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Subscription-Based Business Model: Pros and Cons

12 min read

The subscription business model is one of the biggest trends in e-commerce. With rapid technological development, companies seek new solutions to reach new customers. The subscription model, based on regular payments in exchange for services or goods, provides a stable revenue stream and helps build loyal relationships with the audience. 

In this article, we will look at the features of this particular business strategy and how it affects sales.

How Subscriptions Affect Business: Numbers

When we say that the subscription trend is gaining momentum, we mean a specific financial growth. According to a statistical report in 2022, the global subscription e-commerce market was estimated at $72.9 billion. Considering how quickly subscription strategies are being integrated into modern businesses, this figure is expected to increase to $904.2 billion by 2025.

It is important to note that this business model also has a major impact on companies and their growth. According to a study, companies that use a subscription strategy increase their revenue 5 times faster.

Subscriptions can be your lifeline in the sea of e-commerce, which can often be quite choppy. 

Overview of Different Types of Subscription-Based Platforms

Recurring payments have become a frequent offer from SaaS service providers, online banks, and mobile operators. These companies understand the importance of generating recurring revenue without constantly reminding customers to pay. Other industries, such as online retailers, media, and educational platforms, have started to adopt this approach to ensure stability in customer relations. Below, we will look at the types of businesses best suited to the subscription sales model.

  • Food delivery

According to statistics, the total number of users who order food for delivery online is 3.1 billion worldwide. For the first time, the online delivery industry faced a significant increase in popularity during the first COVID-19 pandemic. Since then, people around the world have been using delivery services regularly. Users optimize their meals and delegate the routine with meal kits, thanks to subscriptions.

  • Content 

Subscription services such as Netflix, Amazon Prime Video, Apple TV+, and many others have billions of users worldwide. Video content subscriptions have greatly impacted the movie theater market, which has suffered heavy losses. However, more and more users choose online platforms to watch movies at home.

  • Business services

B2B subscriptions are one of the most effective ways to optimize processes in business introductions. Thanks to this option, companies do not have to worry about office maintenance and have access to various types of services all the time.

Benefits of Subscription-Based Platforms for Businesses

The recurring payment model allows customers to automatically renew their access to the platform without worrying about timely payment. Speaking about the benefits of such a strategy for businesses, we can highlight the following:

Increased revenue

Several factors significantly impact the increase in revenue. First, it is easier for a customer to spend a small amount of money in installments than to pay all at once. However, the customer subscribes to the service for a long time, constantly replenishing the company's profit. 

Secondly, subscription programs often offer a trial or lower price period. By allowing the customer to save money in the initial period, the company builds loyal relationships with its audience, which leads to consistently high profits.

Reducing customer churn

"you can cancel your subscription at any time" is usually hypothetical. Not even half of users cancel their subscriptions. Thus, we can confidently say that subscribing is an effective way to keep customers on the platform. 

Profit forecasting

The subscription business model allows for more accurate profit forecasting thanks to the exact number of subscriptions issued. It greatly simplifies the further development of the business strategy and allows you to get out of the "unknown" state.

Disadvantages of a Subscription Model

Although the subscription business model has many advantages for companies, the disadvantages are still worth mentioning. 

  • Regular confirmation of product quality

Businesses should constantly remind customers how good the product is to prevent them from canceling their subscriptions. It can be done in various ways, such as constantly adding content, constantly improving the tariff, expanding the product selection, and much more. 

  • Long-term purchases

Purchasing a product with a one-time payment is more attractive to people than regular payments over a long period. Consequently, potential customers tend to think longer, carefully weighing the advantages and disadvantages before choosing a subscription model. Moreover, decisions are less likely to be driven by emotion alone in such cases.

Analysis of Subscription Model Impact on Consumer Habits

The habits of the modern online consumer can be characterized as a desire for convenience and personalized experience. One of the main goals of people who subscribe to subscription services is to automate processes and make life easier. Even though subscriptions can indeed make some processes easier for most people, the likelihood of unsubscribing among customers still remains. In a study of the global subscription e-commerce market, the following figures were highlighted:

  • 34% of customers canceled their subscriptions due to difficulties in long-term planning;
  • 40% of customers cancel their subscriptions after just 6 months.
Possible Challenges in the Future

Any company adopting a subscription model may face potential pitfalls in the future. 

  • Subscription = fatigue

The fact that the subscription model is becoming increasingly trendy among companies in different niches makes customers feel fatigued. Users feel overwhelmed by subscriptions, so they have to choose.

  • Low retention rate

Another consequence of subscription fatigue is a decrease in user retention. To prevent a sharp drop in engagement, companies must find ways to keep customers interested and justify the value of their subscriptions.

  • The need for differentiation  

Companies need to differentiate their offerings to overcome subscription fatigue. They must consistently provide unique and valuable content or services to retain customers in a competitive market.

Conclusion

The subscription business model is proving to be an effective tool for ensuring stable revenue for businesses and a powerful channel for establishing and maintaining long-term customer relationships. By providing regular access to valuable content or services, companies ensure financial stability and position themselves as reliable and valuable partners for their customers. Using this model can be a key success factor for many businesses in today's competitive environment.

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