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-model||Major Advantages||Major Disadvantages||Key Metrics|
|Frequent subscriptions||Predictable revenue||Higher cost barrier||ACLV and MRR|
|Infrequent subscriptions||Long-term and predictable revenue||Lower retention with higher cost barrier||ACLV and MRR|
|Freemium||No price restrictions and no need for free trials||Challenging pricing strategy since the majority of users do not pay||Percentage of paying users, ARPU and ARPPU|
|Microtransactions||Low cost barrier for purchases||Low margins since the majority of users do not pay and high payment costs||Percentage of paying users, ARPU and ARPPU|
|Virtual goods and virtual currencies||High acquisition rates and low cost barriers||Virtual economy management since the majority of users do not pay||Percentage of paying users, ARPU and ARPPU|
|Dual currencies||High acquisition rates, reduced conversion friction||Potential legal issues with RMT and low percentage of paying users||Percentage of paying users, ARPU and ARPPU|
|Advertising||Mass adoption with users assuming no costs||Dependency on market rate for advertising and no direct revenue||CPM and CPC|
|Offer-based||Mass adoption with users assuming no costs||Dependency on market rate for advertising and no direct revenue||ACPM, 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 industry, customer demographics, product or service, 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:
- 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.
- 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.
- 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.
- 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 innovative ART Advanced Retention Technology™ system enables us to increase your customer retention rates well beyond any optimized home-grown retry logic that you may have implemented – up to an additional 5% monthly. 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.