Subscription Service Business Model-How Does It Work?

Most companies or businesses generate revenues by selling their products or services. They make a profit from the transaction. Some companies may also offer after-sale services, such as a warranty, for which they charge customers. However, most of these companies don’t make any revenues or profits once the transaction is over.

However, there is a business model that changes that, known as the subscription service business model.

What is a Subscription Service business model?

Most companies offer customers one-off services. However, companies that use the subscription service business model provide continuous services for which they charge customers after regular intervals. These companies focus on keeping or retaining their customers rather than using them for a one-time transaction.

Essentially, the subscription service business model-based companies focus on a continuous stream of income or revenues. These companies have unique products for which customers are willing to pay a fee regularly, usually monthly, quarterly, or annually.

Since their primary source of income is the same service, these companies focus on working on the quality of their services to increase the time for which customers stay with them.

While the subscription service business model existed in the past, such as in some newspapers or magazines, the model has become more popular recently. Its source of popularity comes from the internet, where companies offer services online, and customers pay a monthly fee to use those services. Most big-name companies are shifting towards this model wholly or through one of their segments.

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How does the Subscription Service business model work?

The subscription service business model uses a service as a base to attract customers. Usually, companies have a unique marketable product that they can provide to customers.

However, if they give access to the service for a one-time fee, they can’t get the same profits. Therefore, they put their services behind a subscription service, where users have to pay regularly to use it.

Most of these services also come with a cancel and resume feature. It means customers can cancel their subscription service at any time and come back whenever they want.

Similarly, the subscription service business model-based companies usually keep their prices low so customers can afford to pay regular payments without having to cancel.

Companies with this business model also focus on the quality of their service because it is their primary source of income. If the quality of their service deteriorates, customers are unlikely to pay regular payments for it.

Lastly, customers usually pay through credit or debit cards or other online payment platforms. Most of these subscription-based services also come with auto-renew features, allowing companies to charge customers at the end of their subscription.

What are the advantages and disadvantages of the Subscription Service business model?

There are several benefits of using a subscription service business model, but it may also come with some disadvantages. Some of these include the following.

Advantages

The most prominent advantage of using a subscription service business model is its constant revenue source. Companies don’t lose customers after every transaction until they come back, unlike traditional business models. For companies, it also becomes easier to forecast their sales and make budgets.

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The subscription service business model also helps in customer relationships. Since companies rely on customers to generate steady revenues, they need to identify their customers’ needs and cater to them. Therefore, companies in this model can get much closer to their customers as compared to other models.

Some companies can also divide their subscriptions, allowing customers to subscribe to only the services they need without paying the full price. It lets both the company and its customers benefit from using this model.

This model is also great for customers as companies try their best to provide the best possible services they can. Customers can also leave a service at any time and resume later, which means they aren’t bound to paying regularly.

Disadvantages

Companies using the subscription service business model have significantly higher costs than some other business models. It is because they need to continuously improve their services to retain existing customers and attract new ones. Similarly, they need to invest in the service so customers can see the value in paying for it heavily.

Companies also have to spend more on customer support and relationships, which results in higher overhead. Similarly, another disadvantage is that it is difficult to scale in this type of business model compared to others.

Examples

The best example of a company that uses a subscription service business model is Netflix. The company has an online platform for which users need to pay a subscription fee. Similarly, Amazon Prime, Microsoft Office 365, Amazon Web Services, etc., have subscription-based services. Local businesses, such as gyms, also offer membership services, which need a subscription fee.

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Conclusion

The subscription service business model is for companies that offer continuous service to customers and charge them a subscription fee. Usually, the service is unique, and customers are willing to pay for it after regular intervals. There are many advantages and disadvantages of the model, as listed above.

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