Benefits of a subscription business model for small business owners

A subscription business model is a great way to produce recurring revenue. You’re likely familiar with many success stories. Netflix, Hello Fresh, and Amazon Prime are just a few examples of the subscription revenue model where customers sign up to a regular service, software, or product and pay for it monthly, quarterly, or annually. Many of the businesses adopting it seem new, exciting, and mainly digital, but subscription models have been around for centuries. They’re tried and tested.

Businesses of all sizes embrace subscription models to diversify revenue. Relying on one source of income is an uncertain place to be, because all it takes is a supply chain issue to make your single customer type or product offering redundant or less desirable.

With diverse sources of income through a subscription business model, your business can weather most storms and still generate healthy revenue. One great example of this is a car manufacturer servicing plan. When the cost of living is high, or there is economic uncertainty, customers might be reluctant to buy a new car. However, they’ll be very keen to keep their current vehicle well-maintained and regularly serviced. This business will keep generating recurring revenue because it has diversified its income streams with a subscription model. This is one of the key benefits of subscription model businesses.

Predictable revenue streams

Monthly recurring revenue (MRR) is revenue that is generated on a monthly basis, sometimes in a predictable amount. If your business can accept recurring payments it can help maintain healthy cash flow, because customers can repurchase a service or product automatically. That means you don’t have to wait for customers to actively engage before they buy – they’re already signed up.

Some customers may cancel or change their subscription preferences, but a subscription revenue model is relatively stable overall. The ability to securely store customer payments is a great way to generate MRR for your business.

Increased customer loyalty

Starting a subscription business can develop a long-term relationship with your customers. The benefits customers receive through their subscription helps you to retain them and reduce your customer churn, which is costly. Your customers may love the reliability, the fact they don’t have to think about re-ordering, or the surprise of what they’ll receive each month. Whatever it is they’re looking for on a regular basis, a subscription model helps to retain them.

Subscription models also provide a great opportunity to boost customer satisfaction with personalization. If customers are subscribing to access content, tailoring recommendations will help subscribers remain engaged. Personalization can include curated products based on previous purchases and preferences, giving customers the ability to choose their own products and services. A personalized approach can even help identify the most relevant channels of communication to engage with them.

Enhanced customer lifetime value (CLV)

Increased customer loyalty and recurring payments means increased customer lifetime value (CLV). A subscription business model can grow revenue from each customer, and upselling and cross-selling opportunities are constantly available, including subscription add-ons and various levels of commitment.

CLV demonstrates the value of the average customer throughout your relationship with them. It’s an essential metric for any business because it helps you to compare how much you’re spending to attract and retain them and what they’re worth to your business.

Flexibility and scalability

Upselling and cross-selling opportunities make your business’s subscription model scalable and flexible. Many subscriptions, particularly those based on software or service rather than tangible products, can be sold internationally with ease, generating a borderless customer base all over the world. Customers can customize their subscription features if their needs and circumstances change. That means customers that want to pay more to access greater perks have that option, while those who wish to scale down and pay less can stay happy too.

Data-driven insights

The ability to gather insights and data that are meaningful and measurable is one of the key benefits of subscription model businesses. Analyzing subscriber data can help your business to identify trends and opportunities, as well as spot scenarios where customers don’t convert or don’t continue to subscribe. Without this data analysis, your business is in the dark.

Challenges and considerations

A subscription business model can be lucrative, but they have their challenges too. Supply chain disruptions, too many steps, lack of novelty, and uncompetitive pricing can all lead to a high churn rate.

It’s important to carefully consider and be flexible with your pricing strategy. Businesses with subscription models can be plagued with stagnant AOV, as customers will subscribe and forget. Customers can also be easily lured by competitors. Many of us pay for multiple streaming services because they all offer different content, but we’re unlikely to subscribe to two different razor companies or two website building tools at once. If your customers can get a better deal on their subscription elsewhere, they will.

The third major challenge to consider is customer acquisition costs. These need to be carefully balanced against the subscription benefits, or your business could experience low CLV and high marketing and development costs.

Is a subscription model right for you?

Your business’s subscription model is much more likely to succeed if you listen to the real experiences and strategies of other subscription revenue model businesses. With these insights you’ll be able to access the key advantages of subscription model businesses – predictable revenue, customer loyalty, high CLV, flexibility and scalability, and data-driven insights.

Ready to implement subscriptions? Explore PayPal’s recurring payment options for your products and services.