A subscription based business model works when you sell a product or service with monthly or yearly charges. The key to the success of this business model is to turn customers into loyal users and retain them for a longer period, as it is more cost-effective than acquiring new ones.

One of the main advantages of this model is the predictable revenue it generates, allowing businesses to forecast their income more accurately.

Most software as a service (SaaS) organizations work under a subscription business model. According to Statista, there are approximately 9,100 SaaS in the United States.

In this guide, you’ll learn how the different types of subscription business models work and you'll learn how to choose the best one, in case you are looking to buy a SaaS. Keep reading!

Types of subscription business models by product or service

There are several types of subscription businesses targeting individual consumers and organizations. Here is a list of the most common ones:

1. Services

Common services such as electricity, cable television, gym memberships, and even storage units can be considered as traditional service subscriptions. They cover a wide array of industries, some of which can be essentials (such as utilities), while others are a luxury (club memberships), all typically involving recurring billing.

2. Subscription boxes

In the past years, subscription boxes have become popular among users due to the possibility of accessing new and surprising products every month or quarter. Also, there are services where consumers get which product they want to receive. An example is HelloFresh, a meal delivery service with the necessary amount of ingredients to prepare a recipe. Customers choose the dish they want to cook from a catalog full of options that follow different dietary preferences.

Customer loyalty plays a significant role in the success of subscription boxes. Satisfied users are more likely to continue their subscriptions and recommend the service to others.

3. Product subscriptions

Other services allow users to receive personal goods at their homes. One of these is the Dollar Shave Club which provides clients with different types of shaves according to their preferences.

Monitoring the churn rate, or the percentage of customers who cancel their subscriptions, is crucial for the success of product subscription services.

4. Streaming subscriptions

Through a streaming subscription service, users access TV shows, films, music, podcasts, audiobooks, and more. Every month, customers pay to watch the full catalog of the streaming platform whenever and wherever they want. Companies like Netflix or Spotify are some of the main examples of this type of subscription.

5. Car subscription services

A car subscription service grants access to a vehicle in exchange for a monthly fee. Besides using the car, customers have access to maintenance, roadside assistance, and liability insurance, among other perks. However, this service is different from a lease since the latter requires a long-term commitment while a subscription service allows consumers to use the service for a short time.

The flexibility of car subscription services allows consumers to switch vehicles or cancel their subscriptions with minimal hassle, making it an attractive option for many.

6. SaaS subscription 

SaaS subscription business models offer access to a service to companies or organizations. The main trait of this subscription is that it’s used in B2B business models. Nowadays, more and more companies are using services for which they have to pay monthly or yearly instead of buying a license.

Organizations that are constantly improving their products use this business model. So, every time they launch new features customers have immediate access to them, instead of having to pay every time a new version of the product comes out. Understanding a customer's lifetime value is crucial for SaaS businesses, as it helps in planning long-term strategies and investments.

Types of subscription business models by pricing

Subscription business models can also be classified by their pricing strategy that creates diverse revenue streams.

1. Freemium

Users access the basic version of the SaaS, and they get charged if they want to get premium features. Several platforms use this model to attract clients that eventually can become advanced or plus.

Canva gives access to main design tools and templates for free. But if you want an enhanced experience, access to unique or more high-quality resources and unlock more features, you have to pay.

The success of a freemium model often depends on the conversion rate or the percentage of free users who upgrade to a paid plan.

2. Usage-based

With this pricing strategy, pay according to how much they use the product. Confluence is a platform that allows remote collaboration among team members. The price to pay depends on the number of users listed on your workspace within the platform, following a pay-as-you-go approach.

3. Tiered

In a tiered business model, SaaS offer a basic service at a lower price aimed at smaller businesses. The highest-priced product targets bigger enterprises. An example of this subscription business model is Asana. Each tier offers different value, catering to the specific needs and budgets of various customer segments.

4. Perks

A perks subscription business model grants access to the service and additional benefits. Amazon Prime is the best example since their subscription offers free shipping for the users’ purchases and additionally grants them access to Amazon’s streaming and music platform.

Benefits of a subscription model

Subscription business models have several benefits for business owners. Predictable recurring revenue and scalability are a few.

But it also has major advantages for users. Here are some of them:

1. Convenience

One of the most attractive features of the subscription model is its convenience for consumers. Customers sign up once to use the service instead of making repetitive purchases each time they want to use it. This is particularly true for subscription boxes or accessing specific products such as a streaming service or even SaaS services. Automatic renewals enhance convenience, as customers do not need to renew their subscriptions for each period manually.

2. New products, services, and features for customers

Subscription models such as a subscription box can come with new products for the consumer. Platforms can develop new verticals or features to improve the experience and make the business more attractive. These new features keep the product relevant for the market.

Innovation is crucial for subscription businesses, to keep the product or service attractive and competitive.

3. Businesses can predict revenue

Through a subscription model, entrepreneurs can have predictable revenue. Knowing the number of paying customers, the company can achieve expected revenue.

Predictable revenue contributes to the company's financial stability, enabling better planning and investment.

4. Can attract more clients

Charging an accessible price every month can attract more customers.

When clients can’t afford the product right away, they might be able to cover the total amount by making monthly payments. Affordability is key in attracting more clients, as lower monthly payments make the service accessible to a broader audience.

5. Eventual decrease in CAC

Subscription models help reduce customer acquisition costs (CAC) by allowing more customers to be brought in through other channels besides social media paid campaigns (these may include referrals or word-of-mouth). Additionally, the CAC will decrease by having more clients who sign up through these sources.

Reduced CAC can lead to organic growth, as satisfied customers refer others and contribute to the business's expansion without additional marketing costs.

6. Stronger relationships with their clients

Since subscription models rely on building strong relationships with clients, the customer success teams and account managers will focus on ensuring clients are happy and satisfied with the service. The key to a successful subscription business is having recurring revenue, and to achieve that, you have to build solid and long-lasting relationships with your customers. Customer engagement is crucial for building strong relationships and ensuring clients remain satisfied and loyal to the service.

How to pick a subscription-based business to buy

A subscription business model has several benefits and can appeal to entrepreneurs and investors.

If you plan on purchasing a business, consider an established subscription-based company or an existing SaaS that's already profitable. Here are some of the advantages:

1. Assess their competitiveness

Study what the service offers and how it’s different from other alternatives in the market. Is it something users will need frequently, or can it be seen as a luxury? Is the value readily appreciated? The type of service you’re providing will impact the best subscription model for your venture. Identifying the unique selling proposition of your service can help differentiate it from competitors and attract more customers.

2. Listen to the customers

Pay attention to your customers’ behavior. If they’re constantly on the run, your service can go an extra length to adapt to your client’s needs and preferences. Looking at what HelloFresh did, they understood that sometimes consumers need the exact ingredients delivered to their homes, so the service provides exactly what their clients need.

Regularly gathering customer feedback can provide valuable insights into their preferences and help improve the service.

3. Review the pricing strategy

When assessing a subscription business model, you have to look into your subscription pricing strategy and evaluate if it’s the right one for your venture and, at the same time, attractive and competitive enough for the market. You don’t want to overprice it for more revenue but at the cost of not having enough customers.

Understanding price sensitivity among your target audience can help you set competitive and attractive pricing for your subscription service.

4. Research regulations and compliance

Businesses can be subject to different regulations. Before buying a subscription business, look for the applicable rules and if the venture is currently compliant. Some of the most common regulations focus on protecting users’ data and auto-renewal policies.

Ensuring compliance with data protection regulations is crucial for maintaining customer trust and avoiding legal issues.

5. Evaluate the current tech

Tech is constantly evolving, and because of this, you have to ensure that the subscription business you’re planning to buy is up to date with the latest tech.

Otherwise, you would have to invest more money in updating internal processes and implementing new technology. Evaluating the technology stack of the subscription business can help identify any potential upgrades or integrations needed.

6. Plan the growth

Ask yourself if you want to expand to new markets, develop new features or products, or change the subscription model to attract more customers.

Developing a clear growth strategy can help guide the expansion and scaling of your subscription business.

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