What is a subscription-based business model?

Did you know? According to a recent study, the subscription economy is set to grow to $1.5 trillion by 2025. It should come as no surprise that most SaaS products nowadays work with a subscription-based business model.

But what is it exactly? More importantly, should you use it in your SaaS business too? 

The goal of this guide is to explain what a subscription-based model is. We also cover the best way to implement one. 

These are the topics we’ll go over:

• A quick explanation of what a subscription-based business model is
• The benefits of having a subscription-based business model
• Three types of subscription-based models put under the lens
• A step-by-step guide to implementation
• Common hurdles and solutions when using a subscription-based model

Let’s begin. 

What is a subscription-based business model?

A subscription-based business model involves customers paying a recurring fee to access a product or service.

Imagine this: Instead of buying a product outright, you're "renting" it for as long as you continue paying the subscription fee. This could be anything from streaming your favorite shows on Netflix to getting a curated box of goodies delivered to your doorstep every month.

The beauty of this model is that it creates a win-win situation for both businesses and customers. Businesses enjoy a predictable, recurring revenue stream because it helps them plan and grow with confidence. Customers get convenience and flexibility in their spending.

Subscription models have taken the world by storm. An average US consumer spent $273 monthly on subscription services in 2021 compared to $237 in 2018. The best part? It shows no signs of stopping.  

Why use a subscription-based business model?

Subscription-based business models are changing how businesses operate and interact with their customers. They offer a host of benefits that traditional models simply can't match:

Better revenue stream predictability 

Imagine knowing, with a reasonable degree of certainty, how much money will be flowing into your business each month. This is the power of recurring revenue. 

Subscription models provide a steady, predictable income stream, which makes financial forecasting and planning much easier. This stability allows businesses to invest in growth, weather economic storms, and focus on long-term sustainability.

Deeper and more long-lasting customer relationships

Subscriptions aren't just about transactions. They're about forging connections that stand the test of time. 

With recurring billing, businesses have multiple opportunities to interact with their customers. They can provide exceptional service, gather feedback, and foster a sense of loyalty and community. This ongoing engagement is the secret to reducing customer churn and increasing lifetime value.

More upselling and cross-selling opportunities

Once a customer is happily subscribed, it opens doors to a treasure trove of additional revenue. Businesses can offer premium tiers with better features or exclusive perks for loyal subscribers. 

This not only boosts revenue but also deepens the customer's engagement with the brand. All in the hopes of turning them into fans of your SaaS product. 

Types of subscription-based models

Subscription-based models are far from a one-size-fits-all solution. They come in various flavors, each catering to different business needs and customer preferences. Let's dive deeper into three popular types:

1. The freemium model

The freemium model is like offering a delicious appetizer before the main course. It provides a basic version of a product or service for free, allowing users to experience its value firsthand. 

The goal is to hook them on the taste and entice them to upgrade to a paid subscription for the full feast of features and benefits. Let’s weigh out the pros and cons:

Pros

• Widening the net: By removing the initial cost barrier, the freemium model casts a wider net. It's designed to attract a larger pool of potential customers who might hesitate to commit to a paid subscription upfront.
  ‍
• ‍Word-of-mouth: Satisfied users of the free version often become enthusiastic advocates. They spread the word about your SaaS product and help organically grow your customer base.
  ‍
• ‍Risk-free trial: The freemium model allows potential customers to "try before they buy." This reduces their perceived risk and increases the likelihood of conversion.

Cons

• The conversion conundrum: Attracting users can be easy, but converting them into paying customers might not be. It requires a well-crafted strategy to show the added value of the premium version and gently nudge users toward an upgrade.
  ‍
• Balancing act: Striking the right balance can be challenging. You need to walk the tightrope between a free version that attracts users and a premium version that offers enough value to justify the cost. 
  ‍

2. Tiered pricing model

The tiered pricing model offers multiple subscription levels. Each has its own set of features, content, or usage limits. This approach acknowledges that customers have diverse needs and allows them to select the plan that suits them. Here are some pros and cons to consider:

Pros

• Broad appeal: By catering to a wide range of needs and budgets, tiered pricing attracts a broader customer base than a single-price model.
  ‍
• Upselling engine: The tiered structure provides a natural path for upselling. Customers can easily upgrade to a higher tier to access more features or benefits as their needs evolve.
  ‍
• Value perception: Offering multiple tiers can enhance the perceived value of the premium tier. Thus, it makes them more attractive to users who might be willing to pay more for additional benefits.

Cons

• Complexity overload: Managing multiple tiers with different features and pricing can be complex. It requires careful planning and administration.
  ‍
• Decision paralysis: Too many options can overwhelm potential customers. This could lead to decision paralysis and potentially lost sales.
  ‍
• Cannibalization: Lower tiers might inadvertently cannibalize sales of higher tiers. This often happens if the price difference isn't justified by a significant difference in value.
  ‍

3. Pay-as-you-go model

The pay-as-you-go model is the one that offers more freedom and flexibility to the customer. 

Instead of a recurring fee, customers are charged based on their actual product or service usage. This model appeals to those who don't need consistent access but still want the option to use the SaaS product on demand. 

Let’s take a look at the pros and cons of this model:

Pros

• Cost efficiency: Users only pay for what they consume, making it an attractive option for those with fluctuating needs or those who use the product frequently.
  ‍
• No strings attached: The absence of a long-term commitment appeals to users who want to avoid being locked into a recurring subscription.
  ‍
• Reduced churn: Since users are not tied to a recurring payment, they are less likely to cancel the service due to lack of use.

Cons

• Revenue rollercoaster: Income can be unpredictable. It often fluctuates based on usage patterns, making financial forecasting challenging.
  ‍
• Underutilization risk: Users might not fully use the product or service, resulting in lower overall revenue compared to subscription models.
  ‍

How to implement a subscription-based model

Embarking on the subscription model journey is a strategic move. However, it requires careful planning and execution. Here's a practical and quick step-by-step:

1. Find your perfect subscription match

The first step is crucial. It involves identifying the ideal subscription model that aligns with your unique offerings and target audience. Dive deep into your SaaS product and consider your customers' needs and preferences. 

Are you a software company with varying feature levels that are well-suited for tiered pricing? 

Do you offer exclusive content that could be gated behind a freemium model? 

Do you provide a service where usage fluctuates, making pay-as-you-go a suitable option? 

The right model will act as a magnet, attracting and retaining customers who see genuine value in your offering.

2. Develop a sound pricing strategy

Pricing is about striking a delicate balance between perceived value and profitability. Consider your costs, competitor pricing, and, most importantly, the unique value proposition you bring to the table. 

Don't shy away from considering different pricing structures. You can always use customer feedback to know how your target audience might respond. Remember, your pricing strategy should be dynamic and capable of adapting as your business evolves and the market shifts.

3. Provide top-tier onboarding and support

First impressions are lasting impressions. Ensure your onboarding process is frictionless, intuitive, and welcoming. Guide your new subscribers through the setup, showcasing the key benefits and features of your offering.

Remember: Exceptional customer support is non-negotiable. A responsive and helpful support team can transform a satisfied customer into a loyal advocate. This fosters long-term relationships and reduces churn.

4. Choose the right billing tool

Behind the scenes, a reliable billing system is the engine that keeps your subscription business running. 

Orb is a powerful billing platform that can handle subscription fees for you. It offers flexible billing options, automated invoicing, and effortless subscription management. By entrusting the financial intricacies to Orb, you free up valuable time and resources to focus on other aspects of business. 

Challenges and solutions with subscription-based models

While subscription-based models offer a wealth of benefits, they also present their fair share of challenges. Let’s take a look at those challenges and how to overcome them:

Fighting to keep churn rates down

The dreaded churn rate is the rate at which customers decide to part ways with your service. 

High churn rates can quickly drain your hard-earned revenue and stall your growth. This can happen for various reasons, such as a lack of engagement, dissatisfaction with the product or service, or simply finding a better deal elsewhere.

Solutions: Focus on strategies to keep users engaged, like offering exceptional customer support. You can also gather feedback and improve your offerings based on what your customers truly want. Also, include as much transparency about the charges as possible in order to build trust with clients. 

Consider implementing loyalty programs, exclusive perks, or personalized communication. This makes your subscribers feel valued and appreciated. 

Maintaining SaaS product quality

Your SaaS product must consistently deliver value to keep customers coming back for more. This means staying ahead of the curve, innovating, and adapting to changing customer needs. Otherwise, your offering might become stale, and users might start looking for greener pastures.

Solutions: Embrace a culture of continuous improvement. Regularly gather feedback from your subscribers and use it to refine your product or service. Monitor industry trends and competitor offerings closely to ensure you're not falling behind. 

Invest in research and development to stay ahead and surprise your customers with new and exciting features or benefits. Remember, the goal is to make your offering so indispensable that customers can't imagine life without it.

Adapting to market changes

Markets are dynamic, constantly evolving with new trends, technologies, and competitors. What works today might not work tomorrow. 

Subscription-based businesses must be agile and adaptable, ready to pivot and evolve as the market dictates. Failure to do so can lead to irrelevance and a dwindling customer base.

Solutions: Stay informed about market trends, monitor your competitors, and be willing to experiment with new ideas. Don't be afraid to make changes to your pricing, features, or even your entire business model if necessary. 

Engage with your customers regularly, listen to their feedback, and be open to their suggestions. Remember: flexibility and adaptability are key to survival and success in the SaaS business.

Next steps

Armed with an understanding of subscription-based business models, the next step is implementation. However, setting up the technical infrastructure to support a recurring revenue model can be daunting.

Challenges like tracking customer subscriptions, managing renewals, and accurate invoicing can become overwhelming. 

This is where Orb steps in as your trusted billing tool.

Orb is a billing platform designed to simplify the complexities of subscription-based models. Here's how Orb empowers your business:

• Flexible pricing model support: Whether you're offering tiered subscriptions, freemium models, or a combination of both, Orb's adaptable tools allow you to effortlessly model your desired pricing structure.
  ‍
• Easier subscription management: Orb automates the subscription lifecycle. It helps you manage everything from sign-ups and upgrades to renewals and cancellations. 
  ‍
• Crystal-clear invoicing: Orb generates detailed invoices. These invoices provide transparency for your customers, fostering trust and minimizing billing-related issues. 

Learn how we can solve your subscription-based billing by scheduling a demo from Orb.