How to use subscription business models to maximize profitability

Subscription business models can help business owners access a predictable stream of revenue and fuel growth. With a subscription business model, customers access a product or service on a recurring bases in exchange for regular payments made at regular intervals – for instance, weekly, monthly, quarterly, or yearly.

Subscription models can be particularly valuable for small- and medium-sized businesses. They can help you build long-term customer relationships and diversify your income to cover the many necessary expenses of building a business.

Whether you’re looking to create a new business around a subscription model or add a subscription service to an existing business, it’s important to understand how to implement this strategy and maximize profitability.

Here, we’ll explore how subscription business models work, different types of models to choose from, and practical tips for starting your own subscription service.

What is a subscription business model?

A subscription business model involves charging customers a recurring fee at regular intervals (such as monthly or annually) in exchange for continued access to a product or service. Many different types of businesses can implement subscription models — including small, medium, and enterprise businesses in both B2B and B2C sectors.

Consider a B2C business owner who sells access to online yoga classes. They might invite customers to pay for one-time classes a la carte or sign up for a subscription package to access multiple classes per month at a discount. The package might also include exclusive access to specialty classes only available to subscribers.

By adding a subscription model to their business plan, small business owners can unlock many potential benefits, including:

• Reliable revenue streams. Improve cash flow and better predict future earnings by establishing a steady base of subscribers who make recurring payments.
• Increased customer lifetime value (CLV). Develop long-term customer relationships, improving retention and CLV. Also, upsell and cross-sell subscribers with personalized offers to keep them engaged and reduce churn.
• Data-driven insights. Access valuable data about who your most loyal customers are, how frequently they use your products, what they prefer from their subscription experiences, and how you can optimize your business plan to increase customer satisfaction and revenue.

How a subscription model works

How does a subscription model work? When a business implements a subscription model, they receive recurring payments from customers in exchange for ongoing access to products or services.

Here's a breakdown of the different steps of the subscription lifecycle:

Customer acquisition

Businesses attract new customers through marketing and promotions. They might entice customers to sign up for their subscription service by offering free trials, introductory offers, or freemium models.

Subscription sign-up

Customers use a subscription sign-up page or portal to choose their plan, which may vary in terms of access levels, pricing structures, and commitment lengths. For example, one customer might sign up for monthly payments of $12 while another customer might sign up for a full year with a discount price of $120 or $10/month.

Recurring billing and access

Automated billing systems charge customers at designated intervals, such as weekly, monthly or yearly. Successful payment ensures continued access to the product or service.

Customer management and engagement

Customers can access their accounts to manage their subscription plans and payment information. For example, a customer might choose to manually cancel or renew their subscription. Meanwhile businesses continue to engage customers with content updates, new features, and exclusive offers to keep them subscribed.

Subscription lifecycle

Businesses continue to provide value to their subscribers and ensure customer satisfaction. They might encourage people to renew their subscriptions by offering incentives and emphasizing ongoing benefits. They might also help manage any issues through a dedicated customer service department and gather feedback directly from subscribers to help optimize their subscription plans.

Understanding the different types of subscription models

There are many different types of subscription models, each with its own unique features. It’s important to understand the benefits of subscription business models so you can choose the right solution for your needs and maintain customer loyalty.

Common types of subscription model business plans include:

Access subscriptions

Customers pay to access software platforms, tiered services, or exclusive content. Access subscription models are popular among SaaS companies like Zoom or digital platforms like streaming services. Small businesses can also use this model to offer access to gated content, exclusive online communities, or members-only features.

Curation subscriptions

Customers receive a curated selection of physical products at regular intervals. This is a popular solution for companies that sell subscription boxes like those containing clothing, meal kits, or beauty products. Small businesses might use the curation subscription model to provide customers with personalized office supplies, craft kits, or product samplers.

Membership subscriptions

Customers pay to be part of a club or program with benefits like discounts or priority services. This is a common model for gyms and warehouse clubs. Small businesses, for example, might offer tiered memberships, exclusive discounts, or early access to products.

Usage-based subscriptions

Customers pay based on how much they use a product or service. A business that provides access to utilities or cloud storage, for example, might implement a usage-based subscription model. Meanwhile small businesses can offer this model for access to data plans, design software, or consulting services.

Freemium subscriptions

Customers access basic services for free and can upgrade to access premium features for a subscription fee. Businesses can use the freemium subscription model to help introduce people to their offerings and educate customers about how their services work before paying. Small businesses, for instance, might hook in new customers with free trials, limited-service access, or free content.

Cost considerations for subscription models

Before choosing your model and setting your subscription costs, it's important to understand the expenses of running a subscription business. Specifically, you will need to prepare for certain upfront expenses and ongoing maintenance costs to cover:

• Billing software. Choose a trustworthy platform that can seamlessly process new subscription sign-ups and recurring payments from subscribers.
• Secure payment gateways. Safely store customer information for streamlined, secure, and authenticated transactions every payment cycle.
• Inventory and shipping. Be sure your manufacturing, storage, and shopping partners can fulfill your volume of recurring orders.
• Marketing campaigns. Acquire new customers and retarget existing customers with special promotions, discounts, and personalized offers to begin or renew their subscription plans.
• Customer management solutions. Provide subscribers with the resources they need to customize their plans and contact representatives if they have any issues. Customers should also be able to easily update their payment information or manually renew or cancel their subscription if they choose.
• Customer analytics tools. Monitor subscriber activity to track performance, retention, and churn. Leverage customer data to identify purchase trends and optimize your subscription offerings.

Tips for starting a subscription service

Once you’ve identified the right subscription business model for your needs, take these steps to start building and launching your subscription service.

Identify your niche and value proposition

Analyze existing products or services for subscription potential. Which products are most popular among your loyal customers? Which services do they access on a recurring basis? How can you deliver value by providing easy, repeated access to these offerings?

Research needs and pain points of your target market to better understand how a subscription service can address them. Also, evaluate competitors' offerings to identify strengths, weaknesses, and opportunities for differentiation. Use your findings to develop a value proposition that sets your business apart and benefits your customers.

Design your subscription model

Choose a subscription business model that suits your value proposition — whether it’s curated boxes, tiered services, or access to exclusive features.

Define what each subscription plan or tier includes, considering curation, delivery frequency, and service level. Price subscriptions competitively, factoring in costs and profit margins.

Develop your back-end operations

Leverage a reliable fulfillment system, either in-house or outsourced. Select a subscription management platform that can automate billing, manage customer accounts, and track metrics for continued optimization. Also, use a reputable gateway for secure payment processing each billing cycle.

Build your online presence

Create a dedicated landing page to showcase the subscription service's value proposition and available tiers. Use social media campaigns to build awareness, engage potential customers, and inspire people to sign up for a subscription plan. Leverage email marketing to nurture leads and convert them into paying subscribers.

Launch and continuously improve

Start with a soft launch or beta program to test your new subscription plan and gather feedback. Use this time to track key metrics such as customer engagement, subscription preferences, churn, and retention. Refine your subscription offerings to increase engagement and retention before initiating your hard launch.

Integrating subscriptions with your existing business

It might seem overwhelming to integrate a subscription model into an existing business plan. Doing so, however, can help you unlock a reliable stream of revenue and increase customer loyalty.

To introduce your new model and keep business running smoothly, take these tips and strategies into account.

Tips for integration

Be sure your new subscription offerings are easy to sign up for and fit seamlessly into the buyer journey by:

• Clearly offering subscriptions at checkout. Work with your payment processor to build subscription offerings into your existing checkout experience, making it simple for new and existing customers to opt into a subscription plan.
• Customizing subscriber sign-up options. Offer volume-based or tier-based pricing depending on your subscription model. Allow customers to set up automatic billing and easily add or update their payment information.
• Supporting different payment methods. Invite customers to use their preferred payment methods, such as credit cards and digital wallets. If you have an international customer base, be sure your payment processor supports different currencies and can securely authenticate transactions from across the globe.

Choose the right payment providers

Trusted payments processors are the key to seamless integration. With the right payment processor and gateway, you can securely accept repeat payments with peace of mind.

PayPal, for example, is a trusted resource for businesses that want to start offering subscriptions. Whether you’re providing memberships, subscription boxes, or tiered service plans, PayPal can help.

In fact, recurring payments are built right into the PayPal Checkout platform. That means customers can easily set up automatic payments and use their preferred payment methods to complete their transactions.

For businesses, subscription management is also simple with PayPal. Choose fixed or quantity-based pricing models. Offer discounted or free trial periods to inspire sign-ups. And accept recurring payments in different currencies.

With a global reach across 200 markets, PayPal provides the tools and expertise that businesses need to diversify their revenue with subscriptions.

Learn more about how to offer subscription plans with PayPal.