In a subscription model, the customer pays periodically for continued use of a product or service. Instead of one purchase and the end of the relationship, an ongoing relationship forms: as long as the customer gets value, they stay and keep paying.
Familiar examples#
A monthly subscription to a video streaming service, a music app, online accounting software, a gym, or monthly product boxes are all examples of this model. Education and streaming services also work with monthly and annual plans.
Why businesses like it#
- Predictable revenue: you know roughly how much you will earn next month.
- Customer lifetime value: a customer who stays creates more value over time than a single purchase.
- A close relationship: with usage data, you can improve the product.
Challenges#
The customer must have a reason to stay each month. If they do not feel the value, they cancel, which makes the churn rate one of the main metrics of this model. Acquiring customers also costs money up front, and payback takes a while.
Practical tip#
Define simple, comparable plans and do not make cancellation hard; a complicated cancellation destroys trust.
Common misconception#
Subscriptions are not only for software; any service that offers recurring value can be subscription-based.