Is a subscription model right for your business?

Where usual sales are a one-off exchange – your customer purchases one item and pays one time – a subscription model bills your customer routinely and gives them extended access to services or repeat shipments of products. They’ll receive peace of mind and a better service, and you’ll accumulate more money over time.

More and more businesses are jumping on the subscription trend. From toothbrush businesses which send their customers new toothbrushes every three months, to childcare businesses which send discounted baby diapers to new mums on a weekly basis. But subscriptions don’t have to be product based: they can be services, such as lawn mowing, or tech based, like access to an exclusive website.

Is a subscription model right for you?

Before you commit to a subscription model, you need to make sure it would suit your business. What would be most convenient for your customers? What role does your product play in their lives?

Some products simply aren’t needed often enough for a subscription to make sense. For instance, cyclists likely wouldn’t need new bicycle seats on a biweekly basis. If your business only offered them as a subscription, you’d likely end up losing sales.

But if you do have a product or service customers need or access frequently, then there are three primary forms of subscription models you can consider.

The three type of subscription models.

• The prepaid model.

The prepaid model is the simplest model, and it’s what most customers think of when they hear the word subscription. They’re when customers are billed a set amount on a monthly basis. Once a payment has been received, they receive access to the product or service. This usually happens automatically, until the customer decides they no longer want to subscribe.

From Dollar Shave Club to Netflix, the prepaid model is one that customers know and understand. Because it is so simple it’s the easiest to implement, but it does come with some downsides.

Set payments don’t necessarily take into account how needs change from a month to month basis, so prepaid models may experience some churn (when customers sign up and then change their minds). They also require extra infrastructure so that you can process automatic recurring payments.

• The term-based model.

A term-based model can help provide stability and peace of mind to a business, but it can be tricky to incentivize customers to sign up for one.

They’re most commonly used by cable and satellite providers and operate like this: the customers are locked into a contract for a set term (this could be a year, or two years) and cannot change provider in that time.

Within that term they’re charged repetitively: you might have signed a one-year contract with an electricity company but pay every month of that year

Your best bet at locking customers into these is through discounts – for instance, if they sign up to your service for a year you can offer them a lower price than your competitor, or a discount on your products.

• The usage-based model.

The usage-based model differs from the other two in one key aspect. Rather than charging customers up front for access to a service or product, the usage-based model charges them based on what they’ve actively used since the last payment.

This can be appealing as customers will only pay for what they use, but can result in some surprises for both parties (have you ever been surprised with a high phone bill and then contested it, or been late paying it?).

To ensure their customers are happy and they get paid on time, many businesses use usage-based subscription models stacked with regular prepaid subscriptions. For instance, you might charge mobile customers $20 a month so that they can text endlessly, but then charge 20 cents per minute they speak on the phone.

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When you’re considering implementing subscriptions it’s important to keep in mind what infrastructure will be required to support them. It’s also important to shift your mindset from one of making individual sales to maintaining and upholding positive relationships with your customers.

It’s key to pick a model which will help you stay flexible, and which you’ll easily be able to scale. If you’re already overwhelmed with your existing customers, you won’t be able to continue growing!

The key thing to keep in mind is that subscriptions, when done right, can help everyone. They give you stability, and they’ll give your customer consistent value.

Lena Klein