Subscription-Based Business – Benefits and Risks
Subscription-based businesses provide services or products to their subscribed users, who pay a certain monthly or annual fee. This guide explains everything you need to know about subscriptions, how they enhance cash flow, and what to do to reduce chargebacks and refunds.
Subscriptions have become popular with business owners in various fields of work.
Still, the fact it works for streaming services and SaaS platforms doesn’t mean that every new startup should embrace subscriptions.
We’ve helped many clients decide whether to offer subscription-based services and how to do it.
Therefore, here’s a comprehensive guide for new and old subscription-based businesses. Once you read this, you’ll know more about these platforms and whether this is the right choice for your operations.
Subscription-Based Business Defined
A subscription-based business collects a subscription fee at regular intervals for a certain service or product it provides. A rule of thumb for every business is to retain as many existing customers as possible while acquiring new ones along the way. Such a ratio ensures a high conversion rate and keeps the churn stats low.
Subscriptions are invaluable in this sense, as they guarantee commitment and recurring payments from consumers for a certain time. Of course, a customer might subscribe to a service and cancel it after the first few months – or even during the trial period. Still, experience has shown that this happens less frequently, at least in digital streaming services, where subscription-based businesses are mostly seen.
Customers benefit from subscriptions, as well, as they can enjoy paying for a service they like in smaller chunks, rather than larger one-time payments. Finally, in most cases, you can terminate a subscription at any time, unless you’ve agreed to different terms and conditions.
How Does a Subscription-Based Business Work?
A subscription-based business provides certain services or products for which customers pay an agreed fee monthly or annually. Those who pay for a service upfront annually typically get a discount.
The consumer must authorize the subscription business to charge their bank card or digital wallet with the agreed subscription fee. When registering to the service provider’s website, the consumer submits their personal and payment data and explicitly authorizes the subscription business to collect the exact payment in question at the predefined date.
Every trustworthy subscription platform sends a notification to its consumers when the subscription is about to expire. That way, the customer can renew the subscription on time and avoid downtime in using those services, and the business in question maintains steady cash flow.
An expired subscription on platforms you use for fun and joy – say, streaming services such as Netflix or Tidal – is not a big deal. However, if the services or products within the subscription are vital for your business – say, stock photo websites or software tools – this reminder is extremely valuable.
Vital Stats for Subscription Businesses
As reported by Statista, in 2022, about 41% of global subscribers were subscribed to businesses supplying home groceries, followed by skin care product providers.
As for digital services, streaming services had the largest number of subscribers and subscription payers.
Interestingly, in 2023, gaming mobile apps took a higher share among the apps adopting the subscription payment model as their primary monetization option; utility can productivity apps came second, while health and fitness apps took third place.
Developing a Subscription-Based Business
New business owners and seasoned entrepreneurs alike can switch to a subscription business model.
Here are some things to consider before going that way:
- Analyze if your offers are eligible for a subscription. A subscription-based business is the best option for entrepreneurs offering products and services that people need regularly. For instance, a marketing agency needs stock photos for their everyday tasks. A cinephile probably wants to be able to watch movies a few times a week. A person who has dry skin needs their moisturizers daily. The providers of such services will benefit from subscriptions.
- Specify your target audience. This is a worn-out piece of advice but it’s always relevant. Specify in advance who would subscribe to your platform. For instance, the entire approach of a subscription-based streaming service aimed at Gen Zers would be different from the one wishing to sell cosmetic products to Millennials.
- Create pricing tiers. Setting the right price for different subscription plans can be a deal-breaker in this field. You need a point of reference before specifying your prices; logically, check out your competitors’ pricing and try to offer more affordable options. It doesn’t mean you should go lower with your packages; providing more at the same price is also a smart thing to do.
- Keep the UX part straightforward. The worst thing that can happen to a subscription business is a blurry registration process. The customer journey from the second they spot your platform to the moment they subscribe to your services must be frictionless. From sheer UX features on your website and blog to the payment options, keep it simple. Our two cents: if aiming at an international audience, offer the relevant globally available payment methods.
Bring Educated, Data-Based Decisions
Let’s say your subscription business is rolling, new subscribers are coming regularly, and the money from subscriptions has started to pour in. If you want things to keep moving in the desired direction, make future decisions based on the proper metrics and analytics.
Start with monitoring the churn rate – the percentage of subscribers you’ve lost over a defined period; if you had 100 subscribers in March and 98 in April, the churn rate is 2%. A high churn rate is a perfect indicator that something’s wrong – the pricing tiers are misplaced, there are issues with payments, or the services/products don’t meet the users’ needs.
Continue with tracking the customer acquisition cost (CAC) – the amount of money your platform has spent to make people aware of your services and convert them into subscribers. Sum up all the money you’ve invested in marketing and advertising over a defined period and divide it by the number of acquired subscribers during that interval.
Keep a good eye on the monthly and annual recurring revenue. The former is the revenue your subscription-based business has generated within a certain month. The latter refers to the total revenue acquired within one year. If you regularly follow the monthly recurring revenue and make educated decisions to keep it growing, its annual counterpart is more likely to fulfill your expectations.
Finally, try to calculate the potential customer lifetime value (CLV). It’s not easy for new subscription platforms because they first need some subscribers and paid subscriptions to be able to make such predictions. Still, after the first few months, you should be able to see whether subscribers tend to renew the subscription after the trial period or not.
Benefits of Subscriptions-Based Businesses
Let’s now cover the most important benefits for subscription-based businesses, their owners and customers:
- Installment payments. If we switch a perspective a bit, we’ll see that payers in general prefer installments to larger upfront payments; do you need evidence? Mortgages for houses and apartments are perfect proof to support this claim. Rare are the people who possess enough money to pay for their real estate at once. The same goes for subscribers (even though the relative amount is much smaller): paying in regular, relatively low installments is convenient and comfortable.
- Precise revenue estimates. When you’re operating with a certain number of subscribed, regular payers, you can estimate your revenue more precisely. This knowledge alleviates the stress of running a business and lays the foundations for further investments and upgrades.
- Valuable customer insights. You’ll hear from many companies, large and big alike, how important building an email list is for effective business management. A subscription-based business gets its subscribers’ emails naturally and organically – entering an email list is simply a part of the registration process. Once you have this email address, you can send out tailor-made offers, from subscription-relevant notifications to upselling and cross-selling options.
- Fortified relationships with clients. Consumers are more likely to emotionally connect to brands they’re exposed to more frequently. The sole fact they’ve subscribed to your platform means you’ve already established this connection. And the habit of using your products and services regularly will only deepen this relationship. However, they expect top-notch service, constant improvements, and personalized offers to nurture this connection.
Potential Risks of Subscriptions
Advocating only one side in any discussion is just like speaking like a programmed chatbot. Therefore, let’s illustrate some potential risks of subscriptions.
The major potential drawback of subscriptions is a high chargeback rate. People often forget to cancel a subscription they don’t want to pay anymore so the business in question keeps charging them for the given services. The customer then sends a refund request to that very business and now we come to a critical point – if you accept the refund request, you won’t have to face the chargeback procedure; and yet again, accepting every refund request isn’t a healthy option for your finances. If we know that friendly fraud is something that happens commonly, it’s vital to build an anti-chargeback firewall.
Start from the cause; getting too many refund/chargeback requests is a sign of malfunction in your subscription system. Either the notifications of expiring subscriptions aren’t sent on time or perhaps your tiers could be fine-tuned to match your target audience more accurately.
Also, let someone do the background processes for you, from AI-enhanced anti-chargeback measures to clearly stated refund policies.
ThePayPortal is here to guide you through some effective fraud-preventing and chargeback-reducing methods.
Conclusion
Subscription-based businesses are already a big deal in the global business scene. In the near future, they’ll become even more omnipresent, with new industries adopting subscriptions or implementing these platforms into their products (think modern cars with music streaming platforms available on their multimedia systems).
CheckoutGate team has extensive experience in guiding international organizations through the process of launching such a business, from opening a merchant account to mitigating fraud risks. Contact us and have your merchant account opened in the shortest time possible: https://acceptpaymentsnow.typeform.com/to/NbSkFD7R.