Subscription Business Model Pros & Cons, Plus Examples

subscription business model

Written by Adriana Pope

June 23, 2021

Do you have a product customers want to order again and again? Well then, you can probably pivot to a subscription business model. A subscription business model is a great strategy for increasing revenue and generating predictable income.

It’s also an excellent way to create loyal customers who are financially supporting your business on an ongoing basis.

In this article, we’ll cover exactly what a subscription business model is and the different types to choose from. We will explain how it works, and why it’s beneficial for companies to implement a subscription business model.

Lastly, we’ll cover some real life examples of subscription companies who are generating millions of dollars in revenue.

Topics Covered:

  • What is a Subscription Business Model?
  • Subscription Business Model Process
  • Subscription Businesses Types
  • Subscription Business Model Examples
  • Subscription Business Model Advantages
  • Subscription Business Model Challenges
  • Subscription Business Model Success Tips
  • Best Subscription Business Model Tools
  • Recap
subscription business pricing plans
Source: Birch Box offers different subscription plans based on delivery frequency

What is a Subscription Business Model?

A subscription business model is when a customer pays for a product or service on a repeat basis.

The customer is charged a set price on a recurring cycle. For example, $30 every month.

Basically, a subscription business model is any company offering recurring transactions.

For example, Netflix charges a monthly fee to access unlimited streaming TV shows and movies.

Let’s say it costs $10 to use their streaming service, they would be charged $10 dollars every month automatically.

subscription business model recurring orders

Subscription Business Model Process

A subscription business model has 3 parts which are: Recurring orders, billing and revenue.

1.) Recurring Orders

A recurring order is a repeat order. When the customer places their initial order, they are agreeing to receive automatic repeat deliveries, and to be charged automatically. When they “subscribe,” they are signing up for future orders. An example of a recurring order is a subscription box which gets delivered every month and charges the customer every month.

2.) Recurring Billing

Recurring billing is an on-going bill. It’s also known as AutoPay. A customer’s card on file gets charged on a set schedule for a fixed price on a regular basis. An example of a recurring bill is a cell phone bill. Let’s say they charge you every month $100 automatically, that’s a subscription.

3.) Recurring Revenue

Recurring revenue is money earned on a repeat basis. Basically, it’s repeat payments for a product or service. It could be every weekly, monthly, quarterly or yearly. The subscriber gets charged automatically on a set schedule, which pays out to the merchant.

subscription business model company types

Subscription Businesses Model Types

There are different types of subscription business model types. We’ll cover the most common ones.

The first step to creating your very own subscription business is to know which direction you are heading down. This way, you can have a goal in mind and then work backwards to achieving it.

⭐️ Subscription as a Service

A subscription service is a valuable service a company offers in exchange for a recurring fee. A great example is Instacart which sells the service of grocery shopping and delivering food to your door. Instacart has a subscription business model. Their “members” pay a monthly or annual fee to get free grocery delivery.

⭐️ Freemium Subscription Model

A subscription business can offer different tiers of pricing. A free option is known as “freemium”. A freemium subscription model helps get people in the door and tries to convince them to upgrade for special features. An example is Trello which is a list making organizational tool for businesses. Trello offers a free plan, but they have upgraded PRO plans for larger teams who need access to more features.

⭐️ Subscription Package

A physical subscription product can be a subscription box or a recurring transaction for a specific product. Usually refill products are the most popular (items people use up and need more of). The idea here is the customer is getting repeat orders of a subscription product. For example, Fillaree is a zero waste company who offers earth-safe refillable soaps and cleaners.

For more examples of different subscription company types, check out our article 10 Shopify Subscription Based Companies We Love ❤️

subscriptions as a service

Subscription Business Model Examples

Here are a couple of our favorite companies who all make money by having a subscription business model. We’ll cover what we love most about their approach from on-page product optimization to savvy subscription marketing tactics.

subscription business model example
Source: Lush Cosmetics made all their products subscribe-able so customers can refill on items they love

1. Lush Cosmetics

These folks specialize in cruelty-free natural cosmetics. They’ve invested everything from lotions to bath bombs, and they also offer their products as a subscription.

If you think about it, lotion is something you buy often. You use it and once it’s all gone, you need more. Their subscription business model lets them offer their products on a recurring basis.

On the product page there’s a choice to buy once, every month, every 3 months, or every three months. What we like most about Lush is they’ve thought about their customers usage.

They have thought about how often a customer would need a refill of their subscription product and that’s super smart!

subscription business model examples
Source: FaceTory offers an award winning subscription box filled with Korean goodies

2. Face Tory

Korean beauty products have made a splash in the USA. FaceTory is disrupting the industry by offering a subscription to their most popular products.

They have two options which makes it super simple. A subscription box with a mix of beauty skin products OR a subscription box with just luxury face masks.

When you click the subscribe button you are taken to their product page where you can select a delivery frequency.

We like how they proudly display their company won an award on the product image itself. This helps sell the item and creates more confidence in a new customer.

subscription business model company example
Source: Bombay & Cedar offers a cruelty-free subscription box filled with beauty products

3. Bombay & Cedar

This company is paving the way for natural beauty and they’re making headway with their subscription box.

They offer a beauty box with different time commitments like a monthly (pay as you go option), 3, 6, and 12 month options.

We really like how they offer free shipping for all US orders and then they list the extra cost for International shipping.

It’s also clever how they list when the subscription box is expected to ship out for the month. This helps get your customer excited and also manages expectations.

recurring charges subscription box
Source: Introverts Retreat offers a subscription box with a wide range of pricing options

4. Introverts Retreat

Who ever thought of this subscription box is a total genius. A book, some chocolate, and tea? Yes please. What we love most about their subscription business model is they keep things simple.

There are 3 tiers of subscription plans ranging from $18.99 to $39.99. Having a range in pricing and offerings helps you capture a larger demographic.

It’s also super clever how you can build a subscription box based on your preferences (they let you choose the book!)

They also collab with authors and chocolatiers which helps with brand awareness.

ecommerce subscription  box case study
Source: Brooklyn Candle Studio creates hand-poured, luxury candles for their subscription boxes

5. Brooklyn Candle Studio

This company realized their customers buy their candles all the time, so why not offer them as a subscription? They now offer a “Candle of the Month” club which delivers a seasonal candle to their customers’ doorstep for only $25 a month.

We love how they have picked a niche like candles, and have niched down even further into luxury candles. It’s always a smart move to specialize in something very specific.

What we appreciate most about this company is how much thought went into their gorgeous packaging which makes each order feel like a gift!

netflix subscription as a service

6. Netlix

Netflix is a great example of “subscription as a service.” You pay a monthly fee and they let you watch endless amounts of movies and TV shows. Seems like a fairly good deal, right?!

Notice how subscription as a service is not a physical product being sold. It’s entirely digital. What we love most about subscription as a service business models, is there isn’t any packaging or shipping.

The main focus is on producing amazing content.

freemium subscription example
Source: Pktochart offers a freemium plan and then lets users upgrade when they want more access

7. Piktochart

This is an amazing website for creating infographics for free. They offer a freemium subscription plan which gives you access to some of their key features.

However, once you’ve reached a certain limit, you are prompted to upgrade to a paid plan. You get 5 free projects, and then if you want more you have to pay. Makes sense and is totally fair.

A freemium subscription is perfect for SASS (software as a service) companies.

In this example, you can see they have a PRO plan and TEAM plan with access to creating unlimited projects and high quality downloads.

subscription business model benefits

Subscription Business Model Advantages

There are a lot of advantages to pivoting towards a subscription business model. I will cover a couple advantages which make it worth the effort to start selling subscriptions.

✅ Predictable Income

Selling subscriptions is a great way to generate reliable income flowing in at predictable times. For example, if you have a 100 customers subscribing to a $30 product every month, you could be making $3000 a month. Since subscriptions are pretty stable, the amount of money earned doesn’t fluctuate too much from month to month.

✅ Less Inventory

Usually subscription companies focus in on one or a couple products. They don’t have thousands of products in their inventory waiting to be purchased. For example, if I was selling a cookie subscription box, I would just need to focus on the contents of that box. Having less inventory helps with managing risk (of not selling items) and with overhead costs. It also just makes it a lot easier to run a company if you are just focusing in on making a single product (or a handful of products) better.

✅ Loyal Customers

If you are looking to create repeat customers, selling subscriptions can help. When customers sign up for a subscription they are essentially committing to being a long-term customer. They will continue to receive your products unless they cancel their subscription. Since the contract is never ending, we call that a “forever transaction”.

✅ Up-Sell Advantage

With a subscription Business model, you easily up-sell to your current customer base. Why? These customers are already familiar with your brand. That means you don’t have to go out and try to find them and bring them to your website. Right off the bat, it saves you money on advertisements. And they already like your products because they signed up for repeat orders. Your current customers are also more likely to buy more items from you.

Grow Grow Grow

Selling subscriptions can have a positive impact on your shop’s revenue. Instead of a customer buying an item one time and never again, subscriptions allow your customers to become repeat customers. They are signing up to buy a product on an ongoing basis which helps boost your revenue. You can grow your company with subscriptions because customers are spending more over time on a regular basis.

✅ Less money on Ads

You can lower your acquisition costs with subscriptions. Acquisition costs are how much you spend to get a customer. The struggle is real. Advertisements can be so expensive, and are hard to master. That’s why its so beneficial to be able to lower this overhead spending. Subscriptions help you create loyal customers who are willing to buy your other products and services. The idea is you can sell to your current customers and make more money.

subscription business model success tips

Subscription Business Model Challenges

Now that we covered the benefits of running a subscription company, let’s go over some of the difficulties you might face. On your journey to success, you will undoubtedly face road blocks. However, if you learn to overcome these challenges, you’ll be better off.

“What stands in the way becomes the way.””

Marcus Aurelius

📍Reduce your Churn Rate

When you have a bunch of customers who subscribe to a product, these customers are your bread and butter. They are essential for your business to continue running smoothly. The goal is to keep them being your paying customer for as long as you can. Hopefully forever, but that’s usually not the case. People will come and go. That’s why it’s important to reduce the amount of people cancelling their subscriptions because it means a loss of revenue.

📍Don’t Ignore Packaging

A gift is a thousand times better when it’s wrapped. Why? The experience of unboxing an item is part of the fun. The same rule applies to your company. You’ll want to make sure your packaging reflects your brand. Consistency is king. You want your brand to be visible in your packaging. Good subscription product packaging can elevate the experience of your customers and make them more likely to stay on as a subscriber. Check out Sticker Mule for some custom branded packing tape!

📍Smooth Onboarding

On-boarding is the way you greet your customers and treat them as soon as they make a purchase. We say, roll out the red carpet. It should be a smooth experience. You want your customers to feel well taken care of. You want your customers to know they made a good decision buying a product or service at your company. A bad on-boarding experience can make customers want to cancel their subscription.

📍Get your First 10 Customers

If you’re thinking about turning your company into a subscription business model, start slowly. We recommend focusing on getting your first ten customers. If you can find ten customers in this world that want to buy your product, it’s a sign you’re on the right track. Whenever people want to give you money for something you’re selling, that’s always a green light.

subscription business model idea
Source: FaceTory

Subscription Business Model Success Tips

Here are some of our tried-and-true business tricks and tips for creating the very best subscription business.

Personality Matters

It’s actually a good thing to be different than your competitors. Show your unique personality through your brand. Having a unique brand with a personality makes you memorable. You want your customers to be impressed and awed by your products so they can tell their friends about your subscription company. With a subscription business, it’s important to stand out. Be remarkable.

Think of your customer

Here’s a great little lesson. Try writing 5 examples of a customer who might be interested in buying your subscription product. What’s their age? Where do they live? How much do they make? Hobbies and interests? Creating a list of these example customers helps you figure out how to cater to your real customers desires. It also helps you stray away from launching products that your current customer base might not be interested in purchasing.

Experiment with Pricing

Your first job is to figure out a reasonable price for your products. Just remember you need to make a profit. Make sure you factor in the cost of shipping, marketing, and packaging as well as sourcing of products. You should have a profit margin of about 10-20%. After you’ve achieved this, you can always experiment with pricing by including subscription discounts.

Offer Free Shipping

Free shipping is a great way to get your website visitors to turn into customers. If a person abandons their checkout because of your shipping costs, this can be a signal to start offering free shipping. How? Factor free shipping into the overall subscription price. Check out this super helpful article by Shopify on How to Reduce Shipping Costs for Small Businesses: 6 Helpful Ways

best subscription app shopify ongoing

Best Subscription Business Model Tools

If you don’t have an online store yet, you can get up and running with a 14 day Free Trial on Shopify.

In order to start your own subscription business, you will use a subscription management tool.

A subscription management tool helps you transform any of your products into a recurring order.

It lets you accept recurring payments and processes all of the subscription billing.

We recommend trying Ongoing which is the best subscription management tool.

Ongoing Subscriptions app instantly works on any Shopify store. Super simple to set up and use.

You can create your first subscription product in less than 5 minutes. Yup, it’s that good!

subscription business model pricing
Source: Bombay & Cedar subscription plans available on their site

Subscription Business Model Recap

We hope you’ve enjoyed our roundup of the best subscription business model ideas.

Now you can try one of these ideas out on your own product and launch your very own subscription business.

Try to use these tips IRL (in real life) and apply them to your own subscriptions business.

Encouraging customers to commit to recurring orders is a great way to increase revenue.

It’s a great path to go down. You won’t regret it!

What subscription business model do you think is the best and why? Leave a comment.

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