You know what a subscription website is, but what exactly is a subscription pricing model?
Companies today are increasingly moving towards offering subscriptions rather than standalone products or services, and for good reason. The subscription pricing model offers some very attractive benefits for companies, allowing for greater profitability and predictability.
But, it’s not all rainbows and unicorns. There are some drawbacks to the model too that founders have to be aware of before implementing a subscription business. Let’s discuss…
What Is a Subscription Pricing Model?
Simply put, a subscription pricing model is a business model where customers pay a recurring fee at regular intervals in exchange for access to a product or service.
Instead of making a one-time purchase, customers enter into a subscription agreement that allows them to enjoy ongoing benefits for as long as they maintain their subscription.
Pros and Cons of a Subscription Pricing Model For Businesses
The subscription revenue model offers some key advantages for businesses, but there are some drawbacks, too.
Advantages of a Subscription Pricing Model For Businesses:
1. Predictable Revenue:
One of the major advantages of a subscription pricing model is the ability to generate predictable and recurring revenue.
By charging customers on a regular basis for an ongoing service, businesses can better forecast their income and plan for future growth. This stability can provide financial security and help fund ongoing product development and support.
2. A Greater Number of Customer Purchases:
Subscription pricing models often result in higher customer retention rates compared to one-time purchases because businesses can maintain contact with their customers more easily. This allows businesses to reinforce marketing messages, and entice continued usage through special discounts and other promotions.
3. Significantly Greater Upselling and Cross Selling Opportunities:
That continued communication provides a powerful opportunity for businesses to offer additional value to existing customers. Firms can provide more tailored solutions, additional features, better products, etc, which all increase revenue and profitability.
4. Rapid Customer Feedback:
Ongoing communication means that companies have a better ability to get feedback from customers, helping the business improve its value proposition and address problems to keep customers engaged and satisfied.
5. Businesses Can Carry a Float:
A subscription float, where cash comes in first and service is delivered later on an ongoing basis, provides companies with positive upfront cash flow which they can invest before the service has to be delivered.
6. Scaleability is a Feature:
Subscription models scale easily – especially if the company is offering a digital or media based product. Adding customers comes at a known and often low variable cost, rather than fixed cost, so little capital is required to grow the business. Pair this with the fact that cash comes in before the service is offered, and the effect is powerful.
Cons of a Subscription Pricing Model for Businesses:
1. Need to Build Expertise in Subscription Marketing:
A subscription business requires specific competence in subscription marketing: attracting subscribers, increasing retention, interacting with subscribers, etc. These are specialist skill sets that a company either needs to build or hire for.
2. Commitment is Required:
Subscription businesses need to commit to the model because unearned revenue proves to be a large liability if the business is closed or the subscription offer ended. Closing a subscription often results in refunding subscribers on a prorata basis, or continuing servicing the subscription while the rest of the company pivots to other projects.
3. Dependency on Customer Retention:
Subscription pricing models heavily rely on customer retention for long-term success.
If customer retention rates decline, it can have a significant impact on revenue and profitability. Businesses must continuously focus on providing value and addressing customer needs to maintain a healthy subscriber base.
4. Potential for Over-Subscription:
In certain cases, customers may subscribe to multiple products or services simultaneously, resulting in over-subscription.
This can lead to subscription fatigue and decreased customer satisfaction. Businesses need to carefully manage their subscription offerings to avoid overwhelming customers with too many options.
Overall, the subscription model for business is an excellent way to structure a market offering for the right niches. It can prove more profitable than other go-to-market approaches and provides greater business certainty for entrepreneurs once the business gets off the ground.