Subscription Business Models that Have Proven Their Market Profitability
Newspapers and magazines are the pioneers of subscription-based businesses. While some say print is dying, subscriptions are definitely not.
During the past decade, subscription commerce companies have experienced tremendous growth and higher returns on investment. According to the Subscription Trade Association (SUBTA), the global subscription commerce economy has a Compound Annual Growth Rate (CAGR) of 17.33%.
SUBTA compares that number to the five-year CAGRs of Apple (9.2%), Microsoft (7.7%) and Amazon.com (20.8%). The numbers are included in the organization’s most recent State of the Subscription Commerce Economy Annual Report.
The global subscription economy makes up 18% of the $41 trillion credit card processing industry, and SUBTA reports that 75% of distributor to consumer (D2C) organizations will offer a subscription commerce business model by 2023.
With the data-backed potential of the subscription commerce model, more brands are brainstorming ways they can break into the subscription market. Below are the six subscription business models to consider in modern business. Each section includes staggering data from SUBTA’s report.
1. The subscription box
These days, there seems to be a subscription box to fill every need. The dollar shave club delivers razor blades and other grooming products to the doorsteps of more than 3 million customers each month. Nearly 3.5 million girls are eager to see which five beauty products will be included in their ipsy Glam Bags.
Subscription businesses have even found ways to deliver their services across species. The Bark Box and Kit Nip Box offer special toys and treats for furry friends to enjoy.
Here’s what the numbers tell us about subscription boxes
- Globally, there are 7,000 subscription box companies. Of those, 70% are based in the United States.
- The United States is home to 18.5 million subscription box shoppers, and 35% of them have three or more subscriptions.
- Men take advantage of subscription boxes more than women. In fact, 42% of them have three or more active subscriptions (compared to 28% of women).
Membership businesses provide access to their services for a recurring fee. Amazon Prime, Costco, clothing rental companies and fitness centers are examples of businesses that leverage memberships to turn big profits.
Here’s what the numbers tell us about memberships
- Amazon Prime is a well-known membership-based subscription service. With more than 100 million members,
- Amazon is making a pretty penny on its Prime dues (which cost $119 per year when paid in full).
- For Amazon, customer memberships are a gift that keeps on giving. The incentives offered with Prime cause members to spend four times more on Amazon than non-Prime customers annually.
- The same goes for Costco. The membership-only warehouse chain had 90 million members in 2017 who paid $55 for an annual membership, earning them nearly $5 billion in membership fees alone. That does not include all the money customers went on to spend in-store once their memberships were active.
- The outlook for customer retention is good for successful membership brands. Costco sees an 80% member renewal rate, while Amazon sees 90%.
- Fitness centers are increasingly reaping the benefits of recurring membership fees. Nationwide, they have enjoyed a 4.94% CAGR during the past five years.
- There are about 36,000 membership-based exercise facilities in the United States with a total membership count of 61 million.
- Clothing rental is gaining popularity in the membership arena, with American Eagle, Ann Taylor and Banana Republic throwing their names in the hat with StitchFix and Trunk Club. Brands that offer clothing memberships see a 50% customer growth and a 100% increase in total customer spending.
3. Subscribe and Save
A customer who plans to purchase a product one time may be enticed to enter into a subscription if savings are offered. At least, that is the hope of businesses that offer subscribe and save subscriptions.
While one-time purchase options are still offered, customers can enjoy instant savings if they sign up to receive replenishment products at a lower price. The allure of this model is the money that can be saved over the long term.
Flexibility is a key component of a subscribe and save business. They often give subscribers discounts, the option to skip a month and the ability to change products.
Here’s what the numbers tell us about subscribe and save business models
- Fifteen percent of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis.
- Home, beauty, fashion and coffee products have an average order value (AOV) of $30 or less.
- These categories have a churn rate of 10% (referring to customers who gravitate away from the products).
- Food, pets and coffee are among the top product categories that attract high-value customers. These businesses often offer one-time purchase add-ons that increase AOV and are believed to reduce churn rates.
4. Media and streaming subscriptions
Subscription-based media is delivered through print, broadcast and online. While publications were the first businesses to offer subscriptions, news media companies have struggled to keep readership in recent years. That is largely because free information is more readily available online.
While 16% of Americans are willing to pay for online news, 80% do not think it is worth it. Even with the odds stacked against them, The TImes managed to turn its digital-only subscription base into a $1 billion business. The newspaper estimates 62% of its revenue now comes directly from readers. SUBTA says a key strategy for media companies is to provide a valuable service at a low fee where the subscription can be terminated and reinstated at any time.
Here’s what the numbers tell us about media and streaming subscriptions
- During the past year, 15% of online shoppers have subscribed to an eCommerce service.
- Almost half of the survey respondents subscribed to an online streaming-media service such as Netflix.
- Once media companies land a subscriber, that person will be more likely to use the service more in order to get the full value.
- Sixty-eight percent of readers view only one article in a 30-day period, while only 9% view more than five.
5. Digital subscription
Technology has paved the way for digital-only companies to emerge. It has also given traditional businesses an opportunity to expand their offerings with digital products. With 3 billion people using smartphones, businesses have found a profitable opportunity with apps. The on-demand taxi service Uber, for example, is used by more than 8 million people in 400 cities across 70 countries.
Here’s what the numbers tell us about digital subscriptions
- The average person uses 9 mobile apps on a daily basis, spending an average of 2.25 hours a day on them.
- LinkedIn, which offers its premium services for a monthly fee, grew from 500,000 users to 530 million during a 13-year time span.
- Digital services are becoming more flexible, with 77% offering multiple plan types.
- Just 17% of digital services offer monthly subscriptions only.
- Annual-only plans make up 6% of digital services.
6. Software as a Service (SaaS)
SaaS describes the subscription-based licensing of software. With this model, users do not install the programs on their computers. One example of a SaaS product is the Adobe Creative Cloud. For a monthly fee, users can access more than 20 creative apps (such as PhotoShop, InDesign and Premiere Pro). This is of value to customers because purchasing each app individually can cost thousands of dollars. Additionally, subscribers can access the latest updates and features as they become available.
There are five SaaS business structures used today.
- Flat-rate pricing: A single product with a set of features is offered at a set price.
- Usage-based pricing: The more a person uses the service, the more they pay.
- Tiered pricing: This is used when businesses offer multiple packages with different combinations of features at different price points.
- Per-user pricing: The fee structure is based on how many people are using the software.
- Per feature pricing: Users pay more according to the number of features they use.
Here’s what the numbers tell us about SaaS
- The median company in the Information Technology sector has a 5-year CAGR of 7.3%.
- Thirty-four percent of SaaS businesses offer free trial periods.
- The SaaS segment has seen the lowest churn rate of all the segments with the voluntary churn being 4.04%.
The key takeaway
While a one-time payment can bring businesses more money at once, a subscription commerce business model focuses on longevity. Recurring revenue each month can add up to more customer spending over time. Additionally, it can drive customer loyalty when users come to depend on the value it adds to their lives.
Business is booming in the subscription world as brands get creative with rethinking their processes. Can your business incorporate a subscription commerce model to cast a wider customer net?
There are many details to manage once a subscription commerce business model is in place. Will recurring revenue come on a monthly, weekly or annual basis? Will there be flexibility to change products and frequency?
Contact us for more information about a subscription management solution that is equipped to handle the most complex situations.