Best Practices for Subscription Business Models

Subscription Business Models

Online businesses have no shortage of business models from which to choose, including the popular subscription business model. While it is critical to offer unique value to customers and continually generate revenue, the right business model accelerates the path to success. A solid business model enables businesses to not only survive downturns but also strengthens and grows businesses long term. It pays to carefully study, choose and implement the right business model for your market while being aware of and committed to identifying and tracking key business metrics. 

Overview of Business Models

The business models fall into four major categories: subscription business model, microtransactions, indirect, and hybrid. This table highlights the major advantages, disadvantages and key metrics of a few models and sub-models:

Model or Sub-modelMajor AdvantagesMajor DisadvantagesKey Metrics
Frequent subscriptionsPredictable revenueHigher cost barrierACLV and MRR
Infrequent subscriptionsLong-term and predictable revenueLower retention with higher cost barrierACLV and MRR
FreemiumNo price restrictions and no need for free trialsChallenging pricing strategy since the majority of users do not payPercentage of paying users, ARPU and ARPPU
MicrotransactionsLow cost barrier for purchasesLow margins since the majority of users do not pay and high payment costsPercentage of paying users, ARPU and ARPPU
Virtual goods and virtual currenciesHigh acquisition rates and low cost barriersVirtual economy management since the majority of users do not payPercentage of paying users, ARPU and ARPPU
Dual currenciesHigh acquisition rates, reduced conversion frictionPotential legal issues with RMT and low percentage of paying usersPercentage of paying users, ARPU and ARPPU
AdvertisingMass adoption with users assuming no costsDependency on market rate for advertising and no direct revenueCPM and CPC
Offer-basedMass adoption with users assuming no costsDependency on market rate for advertising and no direct revenueACPM, CPS and CPL

Best-Practice Tips for Business Subscription Models

The business models for selling goods and services online vary substantially. Picking the right subscription service business model or other recurring revenue model for your business depends on your product or service, industry, customer demographics, and risk tolerance. Even though all of these models have pros and cons, they also share commonalities.

In general, regardless of model, keep in mind these four best-practice tips:

  1. Iterate fast and decisively — Rapid iteration involves reacting promptly to new or evolving market trends and to obvious signs that your strategy is not delivering the desired results. Regardless of whether iteration is aimed at staying ahead of the business or recovering from unsuccessful strategies, you can effectively complement the iteration with tools and access to key metrics that help make the right business decisions.
  2. Identify and monitor metrics — Always make this task a high priority. Determine the important and controllable metrics that apply to your business and put the processes and infrastructure in place to track them effectively.
  3. Gain insight into your customer base and purchase patterns — Understand your customer needs and the motivations behind them. Regardless of your company’s size, always stay in touch and engage in close dialog with your customers.
  4. Add value to your products or services — Keep usability in mind and continue to add features, capabilities and even new products to keep your customers excited about your offerings. Targeted promotions and perks can help drive this excitement, but the product must constantly improve.

Optimizing the Subscription Business Model

Wheter you select a subscription service business model or other form or recurring revenue model, there's a set of best practices built into our flexible Vindicia® CashBox® and Vindicia Select™ subscription billing and customer retention solutions – and reinforced through our Customer Success organization – that will help you achieve longer-term customer lives and greater loyalty.

We help you understand the tradeoffs between conversion rates and fraud when you ask for AVS and CVV information during the sign-up process. We know that if you implement subscription billing prenotifications on a yearly subscription, your chargeback rate will be lower and your customer satisfaction rate higher. These, and other best practice tips, are part of our overall focus on your long-term growth.

Optimizing your subscription business model also extends to the nuances of customer retention. Our advanced retention technology enables us to increase your customer retention rates up to an additional 5% monthly - well beyond any optimized home-grown retry logic that you may have implemented. In a subscription and recurring billing model, that additional monthly percentage translates into an annualized compound increase of over 40% for average customer lifetime value.