’s the ideal approach.

What is the Subscription Business Model?

The subscription business model is a type of business model where companies charge customers a recurring fee to access their products or services.

This model is designed to provide ongoing value and convenience to customers while generating predictable revenue for the business. By offering continuous access rather than one-time purchases, businesses can build long-term relationships with their customers, fostering loyalty and ensuring a steady income stream.

Examples of Subscription Business Models

Subscription business models are prevalent across various industries. For instance, streaming services like Netflix offer unlimited access to a vast library of movies and TV shows for a monthly fee.

Similarly, SaaS providers like Salesforce charge businesses a recurring fee for access to their cloud-based software solutions.

Product subscription boxes, such as Dollar Shave Club, deliver curated packages of goods to customers’ doorsteps regularly.

Types of Subscription Models

There are several types of subscription models, each catering to different customer preferences and business objectives:

• Service-based subscription models provide customers with access to a service, such as streaming content or software applications, for a recurring fee. Examples include Netflix and Salesforce.
• Product-based subscription models involve regular shipments of physical products, such as monthly delivery services or subscription boxes. Dollar Shave Club and Birchbox are prime examples.
• Hybrid subscription models combine elements of both service-based and product-based models. They offer customers access to both services and products. For instance, a fitness subscription might include access to online workout classes and monthly deliveries of fitness gear.

Advantages of the Subscription Model

Perks of the subscription business model range from predictable revenue streams and improved customer retention to data-driven insights and scalability.

Predictable Revenue Stream

Let's start with one of the top subscription business model pros - a predictable revenue stream.

Recurring Revenue

Fixed and regular customer payments provide steady and predictable income, meaning a business can expect good cash flow management.

Regular income through subscriptions helps to maintain long-term financial stability, promoting credibility and therefore enticing customers.

Increased Customer Lifetime Value

Customer lifetime value is increased as a result of subscription services. They allow for the transition from one-time transactions to recurring payments. Business profits are constantly replenished if the customer perceives continuous value in what the subscription service sells, increasing lifetime value.

Lifetime value is also maximised as subscription services sell programmes that often offer either a trial period or one of lower pricing. Customers save money and these strategies in turn attract more subscribers, build customer loyalty, promoting consistently higher profits.

Additionally, removing the need for manual purchasing (via one-time transactions) and implementing automatically recurring payments, increases customer lifetime value.

Better Forecasting

Fixed and regular customer payment instalments mean cash flow is more predictable. This allows for better forecasting, aiding predictions for business growth and budget in the future.  

One-time sales can change more drastically than subscription-based models as there is no commitment for customers to return. Sales can drop sharply if say promotional efforts underperform or sales are seasonally dependent. Subscriptions remove a large part of this uncertainty in business forecasts.

Improved Customer Retention

Increased lifetime value is heavily contributed to by improved customer retention, keeping existing subscribers engaged and making purchases in the long term.

Long-Term Relationships

Long-term customer relationships are forged simply by the nature of subscription business models. There is an initial guarantee that the customer will return customer after the first time purchase.

This gives a subscription business a window of opportunity to invest in customer preferences from the word go, fostering continuous customer engagement. Customer loyalty programs can further enhance these relationships by rewarding repeat customers and encouraging ongoing engagement.

Continuous Engagement in Subscription Services

A subscription-based business model allows for consistent customer engagement which is vital to improved customer retention.

Once longevity has been achieved through subscriptions, businesses can keep returning customers continuously engaged through regular touch points such as personalised updates, exclusive content, and usage insights to keep customers involved - reminding them of the ongoing value they receive.

Ensuring this level of long-term effort with customer engagement means subscribers feel valued and customer churn is reduced as individuals remain loyal over time.

Data-Driven Insights

Subscription-based businesses have a guarantee of returning customers, different from traditional business models, which allows for efficient data collection.

Customer Insights

Subscriptions provide ongoing opportunities to collect data analytics, such as usage patterns, purchase history, preferences, and engagement metrics.

By analysing subscriber data, audiences can be grouped based on these factors and marketing strategies and product offerings can then be tailored to meet individual needs.

With regular access to customer behaviour data, businesses can predict future actions via analytics. Examples include identifying customers at risk of churn or forecasting demand for specific features or services.

Personalised Experiences

From data-driven insights,  businesses can offer personalised recommendations, custom pricing, and tailored content. Personalised experiences enhance customer satisfaction leading to successful renewals and strong customer relationships.

Easier Upselling Opportunities

Upselling is a strategy used to maximise customer spending by offering additional attributes like tiered plans and add-ons. This is made easier by ongoing relationships with customers and customer insights from subscriber data.

Tiered Plans

Within a subscription model, tiered plans refer to various levels of service offered, each with a set price, often incorporating premium pricing for higher tiers. Each tier provides a specific set of benefits. Usually, there is a basic, standard and premium plan.

For example, the streaming conglomerate, Netflix, has extremely successful subscription services: standard with adverts, standard, and premium which has a four-screen allowance instead of two.

Subscription plans with a range of prices allow for maximised spending and tailoring to different customer needs, unlike a singular subscription plan. In turn, customers are presented with a choice of plan that they can change or cancel anytime and businesses can attract a wider scope of customers.

Add-Ons

Add-ons act as a lower-cost strategy for upselling and are optimal for subscription models. Customers can pay for only the features they wish without having to commit to a fully upgraded plan that can be considerably more expensive.

Add-ons are an attractive option for customers looking for specific enhancements or those who are unable to afford to fully upgrade like students or those with low income. This demonstrates the subscription model widens the scope for upselling opportunities.

Scalability

Subscription-based business models offer a fundamental perk of scalability.

Low marginal costs associated with acquiring new subscribers. As a business grows and adds more subscribers, the cost to serve each new customer remains relatively low which means a business can easily upscale their subscription models.

Once subscription infrastructure and systems are in place, the cost to provide the service to an additional subscriber is minimal, allowing the business to scale quickly without significantly increasing expenses.

This makes subscription models highly profitable as they expand and transition into new markets.

Advantages of Subscription Services for Customers

Subscription services offer significant advantages to customers, particularly in terms of predictability and customisation.

With a subscription service, customers know exactly how much they will be charged each month, allowing them to budget more effectively and avoid unexpected expenses.

Customisation is another major advantage of subscription services. Many subscription-based businesses offer personalised options, enabling customers to tailor their experience to their individual needs and preferences. Whether it’s selecting specific products in a subscription box or choosing the features of a software package, customisation enhances customer satisfaction by ensuring they receive the most relevant and valuable offerings.

Overall, the subscription business model benefits both businesses and customers. For businesses, it provides predictable revenue and fosters customer loyalty, supporting steady growth and development. For customers, it offers convenience, customisation, and cost savings, making it an attractive option in today’s market.

Disadvantages of the Subscription Model

Whilst a subscription business model may seem glamorous, it's not without its downfalls.

High Customer Expectations

Today's customer has increasingly high expectations when it comes to the delivery of a product or service.

Constant Value Delivery

While subscription models thrive on ongoing customer relationships, this is reliant on constant value delivery through regular content updates. This poses a disadvantage because businesses must continually provide new content and product enhancement to keep subscribers engaged, which is resource-intensive.

Additionally, this requires ongoing investment, the additional expense may outweigh subscription payments.

If customers feel there is a decline in value for money this could also increase churn rates leading to revenue loss.

Customer Service Demands

As subscription-based businesses grow, a robust customer support infrastructure is increasingly expected, posing a significant challenge.

To maintain recurring payments and good customer relationships, companies are constantly held to high standards to solve customer queries and provide support. This could be for issues with billing, technical support, or product usage.

Subscribers often expect quick resolutions and personalised support, which can lead to increased operational costs and pressure on support teams.

As the subscriber base grows, managing these demands on a large scale requires a robust billing system, advanced technology such as AI-driven chatbots, or additional staffing to meet customer service demands.

If not addressed this can lead to customer retention issues.

Customer Retention Challenges

You cannot take it for granted that a customer will remain just because they subscribe to your product or service.

Attrition Risk

Attrition risk, often referred to as churn rate, is a risk measure for the likelihood that customers will discontinue the use of a service or product.

Subscription business models are associated with high churn risk in the form of cancellations. This can be combatted by maintaining strong customer relationships and novel subscription offerings.

Cancellation & Refund Policies

In subscription-based models, cancellation and refund policies provide a disadvantage when attempting to work out the right balance between flexibility and maintaining revenue.

Flexible policies, while customer-friendly, can lead to unpredictable revenue streams and encourage customers to cancel without hesitation, especially if the service doesn't immediately meet their expectations, reducing revenue, and increasing churn rates.

Additionally, handling refunds or payment disputes for partial subscription usage can increase operational complexities and administrative costs. Striking the right balance between offering flexibility and protecting revenue can be difficult.

If policies are too rigid, they may frustrate customers and harm retention, but overly lenient policies can damage profitability and incentivise opportunistic cancellations.

Initial Acquisition Costs

When continually growing your customer base you also need to consider ongoing acquisition costs.

Customer Acquisition Expense

Customer acquisition expense refers to the total marketing costs accumulated by a business to gain customers.

Unlike traditional business models, subscription models rely on recurring payments, so the full amount is not paid back immediately. This delay can be a strain on cash flow.

Longer Payback Periods

Alongside customer acquisition costs, another disadvantage of a subscription business model is long payback periods. Traditional models usually see immediate revenue whereas subscription business models require a long payback period as part of their payment nature.

This is usually over several months and can also encounter further stress from cancellations, enhancing any existing cash flow issues caused by acquisition costs with subscription business models.  

Complexities in Pricing Strategy

Deciding the subscription price can be tricky, as you need to ensure that you’re able to entice customers without negatively affecting profit. Understanding different pricing models is crucial in this process. Similar to acquisition expense, it’s about finding and striking the correct balance.

It’s important to consider any set-up and administrative costs that you need to take into account when deciding final subscription prices. Researching what your competitor’s charge means you are in line with realistic expenditures in a market.

Subscribers are sensitive to pricing changes and expect to receive good value for their subscription fees. Businesses must continually assess pricing strategies, ensuring they have a balance between affordability and business value to retain subscribers and remain competitive.

Increased Competition and Market Saturation

Two key pitfalls of a subscription-based business model are market saturation and 'fatigue subscription'.

Market Saturation

When a service or product has reached its maximum potential within a market, it has reached market saturation within the competitive landscape.

The subscription business model has become increasingly popular in recent decades and so it is becoming harder to stand apart from competitors, the market becomes crowded and limits new potential customers. This means it’s hard for a business to grow under a subscription model as many other competitors are using similar strategies in a saturated market.

This leads to other consequences such as increased competition, continual innovation, higher acquisition costs, and price wars. Businesses will also turn to retain existing customers which is costly and resource-intensive to keep continual engagement and stop customers from looking elsewhere.

Customer “Subscription Fatigue”

Subscription fatigue contributes to this increased competition between subscription businesses, making it harder to acquire new customers.

With market saturation, customers may feel overwhelmed by multiple subscriptions that provide overlapping features or have diminished in value over time and so are more likely to cancel services if deemed not essential, causing ''subscription fatigue''. As a result, subscription businesses face further challenges in sustaining growth and profitability.

Reliance on Innovation

In subscription business models, there is a constant demand for product development and innovation to maintain customer interest and stay competitive.

As markets evolve and customer expectations rise, businesses must continuously update their products or services to prevent obsolescence. This could involve introducing new features to improve user experiences. Failing to innovate can lead to customer dissatisfaction, higher churn rates, and the risk of being overtaken by competitors who offer more relevant solutions.

Innovation is needed not only for attracting new subscribers but also for retaining existing ones in an increasingly competitive market.

Is the Subscription Model Right for Your Business?

The subscription business model has proven to be highly successful. However, as customer preferences, markets and technology evolve, subscription businesses will have to battle their demons to stay relevant.

If you are a business that prioritises predictable revenue streams with customer insights, easy upselling opportunities, and the ambition to scale up, the subscription model may be right for your business.

But with this comes the need for a creative and critically thinking team that can keep up with customer demands and market competition.

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