The Subscription Business Model Explained
Updated on June 17, 2021
The subscription business model has been gaining popularity over the past few years.
We haven’t spent much time writing about this particular model compared with other monetizations you can find on our marketplace partly because we’ve not seen an adequate number of quality assets meeting our vetting standards until recently.
More entrepreneurs are learning how to build these types of assets while at the same time producing consistent profit year-on-year, as they offer fewer startup costs similar to those of the dropshipping business model. Once you crack the code for this monetization and systemize your operations, this model offers a huge return on investment (ROI) opportunity.
Subscription businesses may offer their subscribers a service, such as software as a service (SaaS), digital download services, streaming services, or what we’ve been seeing more recently is a physical product box set for fan-based clubs, themes, or sporting activities in exchange for a monthly subscription fee. This is a great opportunity for someone looking to break into the world of digital property acquisitions because once you’ve established a brand within your niche, you can scale these types of assets quite easily.
Examples of Real Subscription Businesses
There are tons of subscription businesses today making the transition from what was once considered a print-on-demand service back when every coffee shop was cluttered with magazines and news articles. The subscription business model has now made a pivot to the digital platforms we love and use daily—all for a small monthly fee. Here are a few subscription companies to give you some motivation when building your own subscription-based empire.
Spotify
Most people know of the Swedish music streaming and media services provider Spotify and with good reason. With over 138 million paying subscribers for its service, Spotify is one of the best examples of the true potential the subscription-based business model offers.
Amazon Prime
Let’s face it. You’d be challenged to find a business model today that hasn’t formed a connection with Amazon in some way. This doesn’t stop with the Amazon subscription model for its Prime service. Offering a subscription within a platform its customers already use and love only makes the upsell to its Prime service that much easier for this eCommerce giant. This is why we’ve decided to include Amazon Prime’s approach to this business model within our top picks for the best examples to follow in this space.
We now have a general idea of how this business model can be scaled to generate millions in subscription revenue across the globe and how this monetization could be incorporated into other business models already in motion for you. Let’s then dive deeper into the pros and cons of the subscription model to get a better understanding of what it can offer potential investors.
The Pros of the Subscription Business Model
When deciding to acquire an established subscription business and weighing the pros and cons against other monetizations we offer on our marketplace, you might be wondering why this model stands out as a great opportunity. Service providers are starting to realize the potential this model offers for a recurring revenue stream, and with some add-ons not available to freemium account holders, it can offer a huge scaling potential not commonly experienced with building a model based on one-time purchases.
Cost
One of the great advantages this business model offers over many other models is the cost to maintain this asset. Let’s take the fan-based box set example we used earlier. After making an agreement with your supplier on the products and items that will be included in your sequence for new and existing subscribers, there’s not much else for you to do, as your supplier will often ship these items directly with your packaging detail instructions.
There will be no inventory cost or items to be replaced if they’re lost or damaged, as the supplier will be the one handling these issues most often.
Product Diversification
The best part about this model is that you can have such a large range of products and items to offer your subscribers in order to keep them in your sales funnel. Take the Spotify example we used earlier. Sure, Spotify subscribers could find the content they’re looking for on other platforms, but when you give your subscribers everything they could want in one place, you make it difficult for them to consider switching and paying another provider, as they’re already accustomed to your service.
When it comes to the subscription box-item approach, you can send your subscribers new products related to their interests or the latest trends in that specific niche monthly. This is great for those who already love the niche their business is in as it offers different creatives you could try to get new subscribers into your marketing funnel having first-hand experience.
Brand Recognition
By establishing a club or group feeling for your subscribers, you’re building up more than just a name for a given product or item but a feeling that your subscribers would like to be a part of.
Let’s take, for example, growing a subscription business around a box set for those who enjoy a popular sport. Providing a service that offers a box set of trending products in that niche, current information for that sport with updates on top athletes, and other thoughtful items that no other brands are offering their customers right now gives your subscriber a reason to stay in your club.
This is why so many entrepreneurs have geared their business goals toward incorporating these types of assets now with more and more groups forming online. Once you’ve automated your operations for this model and built a solid brand that your subscribers love and continue wanting to feel like they’re a part of, it can be a great recurring revenue stream that, when automated, can also be quite passive. This all sounds like a great opportunity, but let’s not forget there are also a few disadvantages of this model that you should consider.
The Cons of the Subscription Business Model
The biggest downside to this business model is that your margins might not be as great as, let’s say, selling your own digital products or trademarked items.
Aside from the reliance of this model on the help of outsourced content providers, box item manufacturers, and other third-party suppliers, you’ll need to grow your subscriber base quickly in order to start seeing any significant returns. You’ll also need to keep them as subscribers for more than a month and ensure your customer lifetime value (CLV) numbers are profitable in relation to your marketing spend in order to acquire new subscribers.
With finding a niche that can be sustainable and not just trending, sourcing items that can be sequenced for new and existing subscribers, and automating operations while maintaining profitable margins, it’s no wonder why this model is much more difficult to get off the ground when starting from scratch. This is why we suggest acquiring an established cash-generating subscription business from our marketplace that has already done the start-up work for you.
Now that we’ve covered the awesome and the not-so-great details of the subscription business model, we then dive into the subject of what you should look out for when acquiring this monetization.
What Buyers Need to Know
Whether you’re a first-time buyer or looking to diversify your portfolio of digital properties, there are a few things you must look out for when performing your due diligence on these types of assets.
Obviously, you’ll need to make sure the basics have been provided, such as the profit and losses (P&L) sheet and all accounts and documentation owned by the actual seller. This will involve verifying the seller’s income and traffic by logging into their analytics. It’s never advisable to trust screenshots alone, as they can easily be manipulated and changed with little effort.
Take a moment also to go over the churn rates for the asset and see whether any issues have occurred with keeping subscribers on a longer-term basis. Aside from these basic details, you’ll want to establish some type of marketing plan or outline from the seller in order to assess your growth opportunities moving forward with the deal.
Does the business offer room to expand into other niches?
It may be considered a bit of a risk if the business has closed itself off to cater to only one sub-niche of any market.
Does the business only cover a small portion of the industry’s full potential?
Seeing an easy win like this means you could find additional suppliers that manufacture items related to other niches and related interests. Expanding your reach further by including these sub-niche items in your subscription product line-up is a great opportunity and something to consider during your due diligence process.
Another important feature to look at during your initial research is the relationship between the supplier, source, or item manufacturers and the asset’s owner. You’ll want to make sure that any exclusivity agreements or any product margins established at the time of valuation will carry over to you as the new owner of the business. This is where having a transition period to ensure that the asset is generating 50% of the monthly net profit or more before the funds are released from escrow to the seller is something we get constant praise for offering our buyers. This is especially beneficial for our first-time buyers who are still hesitant to make their first acquisition.
Next, you’ll want to look at the history of the asset and see whether there’ve been any issues or spikes in revenue and traffic. This might be a sign for a trending sub-niche or a category that might’ve some seasonality to it. Find out from the seller the type of advertising it’s doing to get new subscribers, whether it has done anything with email, social, or content marketing, and its overall customer acquisition cost (CAC) is to see whether there’s room for improvement in the marketing spend.
If you’ve already cracked the code to the subscription business model and gained many subscribers over the years and are looking for the best time to make your exit, some preparation work will also be in order to gain the best possible ROI.
What Sellers Need to Know
If you’re planning on selling your subscription business, there are a few improvements you can make now to gain that extra capital when you’re ready to make an exit.
For obvious reasons, you’ll want to pay attention to the buyers’ section above; after all, that’s what your buyers will be most interested in learning about your investment opportunity. Another consideration is that you should try to automate most of the daily operations for your business as much as possible. Updating your website, sending invoices to your suppliers, and answering subscribers’ messages in a timely fashion should all be systemized to make your business more attractive to potential buyers. Always ask yourself how you can make the business easier to hand over to the new owner, in which they can plug and play and start earning with their new investment as soon as possible.
In addition to making your subscription business model as streamlined as possible, it should also represent that club-like feeling we mentioned earlier. Your subscription brand should make your audience feel like they’re a part of your brand or group and not just receiving items from your brand every month in a disconnected way.
Growing a subscription-based brand isn’t exactly difficult, but it can be a long and tedious process. Think about your brand’s identity from day one and try to avoid any personality-driven figures or people so that you can easily hand over the asset to someone else when that day comes. While establishing a recognizable subscription brand is important, you should also consider the market share your asset has and whether other channels could provide you with a bigger piece of the industry as a whole.
Your subscription platform is only one step to gaining new subscribers. Consider expanding into other channels, such as social media and email, to offer promotions and news to your subscriber base, making sure to not lose that trusted connection. In doing so, you also offer additional monetization opportunities should you expand into offering your own white label products or digital services.
When it’s all said and done, the more you can make your business stand out from other subscription services within your niche while making it an investment opportunity that’s easy to hand off, the more you’ll be able to demand a much higher listing price when you make your exit.
Subscription Business Growth Strategies
There are quite a few ways to grow a subscription business model that has already started to gain some traction within its niche. Adding new products to a box set is always one way to do this, while taking a more survey outreach approach to your customer base could uncover hidden pain points your customers—having been subscribers for a certain period—have been experiencing for some time.
Choosing the right subscription pricing is important when deciding how to scale your business model further. Choose a revenue model that’s too high, and you lose out to your audience going elsewhere for less; choose a subscription fee that’s too low, and you lose out on profit margins that could be used to boost your next ad campaign.
Finding new customers for your subscription business will require the curation of new marketing incentives and other promotions used to get your target audience excited to be in your club. If you can incorporate SaaS within your model, you can further reap the benefits of this revenue stream to make your business stand out even more if you decide to exit and gain a huge chunk of capital for your next passion project. To manage a successful subscription business, you’ll need to look at the available subscription pricing models being used in your niche, consider your customer retention rates, and keep your customer relationships strong by providing everything they need all in one place for a great subscription cost.
Resources to Learn More
Interested in learning more about the subscription business model?
Here are a few resources to give you a better understanding of this model and the history behind how it came to be such a popular subscription model for business owners on a global scale.
Wikipedia’s Subscription Business Model History
This article from Wikipedia reports that this business model has actually been around since the 17th century and has adapted to a more digital approach in today’s society, with popular services like the ones mentioned in this article.
Are you excited about subscription businesses?
If you want to take the guesswork out of the subscription business model and focus on optimizing your business to produce a bigger profit, you might want to head to our marketplace and see our current subscription business listings. It’s typically easier to grow a business that’s already making money versus starting one from scratch.
Alternatively, maybe you already have a profit-producing subscription platform you’re ready to make an exit from.
In that case, you might be looking to cash in on what you’ve created by selling your subscription business for a huge capital gain. If that’s you, click here to learn about how you can receive a valuation for your business or begin the next step to reaching your business goals today.
