Subscription business models
Over the past several years, there has been a transformational shift in the way consumers purchase products and services. Savvy consumers across the globe are stating loud and clear that they prefer to rent rather than own, subscribe rather than buy.
Displaying an overwhelming preference for subscriptions, memberships, and other forms of recurring payments, consumers relish the convenience of subscribing not only to music, over-the-top (OTT) entertainment, e-learning, and health and wellness services but also to the recurring delivery of physical goods such as fresh produce boxes, prepared meals, cosmetics, pet supplies and more – all just a few easy clicks away.
From basic usage-based transactions to freemiums to bundled offerings – as well as numerous hybrid subscription models – successful online businesses are deploying recurring revenue business models that cover the gamut to leverage this digital transformation.
The fundamentals: seven subscription business models
To start with, there are seven basic types of subscription models:
1. Usage-based or metered model
With usage-based subscriptions, also known as the pay-as-you-go model, subscribers are billed based on their actual usage of the product or service. An example would be the amount of bandwidth used for an internet subscription.
2. User license model
With the user license model, the subscriber is billed based on the total number of users or concurrent devices accessing the service. This model is popular with SaaS software providers and often includes maintenance services.
3. Tiered model
With the tiered model, the subscriber can select the level of service desired. This model is ideal for upselling, allowing the subscription business to charge more as the consumer moves up within the tiered structure to access more features or products.
4. Free trial model
The free trial model allows consumers to try out the product or service for free for a limited time. This strategy allows consumers to experience the service by removing initial barriers to adoption. However, it is then up to the subscription business to convert users to a paid model when the free trial expires.
5. Freemium model
The freemium model is similar to the free trial model, but it is not time limited. Freemium subscribers can use a limited or simplified version of the service for an unlimited amount of time. As freemium users see the incremental value over time, they will hopefully be willing to sign-up for a full-featured subscription – or move up to the next level in a tired model – as their needs grow. Freemium subscriptions also often offer one-off, non-subscription, in-app purchases as an additional source of revenue.
6. Membership model
With a subscription model, the consumer pays a recurring price to access a product or a service for a certain period of time. With a membership model, the consumer is given special access so they can obtain discounts on products or services or are provided with other membership perks and privileges. Membership models often convey a sense of belonging and community based on shared interests or values.
7. Hybrid model
The hybrid model mixes and matches various aspects of the other models discussed above to create unique subscription offerings that meet specific market needs. For example, some SaaS providers require that subscribers upgrade to a higher tier plan once they reach a specific metered level or number of users.
What makes subscription models so attractive to CFOs?
From a revenue perspective, having a predictable recurring revenue stream has a positive impact on valuations based on expected future cash flow. For CFOs looking to improve business valuations, the fastest way to strategically create value is to create a healthy recurring revenue stream.
CFOs can further ensure predictable revenue streams by offering their products or services as part of a “subscription bundle.” The goal is to create a high margin service and offer it as part of a bundle that makes it essential to the consumer, thereby safeguarding future revenues.
Subscription bundles or recurring revenue bundles (rundles)
The subscription bundle also referred to as a recurring revenue bundle or “rundle”, is one of the newer trends in the subscription industry. The term was coined by Professor of Marketing at NYU Stern School of Business Scott Galloway. While it's been a time-tested strategy in other industries – such as the home and auto insurance bundle, or the classic voice/cable/internet bundle – subscription businesses have latched onto the power that bundling has in driving brand affinity, customer growth, and retention. Bundled subscriptions can be offered as part of any of the seven models described above.
Subscription bundles provide the consumer with value, access, and convenience. Benefits for the subscription provider include:
- Retain customers by offering additional value
- Build brand awareness through partners' customers
- Expand the audience or reach a targeted one
- Unlock new revenue streams without building new products
In general, there are three types of subscription bundles:
1. Organic bundles
These are bundled products and services offered by a single company. Organic bundles are typified by the tech giants that have the scale and product diversity to create their own bundles of core products and services.
2. Aggregator bundles
Aggregators are businesses that offer third-party subscriptions to their incumbent customer bases like telecom or bank would do.
3. Partnership bundle
This refers to two or more subscription businesses that link up to form a strategic partnership. Complimentary services join forces to deliver new benefits, value, or convenience to the existing customer base.
Another area related to business model fundamentals is the concept of in-app purchases. Mobile apps have emerged as the prime online channel for the consumption of entertainment, games, information, books, and shopping. For subscription businesses, in-app purchases enable users to subscribe to and access digital products and content directly from the app on their mobile devices. In-app purchases have become a distinct revenue stream, allowing users to complete purchases without leaving the app, and subscription companies to boost their outreach and monetization results.
The bottom line
Regardless of the model or models used, Vindicia provides subscription businesses with a powerful and flexible subscription billing and management platform that helps fuel growth across the entire subscription management lifecycle, delivering higher revenue at every stage of every model. Our clients acquire, bill, retain, and grow – as they deliver a frictionless experience to their customers. We provide actionable subscription intelligence and remove the stress from subscription management, so our clients can innovate across subscription business models without worrying that billing or management will hold them back.
To learn more about subscription fundamentals, download our eBook: The subscription lifecycle: Subscription business success requires intelligence at all phases of the subscription lifecycle.
And to learn how Vindicia solutions can help you achieve subscription business success, read our datasheets:
Free trial subscription business model
The free trial subscription model allows consumers to try out a product or service for free for a limited time period, after which payment will be required.
Freemium subscription business model
With the freemium subscription business model, a basic product or service is free for all, while premium service levels require users to pay a subscription fee.
Membership subscription business model
The membership subscription business model conveys a sense of belonging and community based on shared interests and values.