Should Your Small Business Use a Subscription Business Model?

November 23, 2023

Many businesses rely on a constant string of one-time sales. Think car dealers, real estate agents, even your local coffee shop – this model describes any number of other businesses, big and small, operating in a wide variety of industries.

This approach can create difficulties. Firms reliant on one-time sales often suffer boom-and-bust variations in their revenue. This makes it hard to scale operations properly and the uncertainty makes it difficult to plan, because revenue estimates only represent educated guesses.

Does that sound familiar? Does your small business or startup struggle to earn consistent, recurring revenue? If so, a subscription business model could be right for you. See why in this article.

What is a subscription business model?

Typically, a sale exists as a one-time occurrence. You might get repeat customers, but the act itself is a discrete occurrence. Each time you generate revenue, you need to conduct the full sale process.

The drawbacks are probably obvious: you're stuck in a constant loop of closing. The specifics of the sale cycle depend on your product or service but, generally speaking, you need to re-convince your previous customers to purchase again. At the same time, you're constantly seeking new buyers.

A subscription model can alleviate some of this pressure. The process involves recurring revenue. The offering you provide your customers comes with a regular fee that they pay periodically (often monthly, but weekly or annual subscriptions sometimes make sense as well).

The pros and cons of a subscription model

A broad swath of companies, in diverse areas of the economy, derive at least a portion of their revenue from a subscription model. According to data published by Statista, these are the most popular categories of subscriptions, in order of what share of consumers say they have subscriptions in those areas:

  • Groceries/food/beverages - 41%

  • Personal care products - 38%

  • Household products - 34%

  • Clothing - 32%

  • Toys/games/books - 26%

  • Pet products - 26%

Given the wide-ranging possibilities for a subscription model, it is highly likely that you could formulate a subscription service, if you thought it was worth the time and effort. Should you consider this direction? Here are some of the pros and cons to think about:

Given the wide-ranging possibilities for a subscription model, it is highly likely that you could formulate a subscription service, if you thought it was worth the time and effort.

Benefits of subscription models:

  • Subscriptions deliver a predictable revenue stream.

  • The process can nurture stronger customer loyalty, since your users incorporate you in their routines.

  • Having an entrenched subscription base makes communication easier, leading to opportunities for upselling.

  • Along with upsell chances, you also have a ready market for new product launches.

  • Your subscription service lets you gather more information about your customers, helping you serve them better over time.

Downsides of subscription models:

  • Setting up your new service will require time and money — you need to be committed to making the necessary investment.

  • Subscription services require constant maintenance.

  • You'll need to have dedicated marketing resources for your subscription service, in order to promote growth.

  • Adding a subscription service might require competencies that you don't already have on your team — you might need to hire or engage with a third-party firm.

What are some common types of subscription business models?

We've looked at the possible upsides and potential challenges related to launching a successful subscription service. However, you still need to think about the details of what such an offering would mean for you. This way, you can consider whether it's the right fit for your business.

There are a few basic types of subscription service to consider. Here are a few of the main forms you could pursue:

Flat Rate

This is the simplest form of subscription model. For one price, all your customers receive access to everything you have to offer as part of the subscription service. The flat-rate structure is often a good place to start, as the backend is easier to manage and you can launch it with a relatively limited offering.

Tiered Structure

Here, your model includes multiple levels. There are various levels of offering, differentiated by price. This structure lets you maximize revenue by giving customers (with different levels of need and with varied ability to pay) choices in what they want to receive.

This structure can also include the so-called "freemium" model. In this case, you would offer some portion of your product for free. Then, your customers can pay for an additional set of products or services.

Based on Usage

A flat-rate model treats all customers as a single group. A tiered model allows them to self-select into pre-selected categories. A usage-based structure provides another level of differentiation — your customers pay for the products and services they consume.

Often, the usage-based model begins with a fixed (or even tiered) entry price. This buys access to the platform and perhaps a minimum level of service. From there, a customer pays as they go, with the ultimate amount determined by their level of consumption.

Is a subscription model right for your small business?

Beyond the pricing models we looked at in the last section, you'll need to consider what to include in your potential subscription service. Of course, the details will depend on your particular company. However, once again, there are some broad categories to consider.

As we've seen, the type of companies that have launched successful services is very broad. Many types of firms, in almost every industry, have discovered ways to develop a subscription service. Still, within that diversity, the types of offerings can be boiled down to a handful of categories.

With that in mind, here are the types of products and services that are often seen in subscription services:

  • Access to content: This includes subscriptions to newspapers, websites, podcasts, etc. Meanwhile, it also includes access to exclusive data (a Bloomberg terminal is a good example). Basically, you are providing some form of media or information that your clients would pay to have access to. (Access to a Netflix account, for instance.)

  • Ability to use a particular software: Software-as-a-service (SaaS) has become the preferred model for most software providers. Here, your clients would pay to use an online tool that you provide. (A large selection of big-name tech companies provide SaaS offerings, including names like Microsoft, Oracle, and Adobe.)

  • Defined service: In exchange for a monthly fee, you provide a preset service. (Your local lawn or snow-plowing company would offer one of these.)

  • Regular delivery of a physical product: You send your customers some of your products on a prearranged schedule. (Stitch Fix, BarkBox, or HelloFresh represent examples of this model.)

  • Access to deals/lower prices: Paying a small fee lets your customers get better deals on future purchases or grants them access to enhanced functionality. (Think Amazon Prime here.)

Tips for getting started with a subscription model

As you consider a subscription model, it's important to understand the strategy. That means a deep dive into best practices. At the same time, you'll need to learn some key terms. Here are a few examples to add to your vocabulary:

  • Annual recurring revenue: (ARR) This figure uses your current billings to estimate a yearly revenue figure. (It can also be computed monthly as monthly recurring revenue, or MRR.)

  • Average revenue per user (ARPU): This amount will tell you how much you are earning per subscriber. It is particularly important when you have multi-tiered or pay-per-usage models.

  • Churn rate: Once you get new customers, you need to learn how best to keep them. Churn rate helps on this front. It lets you know the rate at which your subscribers cancel your service.

  • Customer lifetime value (CLV): This number lets you know the total value you can expect to receive for each customer, from the time they sign up to the moment they leave.

Integrating these new KPIs is just a small part of the process. Launching a subscription service can be a complicated endeavor. While it can bring steady income, as well as other potential benefits, you'll need to optimize its roll out and maintenance to bring the highest potential value.

With that in mind, here are a few tips to keep in mind as you weigh your options:

  • Review your current offerings. Find out what you have ready to be packaged as a subscription and what changes you might need to make.

  • Gather information from your customers. Compile data and conduct surveys. Understand how ready your target audience is for your planned subscription service.

  • Consider your tech backbone. You'll need features like a paywall, automated billing, and customer service for your new service. Consider the best way to put these in place, along with any other functionality your subscription service requires.

  • Establish clear goals. Going in, understand what constitutes success. That way, you can be clear-eyed about the progress of your new approach.

  • Don't over-promise. Have reasonable expectations about what you can deliver, especially at the outset. Provide real value but stay within your means as you grow your service.

  • Develop a marketing strategy. Have a plan for acquiring customers once you launch. At the same time, understand how you'll increase your subscriber base over time.

  • Learn as you go. You'll likely want to tweak your service over time, incorporating customer feedback and reacting to market changes. Have a process in place to stay current and upgrade your service over time.

Thinking about a subscription service for your small business

As we've seen, there are many potential benefits to implementing a subscription model. However, it's not right for every business. The decision will depend on your particular offerings and how prepared you are to deal with the possible downsides.

Subscriptions deliver a predictable revenue stream.

Use the information in this article to help make your decision. By understanding the dynamics that go into the strategy, you'll be better positioned to determine if it's right for you.