Subscription-based billing offers advantages to both companies and customers, so it’s no surprise that business owners are increasingly turning to this model to ensure growth and profit.
Whether you are currently using a one-time purchase model and want to switch to a subscription-based one or are just curious about the advantages of the latter, this article is for you.
We cover some of the essential benefits of relying on a subscription billing model, which will hopefully convince you to consider it for your company.
- Provides a Predictable Revenue Stream
- Reduces Late Payments With Recurring Billing
- Attracts More Customers to Your Business
- Improves Customer Retention
- Provides Additional Marketing Opportunities
- Increases Return on Customer Acquisition Costs
Provides a Predictable Revenue Stream
A key benefit of implementing a subscription model for your business is the ability to continuously and reliably predict the revenue you receive.
This predictability is due to the way that the subscription billing model is set up.
If your company currently relies on a one-time sales model, you’re likely aware of how irregular your income stream can be—it depends heavily on the volume of customer purchases and offers little stability.
Unlike one-time purchases in the traditional transaction model, subscription payments happen on a schedule—most often monthly, annually, or even weekly.
With the subscription model, you gain active customers who regularly pay for access to your product or service.
These payments are processed automatically and deducted from the customers’ bank accounts at each billing cycle until the customer chooses to cancel their subscription.
As a result, your business can have a reliable and consistent revenue stream, making it easier for you to plan and predict budgets.
With this model, measuring the financial health of your company and calculating monthly recurring revenue (MRR) won’t be a hassle since you can expect regular income to enter your company from subscription plans.
MRR is as easy to calculate as multiplying the number of active subscribers with your subscription price.
Venture capitalist Jeff Bussgang acknowledges this benefit from the subscription model, saying this on his blog.
According to Bussgang, predicting your revenue can give your business the assurance it needs to expand– knowing that you can rely on a stable source of income to fund your growth prospects.
So, to avoid the inconsistent nature of the revenue generated by one-time sales, you might want to start transitioning to a more dependable subscription system.
Reduces Late Payments With Recurring Billing
In addition to making payments more reliable and consistent, the subscription billing model can lower the number of late payments.
And this is important, as according to a study, late payments cost small and medium-sized businesses worldwide around one trillion dollars a year.
Just look at this data from the UK.
Even if your company is in a better position than others to handle nearly half of your clients paying late, doing so is still probably costing you a lot of money.
Therefore, you might consider transitioning to a subscription model as an alternative business strategy that could help you regain cash flow control.
Setting up recurring billing enables you to avoid late payments by streamlining the payment process for yourself and your customers.
Subscribed customers will permit you to deduct funds from their bank account automatically or to charge their debit card on a set date each month.
By automating the payment process, subscribers will have a lower chance of missing payments.
It won’t completely eliminate delays, but it can help your business cope with customers who willingly or unwillingly “forget” to pay their invoices.
If you plan on switching to a subscription model, you can try a software solution to help you manage your recurring billing.
Regpack is a payment software that offers small business owners tools to manage the whole subscription process—from creating a payment form for your website to handling recurring payments.
You can use Regpack’s tools like automatic billing, integrated payments, and payment portals to streamline your entire payment process and provide your customers with a no-hassle payment method.
With these tools, your customers can track their balances and register for auto-pay, so they won’t have to think about when their next payment is due, and they’ll be less likely to miss payments as a result.
Attracts More Customers to Your Business
A subscription-based model can also be a great way to draw in new customers to your business, as it offers certain benefits they may find attractive.
Most of all, this business model lowers the barrier of entry by making products and services more accessible to customers.
In other words, subscriptions are simply more affordable than a one-time purchase, and by subscribing, customers gain immediate access to your product or service for a lower price.
This benefit is very appealing, considering that more customers are using subscription services than ever.
Consider the following data.
Given these numbers, you might want to jump on the subscription commerce trend.
According to predictions, over 75% of businesses will offer subscription services by 2023, and you don’t want your customers to turn to your competition because you’ve neglected to do so.
Another benefit consumers find attractive in subscriptions is their convenience.
For instance, with the busy modern lifestyle, people no longer want to spend valuable time browsing through physical stores to get what they want.
Gen Z is especially disinterested in physical shopping, enjoying a fast and convenient online shopping experience instead.
Subscription services are desirable to modern consumers, as they can get regular deliveries of products or services they like without much effort and planning.
Well-planned-out subscription services even go one step further, offering unique and enjoyable experiences while keeping everything convenient.
Look at Snack Crate—a subscription service where boxes of snacks from around the world are delivered to customers’ doorsteps each month.
Source: Snack Crate
By using this subscription service, customers can discover new snacks every month without having to go through the hassle of exploring, researching, and ordering everything by themselves.
Engaging, affordable, and convenient experiences like these appeal to customers and attract them to subscription services, so you might consider using them to bring more people to your business.
Improves Customer Retention
After you have gained some subscribers to your service, the subscription billing model may also help to keep them as loyal customers, which is vital for your business.
Compared to the value gained by customer acquisition, customer retention results in more than a double increase in bottom-line revenue, according to research.
A well-planned subscription business can foster strong relationships with customers and increase retention—creating customers loyal to your business who remain a source of revenue for a long time.
How the subscription business is set up is crucial for keeping existing customers.
Since subscriptions are usually connected to the customer’s bank or credit cards, they renew automatically.
This automated billing eliminates the need for customers to make purchasing decisions after every cycle and to think about buying their favorite product or service again each month.
And if you combine this convenience with fostering a solid and lasting relationship with your customers, your retention rates may grow even higher.
One way of creating a stronger relationship with your customers is by offering them more personalized subscription options to choose from.
Whether it’s flexible payment tiers or an entirely customizable plan, giving your customers the freedom to choose will further build their loyalty to your business and keep them satisfied.
A good example of personalization is the subscription-based meal-kit service HelloFresh.
HelloFresh offers many options that cater to various diet preferences their customers might have and gives them the choice of how many recipes they want to receive per week—considering different customer budgets and lifestyles.
By providing your customers with more personalized options, you make sure they feel cared for, so they will be more inclined to keep being subscribed to your business as they will view it as valuable and convenient.
Maintaining communication between you and your customers and being considerate of their needs is a step in the right direction for creating a devoted customer base that will stick with you for a long time.
Provides Additional Marketing Opportunities
By nurturing relationships and retaining existing customers, you can increase your revenue further by using different marketing techniques.
You can leverage the trust you’ve established with your customers by providing a quality service or product in order to suggest upgrades to their existing service or to offer related products they might genuinely like.
You can create these marketing opportunities in two main ways, upselling and cross-selling.
The first method, upselling, concentrates on offering customers the opportunity to upgrade their current subscription plan and gain access to more features and benefits.
Businesses mainly utilize upselling through subscription tiers.
Tiers are packages your business can offer its customers, delivering as many services and features as the customer pays for—from a limited but affordable subscription offer to a more premium tier with all functionalities unlocked.
For example, here are the different tiers offered by the email marketing platform Mailchimp.
Mailchimp offers several options, ranging from the free version to the premium subscription.
The jump in price from the essential to the standard plan is not significant, so it can be easy for customers to upgrade.
Upselling works well because once customers get used to their current subscription fee, they are more likely to understand the value they would get from the next subscription tier.
The second method, cross-selling, offers customers a complementary product or service related to the one they are currently using.
For example, the customer engagement platform Twilio provides many different services in addition to their main one, Twilio Engage.
They cross-sell custom phone numbers, programmable messaging and voice services, etc.
The idea is simple: use the trust and loyalty of your customers, along with the information about the services they use, to offer supplementary products they might be interested in.
Both of these methods are ways of creating expansion revenue and increasing the profit of your business.
Increases Return on Customer Acquisition Costs
Getting people interested in your business and turning them into paying customers takes money and effort.
These costs that go into convincing customers to buy your product or service are called Customer Acquisition Costs (CAC).
They include sales and marketing expenses as well as property and equipment.
You can see the way you can calculate CAC in the following illustration.
In the subscription business model, the CAC is more or less similar to a one-time payment model—the marketing and sales strategies generally remain the same, and with that, their cost.
However, what does increase with subscription businesses is the Customer Lifetime Value (CLV), or the profit customers bring you during their time with your company.
To see what we mean by CLV, we can use the popular subscription service Netflix as an example.
A customer subscribed to the basic subscription plan will pay 8.99 USD monthly.
Given that the average duration people stay subscribed to their service is 25 months, that would make the average CLV of a Netflix customer 8.99 times 25, which is 224.75 USD.
The CLV with subscription businesses will be higher than in the one-time payment model—the recurring billing, combined with the generally lower price of subscriptions, can increase CLV by up to 1.78 times.
The higher lifetime value is because, once clients subscribe to an affordable subscription tier, they will most likely provide more money for the company in the long run than the cost involved in acquiring them.
As long as you build a strong relationship with your customers and increase renewals, the value of a single customer can be much bigger than in the one-time purchase model.
Subscription-based businesses will be even more prevalent in the future, so you might want to consider switching to this model to keep up with your competition and offer your customers a more affordable and attractive alternative.
Or, as Zuora’s CEO Tien Tzuo puts it more directly: “If you’re not shifting to this business model now, chances are that in a few years you might not have any business left to shift.”
With this article, we hope we have convinced you of some of the benefits of having a subscription model.