How To Create A Subscription Based Business

Remember Blockbuster? It was the name in home-video and they felt invincible at the top.

That is until the video industry started to pivot when companies like Netflix came along with a subscription business model.

Instead of getting with the times, Blockbuster decided to stick to their guns and focus on home rentals.

And, as a result:

Blockbuster went bust and everyone swapped their Blockbuster video card for a Netflix subscription.

Now, other industries are catching up and reaping the rewards of subscriptions like:

Music with Spotify and Apple Music.
eCommerce with Amazon Prime.
Fitness with Apple Fitness+.
Books with Kindle Unlimited.

After all, no one wants to be the Blockbuster of their industry. That's why we've created this ultimate guide to subscriptions.

It's your one-stop shop to understand everything you need to know about subscription business models. We'll cover:

What a subscription business model is (and how it works).
Why a subscription business model is lucrative.
6 ways a subscription business model can help your business.
The different types of subscription business models out there.

That way, you can make an informed decision about how subscriptions can work for your business.

Let's get started…

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What is a Subscription Business Model and How Does It Work?

A subscription business model is when a customer pays a fee on a regular basis to get access to your product or service; allowing you to earn recurring revenue from a group of loyal customers.

It's like having a continuous agreement with your client, where people agree to pay for your products or service for a certain period of time, like every month, year, or quarter. And, customers have the option to cancel their subscription anytime.

The subscription business model is part of a wider cultural shift called the membership economy where people are searching for "access" over "ownership". (More on that later.)

Netflix is a great example of this kind of subscription business. They give their viewers access to all past, current, and future content for a recurring monthly fee.

As long as you pay, you (and your moocher friends) can watch. And, when you cancel your subscription, you lose access to their streaming service.

And, if you're anything like me, you probably don't even notice that $15 monthly payment coming out of your account anymore!

Netflix's subscription-style business disrupted the entertainment industry and wiped out DVD rental businesses (ehm cough Blockbuster).

But why was their business model so successful?

The short answer is:

Netflix created a whole new experience for people to consume content. (Was 'binge watching' even a thing before them?)

They also provide a ton of value for a very affordable upfront cost.

To fully understand why subscriptions are popular among businesses and consumers, we'll need to delve deeper into some theory; the membership economy.

The Membership Economy: Why Subscriptions Work So Well

Now for the longer answer…

The membership economy, also known as the subscription economy, refers to a shift in mentality, within consumers and organizations, from ownership to access.

In the membership economy, people and organizations act differently and have different goals.

On one end, consumer trends like…

changing needs; consumers are putting more value on engaging, authentic, and validating experiences over material wealth
increasing demand for hassle-free experiences; by removing the burden of ownership, such as maintenance and upkeep

… have driven more people to subscribe to their favorite products and services. In fact, over the last 9 years, the membership economy has grown nearly 6x!

From the business side, subscription companies want to build long-term relationships with customers.

This lets them create a more predictable cash flow, a direct customer feedback loop, and greater customer loyalty.

These businesses rely less on one-time sales that don't always inspire brand loyalty, as people can often change brands to find good deals.

Instead, subscription companies focus on finding their super users; people they can create and grow the 'forever' transaction with.

There are 3 main pillars for businesses to be successful in the membership economy:

Subscriptions: where businesses regularly offer a lot of value to customers, in-return for recurring revenue.
Community : a network of die-hard fans that enhances the value of membership, lets you get direct feedback on your service, and increases customer retention.
Increased loyalty: building a long-lasting connection between your customer and your brand; this can increase referrals and word-of-mouth marketing.

If you're interested in learning more about the membership economy, you can watch a quick summary of Robbie Kellman Baxter's book here:

Click here to watch the video -> youtube.com/watch?v=lQLVR45drwg

Now that we've got the theory down, let's look at practical ways subscriptions can help your business.

6 Ways A Subscription Business Model Can Help Your Business

A subscription business model gives you a more predictable income stream and a loyal customer base.

For example, if you have a piece of content you can monetize it for as long as it's relevant!

Let's say you create online courses on how to play the piano. You have several course videos each one breaking down how to play a specific song.

You could sell each course individually, or group a few videos together and sell them as a bundle.

But that means you'll have to keep finding new leads, convince them to buy from you, and spend a lot of time and money on marketing your videos.

OR, you could do what Play Smooth Piano does, which is create a membership platform where subscribers get unlimited access to all course videos.

That way, Play Smooth Piano are able to:

Monetize their older videos with minimal marketing efforts.
Rely on a group of people to pay them consistently.
Focus on creating new content that benefits their subscribers.

Put simply, would you rather earn $10 once and have to keep trying to convince new people to buy from you? Or get $10 every month from a trusted group of people for years?

Here are the 6 main benefits subscription companies can do:

1. Predict your revenue more accurately

Predictable revenue streams will make your business financially secure which will:

Reduce your stress about keeping the business running.
Give you the freedom to focus on other parts of your business.
Let you reinvest the money you get back into your business.
Allow you to improve your product.
Help you grow your business.

Based on the number of subscribers you have, you can calculate your Monthly Recurring Revenue (MRR), which is the amount of predictable revenue you get per month from subscribers.

To calculate your MRR you just need to multiply the number of active subscribers you have with the price of the subscription.

MRR = Number of Active Subscribers * Price of Subscription

Let's say you have 100 subscribers and charge $10 per subscription. Here's what that calculation would look like:

MRR = 100 subscribers x $10 = $1000

If you get 5 new subscribers the next month then your new MRR will be:

MRR = 105 subscribers * $10 = $1050

Better still, this will compound with what you earned last month because the first 100 subscribers are paying again.

But, you will have to keep track of the different subscription tiers and durations you offer; because it can lead to some complicated sums like…

Monthly Recurring Revenue per Subscriber = (Subscription Price / Subscription Period) * Avg Days Per Month in a Year (30.41)

…to calculate the revenue of every subscriber individually then you'll have to add them all up. That's a lot of calculations.

That's why here at Uscreen, we do it all for you! Your MRR is automatically calculated and takes into account different subscription plans.

Being able to predict your revenue stream will help you better understand the financial health of your business and where to reinvest your revenue!

2. Offer more affordable prices for customers

By charging your customers periodically (weekly, monthly, annually, etc) you'll be able to spread out the cost of using your service.

Transactional businesses often have higher prices because they want to make sure they're profiting the most off that one sale, which can act as a barrier to getting new customers.

But, subscription companies can offer more affordable prices that are paid regularly, which can:

Be less intimidating for customers.
Make customers feel like your service is more affordable
Let you scale your business by attracting more customers.

They can also motivate your subscribers to use your service more. In fact, research suggests that people who pay for a service frequently in smaller amounts are more likely to engage with it in the future!

Pricing of a subscription business model is less intimidating to customers because you can charge a lower upfront cost more frequently.

3. Increase customer lifetime value (LTV)

The customer lifetime value (LTV) is the total worth they have for your business over the course of your relationship with them.

Subscription businesses focus on providing consistent value over an extended time to their client. This creates a customer experience that keeps them wanting more.

As someone who likes to discover music and listen to my favorite songs uninterrupted, my Spotify subscription gives me a lot of value.

It creates daily and weekly playlists based on my ever-changing music taste, makes discovering music easy, and allows me to listen to my favorite songs seamlessly. So long as I get these services from Spotify, I will continue to pay for my subscription in the future.

This means that my lifetime value as a Spotify subscriber is high because they can safely assume that I'll pay them every month so long as their product gives me value.

By offering consistent value and more accessible pricing, subscription businesses can keep their subscribers for longer, which raises their customer lifetime value.

4. Build a stronger customer relationship through communities

Growing a community around your subscription business lets you create a loyal and profitable fanbase where your customers feel heard and validated.

That's because you're tapping into a primal human need; we want to feel like we belong somewhere.

A great example of this is Studio Bloom, an online video streaming service that creates fitness-focused content for pre- and postnatal mothers.

At the core of their business is an exclusive online Facebook community of over 1500 people, created to holistically support mothers' health.

Bloom community members get more than just a fitness program, they can:

Discuss their pre- and postnatal journey with like-minded people.
Get general support for their motherhood journey.
Have their questions answered.
Receive education and guidance during and after pregnancy.

These perks enhance the value of membership which creates a long-term connection with customers.

Communities can improve your customers' overall satisfaction with your product or service, increase their loyalty, and word-of-mouth marketing.

How to Use Tribe Mentality to Boost Your Membership Site

Tribe Mentality: The Secret Sauce of Any Successful Membership Website

5. Increase customer retention (and decrease customer acquisition costs)

A subscription business model is designed to keep customers for longer and reduce the number of people who stop using your service (churn rate). That's because subscription companies offer:

More affordable upfront pricing.
A nurturing community.
A valuable service.

Research shows if you improve customer retention by just 5%, you can increase your profits by 25% to 95%. This is why focusing on keeping the customers you have is so important!

That way, you're streamlining your marketing budget instead of just focusing on acquiring new customers (which costs 5x more than retaining existing ones).

With a low churn rate and predictable income stream you can:

Expand your marketing efforts.
Focus on selling new products to your existing customer base.
Grow your community features for a better user experience.
Improve your product/service by leveraging your community.

A subscription business model focuses on retaining existing customers, creating a loyal and profitable fan base, and decreasing customer acquisition cost.

Speaking of which…

6. Learn directly from customers and improve your business

You can leverage your community to your business's advantage. What better way to find out what to improve on in your business than to ask your customers directly!

We even do this here at Uscreen!

On the Uscreen dashboard, our community members can suggest features. which helps us:

Understand what our community members actually need.
Which features we should prioritize building.
Retain customers proactively in a cost-effective way.
Give our customers the value they need to stay.

You can get valuable insight on your product or service from your community members, this will improve your user experience and the strategic business moves you take.

Now you know the 6 ways how offering a subscription can directly improve your business. Coming up next is what type of subscription will work for your business.

The 2 Different Types of Subscription Business Models

Subscription-based models are perfectly suited for 2 types of businesses:

Those who offer access to a product.
Those who offer a repeat service.

Here's a breakdown of each type…

1. Access: Premium Content For Dedicated Subscribers

If your business needs access to…

video streaming content (i.e. subscription video on demand)
written content
software

… then offering a subscription is a lucrative pricing strategy.

It'll give your clients access to your exclusive products so long as they pay you a recurring subscription fee.

Let's take a look at what access-based subscription businesses look like:

Subscription Video On Demand (SVOD)

If you create video content that educates, engages, informs, or entertains your audience, your subscription business will focus on offering access.

An example of this could be having a standalone video streaming site where customers can access premium content.

Streaming services like Netflix, Amazon Prime Video, and HBO Max have all jumped on the subscription bandwagon.

But you don't have to be a video production giant to have a successful subscription business…

Take Cakeflix, a video streaming service that offers an extensive library of over 1000 cake decorating, baking, and business tutorials.

They provide a lot of free cake decorating tutorials on their Instagram and YouTube pages, where they've built a large following.

But, they found that monetizing free content alone was hard.

That's because their income would fluctuate and they had to spend a lot of time and effort expanding their social reach for a small and unpredictable return.

So, Cakeflix decided to create a subscription-based online school for their most dedicated supporters who want to:

Improve their decorating and baking skills.
Learn new techniques.
Start their own successful cake business.
Connect with like-minded bakers.

Now, their subscribers can get access to premium video-based lessons and a community to share their experiences with:

With their subscription revenue, Cakeflix can:

Generate a consistent and reliable revenue stream.
Offer a premium service at a reduced cost.
Scale their business.
Reinvest their recurring revenue to create more content and offer more value.
Reduce churn rate by nurturing their community of loyal customers.

Cakeflix also offers one-off sales of specific tutorials (at a higher cost than their subscription).

That way they can sell their product to all types of customers. Those who want to be a part of a community, and those who want to brush up on a specific skill set.

Written Content

In the digital age, paper businesses are going down the drain (sorry Dunder Mifflin).

All the mainstream news publications like The New York Times (NYT), The Financial Times, The Economist, and much more have moved to create subscription products.

Some publications also leverage free content, like one or 2 free articles a week, to reel in more potential subscribers.

Let's take a look at NYT's business transformation in the membership economy…

Before 2011, 68% of NYT's revenue came from advertising. When the digital revolution came along, NYT thought they could just replace print ad with digital ad revenue.

But, when it comes to ad revenue, it's hard to compete with giants like Google and Facebook.

In fact, NYT's ad revenue declined so much that they were no longer able to invest in quality journalism. While NYT focused their resources on supporting advertisers, the reader's experience got left behind.

So, in 2011 NYT decided to put up a paywall and get their readers to pay for their news.

And it worked!

It turns out, millions of people (specifically 6.5 million) are willing to pay for high-quality journalism. Now, 73% of NYT's revenue comes from subscriptions.

By creating a subscription-based product NYT transformed their business and were able to:

Retain more viewers.
Increase their reader base.
Grow their revenue.
Create a sustainable business model that puts the reader front and center.
Invest in more niche products like the NYT Crossword app.

Now NYT offers a premium reader experience and has formed direct relationships with their readers.

With a recurring income and loyal customer base, NYT is able to reinvest its subscription income into quality journalism. This creates a self-reinforcing effect where readers want to stay to get well-researched information.

Software As A Service (SaaS)

SaaS companies let people use premium software and provide value to users by automating or optimizing processes.

A subscription pricing structure for SaaS companies can be very profitable because it lets them:

Offer a lower upfront price.
Receive consistent income.
Scale their business.
Present a low commitment product. (For example, if a customer outgrew the product they can just cancel their subscription.)

Let's take a look at Mailchimp, a marketing and commerce tool that helps people build their brands and sell online.

They offer different plans for their services, targeted at different business budgets and needs:

With its subscription business model Mailchimp can:

Make its product more affordable.
Let customers use the product for as long as it's relevant to them.
Offer a tiered subscription at different price points.
Scale their business alongside their clients. (Part of their pricing model is based on the number of their clients' users.)
Reinvest their recurring income to expand on their product (they have 3 different products: marketing, website & e-commerce, and transactional email).

Now that you know the different types of access subscription businesses, let's take a look at subscription businesses that focus on repeat services.

2. Repeat Services: A New (Or Restocked) Product Every Month

If you're a business owner who deals with physical products, subscription models can help you turn your product into a fun experience and/or personalized service to your customers.

A great example of this is monthly subscription boxes. These are a recurring delivery of products made for everyone regardless of how niche their interests are.

People who are…

tea aficionados that want to be surprised with this month's pick of funky tea mixes
looking to streamline their cooking schedule with meal-kits that have pre-measured ingredients and recipes
really into socks and want to have the latest picks of fun sock brands

…benefit from subscription boxes because it offers them new value on a regular basis, solves a consistent problem, and/or restocks their favorite products.

Better still, research shows that most subscription box businesses have a 40%-60% profit margin and can retain 80% of their customers!

People value a personalized service and the ease of restocking or buying new products, making subscription-box businesses successful. These businesses can:

Sell more products.
Have a sustainable pricing model.
Rely on a loyal customer base.
Earn a recurring revenue.
Safely forecast the inventory they'll sell.

Let's take a closer look at meal-plan subscription boxes like Hello Fresh. They offer a versatile subscription that works for different types of customers:

Regardless of what type of diet you follow, how many people you want to feed, or how much time you have, Hello Fresh has a plan for you!

They charge you on how many servings you want and how often you want it!

Customers will get pre-measured ingredients and an accompanying recipe, that they can choose, delivered straight to their doorstep.

It lets people avoid the dreaded discussion of 'what are we going to eat today?'

With their subscription box, Hello Fresh transformed the household cooking experience. It made:

picking a meal
shopping for ingredients
portioning food
cooking

… a seamless experience.

Wrapping it up

Congrats! You've made it through this pretty intensive guide!

Subscriptions are changing the business landscape for both customers and business owners.

Whether you're a content creator, Saas entrepreneur or you sell physical goods, adopting a subscription business model can let you:

Accurately predict your revenue.
Offer more affordable prices.
Increase the lifetime value of your clients.
Build strong bonds with customers through your community.
Increase customer retention.
Improve your user insight.

From a consistent income stream and a loyal customer base, all the way to growing your business, it's time to see how subscriptions can change your business, for the better.

FAQ

How does a subscription business model work?

A subscription business model works by charging customers on a recurring basis (i.e. monthly, annually, quarterly), in return for your product or service.

Netflix Is a great example of this. They give their viewers access to all past, current, and future content for a recurring monthly fee.

What is a subscription-based business model?

A subscription business model is based on selling a product or service in return for a recurring fee.

What are the different types of subscription business models?

There are 2 types of subscription business models:

1. Businesses that offer access to a product, like video streaming content, written content, or software.
2. Businesses that offer a repeat service and deal with physical products.

Is a subscription business model good?

A subscription business model, when done well, can let you: earn recurring revenue, grow your business, and create a community

Because of that, there are 6 ways a subscription business model can improve your business:

1. Accurately predict your revenue.
2. Offer more affordable prices.
3. Increase the lifetime value of your clients.
4. Build strong bonds with customers through your community.
5. Increase customer retention.
6. Improve your user insight.

Is a subscription a good or service?

You can offer a subscription as both a good and a service.

If you deal in physical goods you can use subscription boxes because they offer new value on a regular basis, solve a consistent problem, and/or restock customer's favorite products. This also gives your clients a fun experience or personalized service to consume your product.

If you deal in content or software as a service (SaaS) you can offer a subscription by giving your clients access to your exclusive product/service, so long as they pay you a recurring subscription fee.