The amount of cash coming into a business and the amount flowing out (aka cash flow) is an issue for many small ventures. The problem comes when you haven’t yet been paid by your customers but have bills due. If you find yourself in this uncomfortable spot, don’t despair. A subscription business model could be the answer.
Many businesses use the subscription model to successfully generate regular, ongoing income.
Subscription model income can be an additional revenue stream or it can be the primary way you make your money. It depends on your business circumstances and goals.
Related: Selecting the right business model
What is a subscription business model?
A subscription business model requires customers to subscribe — in other words, to pay a regular fee — to have ongoing access to a product or service.
Examples of successful subscription models include popular entertainment streaming services like Netflix and Spotify. One recent study estimated that Australians currently have nearly 37 million subscriptions to home entertainment services, including video on demand, music and gaming.
This figure has grown exponentially in recent years, especially during the COVID-19 pandemic restrictions. It is also forecast to continue to grow into the future as more and more businesses look to secure new revenue streams with the Australian economy heading into its first recession in nearly 30 years.
Software companies like Adobe, Microsoft and Norton have also successfully transitioned to a subscription business model.
Have you noticed these companies switched to ongoing subscription licences for their software products rather than charging users a single license fee? This is the subscription model at work.
How to set up a subscription service
Setting up a subscription service can be done in five steps. Let’s look at each in turn.
Step 1 – Identifying suitable products or services
This may require some market research to determine if your customers would be willing to pay an ongoing fee for your product or service, and if so, how much.
You may need to ‘think outside the box’ to come up with a subscription idea. For example, Sydney clothing rental company GlamCorner has a subscription model where you can sign up to choose and receive a monthly box of designer clothing.
You can wear these clothes you choose for one-off occasions or keep them for as long as you like. When you want to update your wardrobe, you simply return the items in your box and choose more. Subscriber deliveries and returns to GlamCorner are free.
Step 2 – Choosing a distribution channel
The next step in implementing a subscription business model is to decide how you will deliver the product or service.
For example, can your product or service be delivered online or will it require physical delivery? If it requires physical delivery:
- Will you have any geographic restrictions?
- What will be the quickest, safest and most cost-effective way to distribute it to your subscribers?
If you already have a website but have never shipped products, you’ll find step-by-step instructions on setting up shipping for your small business in this terrific post.
Editor’s note: Online Store from GoDaddy has all you need to create a secure web portal where you can display your wares, securely accept payments and mail physical products or sell digital downloads. Check it out.
Step 3 – Working out your subscription terms and conditions
Ideally you should make these terms and conditions flexible, while still ‘locking’ your subscribers in as much as possible.
For example, you can offer discounts to customers for signing up for longer subscriptions, but you should have a fair cancellation policy. Potential subscribers may be hesitant to commit to a long-term subscription if they can’t cancel easily.
Payment terms are another important consideration in the subscription business model. Again, flexibility is the key. For example, if you can offer monthly, quarterly and yearly subscriptions, you should give your customers those options and price them accordingly.
A monthly subscription could make your product or service more appealing to more people rather than only offering the more expensive, yearly subscription.
Step 4 – Setting up your subscription logistics
Your subscription logistics include anything that allows your customers to sign up and pay for their subscription.
This will generally be done online via a secure web portal. This portal should enable your customers to access any information they need to set up their own account and to subscribe (pay) to your product or service on an ongoing basis.
A simple series of tooltips will help to get people familiar with the sign-up process.
Your subscription system should also be scalable — in other words, capable of handling growth in your subscriber numbers. Check with your hosting provider on this question.
Step 5 – Promoting your subscription service
Subscription business models obviously require subscribers to succeed. If your subscription logistics are scalable, you’ll want to grow your subscriber base as quickly as you can.
This is where you provide a sample of your product or service for free to encourage people to subscribe. A freemium model can be a very effective promotional strategy to generate paid subscriptions.
Another promotional strategy is to provide special offers to new subscribers such as free delivery or other limited-time bonuses for signing up.
What types of ventures can use the subscription model?
If there is an ongoing customer need for your product or service (or if you can create one), then a subscription business model could work for you.
In addition to home entertainment and software, subscription services can be suitable for a diverse range of industries, including:
- Web development and design (e.g. if you’re a web pro you might be able to sell a subscription service for monthly website updates or security audits).
- Home services that you need done regularly.
- Retail (e.g. personal care and grooming products).
- Food services (especially those associated with specific types of foods or diets).
- Information or premium online content services (e.g. news services)
Retaining your subscribers
Keeping as many of your existing subscribers as possible is just as important as attracting new ones. You can do this by making sure that you continue to offer ongoing value to them. Don’t neglect them in your hunt for new subscribers. Regularly show them that you value their loyalty.
In these challenging economic times, getting as much secure, ongoing revenue as you can for your business is crucial. A subscription model can be a great way to do that if it suits your product or service.