Subscription business models are surging in popularity thanks to the steady streams of revenue they provide. Instead of a single transaction, subscription businesses are based on repeat business. This has many benefits, including deeper customer relationships, more predictable income, and ease of budgeting and forecasting.
What is a subscription business model?
The subscription business model involves customers paying a recurring fee for a product or service, which provides ongoing revenue and builds lasting customer relationships. For example, a wine club operates on a subscription basis, offering customers the flexibility to receive a carefully curated selection of wine delivered to their door monthly or quarterly. Subscribers benefit from the convenience and surprise element of these packages, often discovering new vintages and varietals they might not have chosen otherwise. This model allows businesses to maintain a steady cash flow and capitalize on customer data to personalize offerings further, fostering deeper engagement and loyalty. It also enables efficient inventory and resource management, as businesses can predict demand and adjust their logistics and production cycles accordingly.
Here are other examples of subscription-based businesses:
- Subscription boxes: This can include meal-delivery kits, books, pet items, clothing, and more.
- Content: Content can consist of music, movies, digital books, and podcasts and is typically delivered digitally by media platforms such as Netflix and Spotify.
- Software: Subscription-based software or software-as-a-service (SaaS) is now the default method for purchasing software. Subscriptions can be monthly, quarterly, or annual and the fee typically includes ongoing maintenance and updates.
- Freemium: Freemium is a business model that offers basic features of a product or service for free and charges a premium for additional or advanced features. For instance, in podcasting, freemium involves providing basic content for free and offering premium content for a fee.
- Membership: This subscription model provides access to a service for a fee, such as a gym membership or online learning.
How to start a subscription business
If you’re interested in starting a subscription-based business, take the following steps:
Step 1: Determine the value of your subscription business idea
The first step, whatever your industry, is to determine if your product or service is something that consumers want or need on a regular basis. Very few people will be willing to subscribe if they only need the product once or want one-time access to a service.
For your business model to last, you must offer value to your customers such as enhanced and personalized customer experiences, convenience, and cost savings.
Conduct research and thoroughly understand your market and the demand for your product or services, as well as the long-term value your customers desire. Dive deep into your target demographic. What motivates them to make a purchase, what keeps them engaged, what brings them back, but most importantly, what drives them away?
Without understanding their motivations, you cannot identify the subscription opportunity or develop an effective customer retention strategy.
Step 2: Determine your subscription business pricing structure
Pricing is key to your subscription strategy. Remember that a one-size-fits-all approach could discourage some consumers. For example, to encourage new customers to subscribe to your service, consider offering a start-up discount for a few months. You could also offer discounted rates to certain groups, such as veterans, teachers, and students. Then, adjust your pricing over time as you learn from your customers and provide them with additional value.
Popular pricing options for a subscription-based business model include:
- Single flat price: Consumers pay a fixed rate, regardless of how much they use a product or service.
- Freemium option: In this option, the base product or service is offered free, while more advanced tiers are charged at the appropriate rate.
- Multiple tiered options: Charge different prices based on product features, usage levels, and number of users.
Remember that subscription models that align service and pricing tiers with customer needs and preferences are the most successful.
Step 3: Create a business roadmap
Don’t ignore the importance of a business plan. A well-thought-out plan can act as a guide for your company, offering a detailed overview of its operations, goals, and strategies. It can also help you secure funding or form new business partnerships. Use it to help investors understand that they will realize a profitable return and that collaborating with or investing in your company is a wise decision.
The basic business plan contains the following elements:
- Executive summary
- Company description
- Industry and market analysis
- Competitive analysis
- Organization and management
- Product or service offering
- Sales and marketing strategy
- Startup and ongoing costs
- Financial projections
Step 4: Select a business structure
When selecting a business structure, it's essential to consider how it will affect your day-to-day operations, tax obligations, and the level of risk to your personal assets. It's crucial to strike a balance between legal protections and potential advantages. The four most common are:
- Sole proprietorship: This type of business is owned and operated by one person, with no legal distinction between the owner and the business. Consequently, the owner is personally responsible for all debts and obligations incurred by the business. No state filing is required to establish a sole proprietorship.
- General partnership: A general partnership is the most straightforward type of partnership. It is automatically formed when two or more individuals engage in a business venture for profit. In a general partnership, owners have unlimited personal liability for the business's debts, including the acts of employees. No state filing is required to establish a general partnership.
- Limited liability company (LLC): An LLC offers limited liability protection (by separating the business assets of the company from the personal assets of the owners) and pass-through taxation.
- Corporation: A corporation is a separate legal entity owned by its shareholders, thereby protecting owners from personal liability for corporate debts and obligations.
For more information on business entity structures, read Comparing company types and Compare S corporation vs LLC.
Step 5: Understand the legal requirements of your subscription business
Most businesses must comply with licensing and registration requirements. Your business may need a general business license from your state or local government. Even home-based businesses sometimes require a home occupation permit. Also, check with your HOA to ensure your business isn’t restricted by HOA covenants or zoning regulations.
Another consideration is doing business under an assumed or trade name which requires a “doing business as” or DBA filing with your state or local jurisdiction.
To hire employees, you must obtain an EIN and register with your state’s Department of Labor.
You must also fulfill other requirements, such as obtaining a registered agent and filing a Beneficial Ownership Information Report with FinCEN.
Ensure you're ready to handle all the legal and regulatory requirements that could impact your subscription business. Both federal and state governments have consumer protection laws in place for auto-renewals and cancellations. It's important that auto-renewals and terms of service are clearly and prominently displayed and that cancellations are easy to carry out. Additionally, you should also consider regulations concerning data privacy and security.
Lastly, there may be additional considerations based on your service or product line. For example, if you offer SaaS products, look into intellectual property and contractual liabilities.
Legal requirements can be complex and differ by location, so it's a good idea to seek advice from legal professionals.
Step 6: Open a business bank account and obtain a business credit card
It’s essential to keep your business and personal finances separate. Having a business bank account and credit card makes this easy. It can also help maintain the limited liability protection of forming an LLC or corporation. Even if you don’t structure your business as an LLC, keeping your finances separate is crucial for tax reasons.
To open a business bank account, you’ll need to provide company information, such as formation date, business type, and owner names and addresses. If your business isn’t incorporated, most banks require a DBA name. Contact your bank to understand their requirements.
For more information, see Avoid piercing the corporate veil to maintain personal asset protection.
Step 7: Have the right tools for a scalable and user-friendly subscription service
A critical part of your subscription service is your website. Research a solution that fits your current and future needs – whether a pre-built template or custom design – and can quickly scale. Make sure it’s user-friendly, mobile-responsive, and optimized for conversions.
You’ll also need subscription management software for billing, customer relationship management, and subscription changes.
If you sell products, establish a system for order capture, payment processing, fulfillment, shipping, and ongoing service.
Make sure you keep an eye on how your products or services are doing. Think about getting some data analytics tools to track how users are behaving, group customers, predict churn, and make the customer experience more personal.
Step 8: Have an operational plan
Remember, for your subscription business to run smoothly, you need to have efficient operational processes and logistics in place. This involves managing inventory and orders, dealing with customer questions and support requests, improving subscription billing and payment processes, and ensuring data security and compliance.
Step 9: Have a marketing plan
Use different marketing channels to attract and engage with subscribers for your subscription business. Combine digital marketing, content marketing, social media, and email campaigns to bring in new subscribers.
Don't forget to create and brand your social media platforms.
Consider setting aside a small budget for ads and plan a launch campaign to create interest and attract initial subscribers. You might also want to think about offering promotions or special discounts to encourage new subscribers. And don't forget to reach out to influencers to partner with (for free or a fee). Also, try networking in online communities to increase awareness.
Learn more from BizFilings
BizFilings simplifies the process of starting a business, allowing you to concentrate on your passion. For additional details, explore our state guides for LLCs and corporations.
