Demystifying Subscription Business Model
Demystifying Subscription Business Model
The subscription business model has been on a steady rise, gaining significance as the preferred type of billing for customers and businesses alike. With end-users able to subscribe to a product or service with monthly/annual recurring payments, they now have the option to try before committing and enjoy the experience first. For businesses, this allows them to maintain a predictable revenue stream, build stronger customer relationships, and strengthen and increase their revenue for scalability.
In this blog, let’s demystify the model and look at why businesses prefer this, along with some popular use cases and the future of the subscription economy.
Understanding the Subscription Business Model
The subscription business model is a tectonic shift from a one-time billing to a monthly/quarterly/annual billing model also known as recurring billing. This translates into a customer paying a recurring price at regular intervals for accessing a product or service and/or a usage-based price for availing these products or services. Although this has been in implementation for a while now, use cases in many industries have been accelerated by digital transformation across industries like Automotive, Media, Entertainment, and Healthcare.
Let us take a quick look at the four types of models:
- Freemium, where users are offered a basic version of its offerings free of cost.
- Flat fee model, where users pay a flat price for a subscription, irrespective of their usage, such as the Amazon Prime subscription.
- Usage-based model, where a user pays a fee solely determined by consumption of product or services. Now this can be based on pay per unit or a pay as you grow pricing model, such as the AWS EC2 consumption.
- Hybrid model, where a consumer is charged on usage on top of a flat fee, such as an overage charged on top of a mobile phone’s monthly recharge plan.
Exploring the sustainability of the Subscription model
The subscription economy is growing, and the opportunities it presents aren’t just limited to SaaS products and subscription boxes. As consumers move away from ownership of products and service, we will witness unexpected verticals adopting service subscription models. And here’s why this model is only set to rise in the coming years:
- Revenue predictability – With subscriptions, it becomes easy for companies to predict a revenue stream. In turn, this is favourable for forecasting and scalability.
- Better Customer Relationships – As customer engagement is constant with recurring renewal cycles, organizations get enhanced visibility into customer satisfaction, which helps in better retention over a longer time period.
- Cross-selling abilities – Businesses can gather feedback easily through dedicated consumer lifecycles and bundle offerings as tiered packages. This will create more opportunities to cross-sell and increase sales.
- Ease of tracking financial health – Subscriptions offer clear visibility into MRR (Monthly Recurring Revenue), Customer Lifecycle Value (CLV), churn and retention health. This helps in assessing financial health and, accordingly, cross-sell or upsell to achieve a forecasted growth.
Here are some industries that have implemented the Subscription Model.
- Automotive: Leading automobile manufacturers such as Audi, Volvo and BMW have come up with a subscription model with tiered package options that covers insurance, maintenance, cleaning and delivery at an affordable fee.
- Airlines: For frequent travellers, airline subscription is a boon. Subscriptions reward loyalty with convenience such as additional elite packages, lounge access, free miles and much more.
- SaaS: The usage-based pricing model has widely seen acceptance across tech stacks. This helps organizations to start at a lower cost with minimum friction and not get stuck with a fixed cost.
- Health and wellness: There are various personalized health and wellness programs available along with value added services, customised for users’ convenience. This includes meal plans, health check-ups, fitness consultation and more by leveraging hybrid models.
- E-learning : Online e-learning platforms can tap into the global market by offering multiple courses with substantially lower fees compared to one-time purchased courses.
- Entertainment: Whether it’s a Spotify, Netflix or Audible subscription, all of us have at least subscribed to one of these entertainment modes especially during pandemic. Thanks to flexible subscription models, it has been rather easy to gain access to multiple forms of media.
Industry Use Case Example in implementation (OTT)
The Way Ahead for Subscription Business Models
Predictable revenue streams in a recurring billing model allows businesses to forecast growth in a highly competitive marketplace. Further, millennials prefer to access a service or product instead of owning it. In the past few years, many businesses like Adobe and Microsoft have seen increased revenues with stronger customer relationships once they shifted to the subscription model. While there are multiple drivers for this trend, increased awareness around financial inclusion and infrastructure development supporting easy payment options and integrations have enabled it to be easily adopted over traditional billing systems.
As per one of the market research, market growth for the subscription economy will accelerate at a rate of 15.5 % (2019-2025). While businesses are quick in transforming from a transactional to subscription-based model, they are scouting for multiple benefits and this is something that this model has to offer in abundance.
As new paths open, businesses might have to revisit the customer journey to ensure customer experience is enhanced for a resilient revenue stream. GS Lab is your versatile, dynamic partner to help you transform your billing models, accelerate your transformation and fast forward your transformative customer experience.
Leaps and Bounds into a Subscription-based Future
With GS Lab’s technical expertise stretching over 18 years in billing and payment solutions, we are poised to be your engineering product partner throughout your lifecycle development. Our experts boast of domain exposure across subscription management, billing and invoicing, payments and integration, and financial analytics dashboards through the entire tech stack to make your transformation a seamless one.
Read more about our expertise at play with these success stories: https://www.gslab.com/fintech
Deepesh Soni | Senior Business Analyst – Fintech
Deepesh works as a Senior Business Analyst at GS Lab and has over 5+ years of experience working with the Fintech/Financial Banking industry. Deepesh has worked in various projects and across various FinTech products. Worked under strict timelines and compliance projects to resolve requirement gaps.