Are you interested in running a subscription business, but you have no idea if it’s the right choice? I’ll present the pros and cons in this article so you can make a decision. Having a balanced overview will help you make the best choice for your business.
The subscription economy is set to reach $1.5 trillion by 2025, which indicates that this type of business model is only increasing in popularity. Perhaps it could be the right monetization model for your company. Read the rest of the article to find out if it’s the right choice for your company.
Pros of a Subscription Based Business
Let’s start by taking a look at some of the top advantages of a subscription based business.
Continuous Revenue Growth
With a subscription model, businesses have the potential for continued revenue growth. As new customers are acquired, they build upon existing revenue streams, leading to compounding growth over time. This is particularly beneficial for startups and companies in industries with high customer acquisition costs.
Flexibility and Scalability
Subscription models often offer different tiers for pricing options, allowing customers to choose the level of service that best suits their needs and budget. This flexibility increases the potential customer base. Additionally, as businesses scale and add more subscribers, they can benefit from economies of scale and reduce costs per customer.
Customer Loyalty and Retention
Subscriptions foster a sense of loyalty and commitment from customers. When people subscribe to a service, they are more likely to stick with it over the long term, reducing customer churn. This helps businesses build a loyal customer base and improve customer lifetime value.
Also, you can use different strategies to increase the likelihood that customers will stick around for multiple billing cycles.
Predictable and Recurring Revenue
Subscriptions provide a steady stream of revenue as customers commit to regular payments. This predictability allows businesses to forecast and plan their finances more accurately, making it easier to manage cash flow and invest in growth.
Also, investors prefer predictable and recurring revenue models. Hence, you’ll potentially get a larger sale when selling your business.
Improved Customer Relationships
Ongoing relationships between businesses and customers are forged when a subscription based model is used. Companies have the opportunity to engage with subscribers regularly, providing updates, personalized recommendations, and exclusive content. This interaction deepens the relationship and that makes customers more satisfied with the service.
Opportunities for Upselling and Cross-Selling
Subscriptions provide a platform for upselling and cross-selling additional products or features. Once customers are subscribed and engaged, businesses can offer upgrades or complementary services, expanding the revenue potential per customer.
Also, you get to test many different upselling opportunities to see what works and what doesn’t. That’s because customers stay with you for a long time and you’ll get to understand them at a deeper level.
Reduced Piracy and Unauthorized Use
For digital products or services, subscription models can help reduce piracy and unauthorized use. By requiring users to have an active subscription, businesses can enforce access controls and prevent unauthorized sharing or distribution of their products.
This can be one of the biggest problems to overcome, depending on what industry you are involved in.
Cons of A Subscription Business
Now let’s take a look at a few of the drawbacks of running a subscription based business for a balanced overview.
Customer Churn and Retention
The customer churn rate is one of the biggest problems with subscription based businesses that don’t offer a reason to stay beyond the 1st billing cycle. While subscriptions foster customer loyalty, there is still a risk of customer churn.
If customers are not satisfied with the service or find better alternatives, they may cancel their subscriptions. Businesses need to continuously focus on providing value, maintaining high customer satisfaction, and reducing churn rates.
Customer Acquisition Costs
Acquiring new customers for a subscription-based business can be expensive. Marketing, advertising, and promotional efforts are often needed to attract and convert customers. This can increase upfront costs and potentially impact profitability, especially in highly competitive markets.
Service Quality and Customer Expectations
Subscribers have higher expectations for the quality and value of the service they receive compared to one-time purchasers. Businesses must consistently deliver on their promises, provide timely customer support, and ensure the service meets or exceeds customer expectations.
Failure to do so can lead to customer dissatisfaction and negative reviews, impacting the business’s reputation. Therefore, you may end up investing more in ensuring customers are happy than with other models.
Subscription-based businesses rely heavily on a consistent flow of subscribers to generate revenue. If there is a significant decline in new customer acquisition or a high rate of cancellations, it can have a significant impact on the business’s financial health. This revenue dependency can make the business vulnerable to market fluctuations or changes in customer preferences.
Difficulty in Pricing and Value Perception
Determining the right pricing strategy for a subscription-based business can be challenging. Setting prices too high can deter potential customers, while setting them too low may lead to revenue shortfalls. Additionally, customers’ perception of value can vary, and it can be challenging to align pricing with the perceived value of the service.
Lack of Ownership
Subscription models often involve providing access to a service or product rather than selling a physical item. This means that customers don’t have ownership or control over the product, and if they stop paying the subscription, they lose access to it. Some customers may prefer outright ownership, leading to potential resistance or lower adoption rates for subscription-based offerings.
To conclude, there are many great reasons for running a subscription business, and a lot of the top digital companies are having great success with it. However, you need to be aware of the drawbacks to ensure that you mitigate some of them.
There are many industries that can use a subscription based model. Whether it’s selling physical supplements or offering VPN services. Therefore, it might fit the products you are selling.