You may have heard about subscription businesses and what owning a subscription business might be like. This article will help clarify what you may or may not have heard by going through some of the basics of owning and operating a subscription business.
According to a well-researched and cited entry in Wikipedia, the subscription business model follows a strategy in which a customer must pay a subscription price to have access to a product or service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites. Rather than selling products individually, a subscription sells periodic (monthly or yearly or seasonal) use or access to a product or service. A common example of a subscription service would be a monthly cable tv service or a streaming service such as Netflix.
As noted, businesses benefit because they are assured a predictable and constant revenue stream from subscribed individuals for the duration of the subscriber's agreement. Not only does this greatly reduce uncertainty and the riskiness of the enterprise, but it often provides payment in advance (as with magazines, concert tickets), while allowing customers to become greatly attached to using the service and, therefore, more likely to extend by signing an agreement for the next period close to when the current agreement expires.
In addition, FastSpring notes the following four characteristics about subscription-based businesses:
1. Subscriptions are the Future
The subscription service model has seen a boom in recent years. Although there is a case to be made for having a reliable, physical product in hand, the massive benefits of the subscription model cannot be overstated. And just what are those benefits? Chief among them are ease of distribution, reliable revenue, and a pro consumer structure.
2. Ease of Distribution
Distribution has always been a challenge for the selling of software as a physical product. To do so, you’ll need to take shipping costs, buyer location, and cost of the product itself into consideration. Not only that, but customers will be expecting support for more physical shipping, and your business will need to repeat the process each time you release a new product. Depending on the popularity and success of your business, the costs and time spent on physical products can add up and impact your growth negatively.
The subscription model solves all these problems in one swoop. Without the need for a physical copy, you can ship your product instantaneously to your customers. Each subsequent release of your product will be in the hands of your customer in the same amount of time, guaranteeing that each of your customers will possess the same product. Depending on your business’ ability to accept and process payments, global markets may become more easily accessible. No longer affected by shipping costs, your business can then redirect its resources to other important areas.
3. Reliable Revenue
One of the largest benefits of the subscription model is its ability to reliably predict revenue that your business will receive. This translates into a more consistent cash flow and a higher predicted value for your business. Subscription business models can be set up as a monthly or annual billing. Given that customer payments are typically tied to the credit card they used for the purchase, there is a much higher chance that the renewal fee will be approved and processed without any issues.
4. The Challenge of Subscriptions
Despite these strengths, the benefits of the subscription model do not necessarily mean the system is without its challenges. Customer incentives to subscribe, retention, and cancellations are continual hurdles that SaaS subscription businesses must face.