A successful subscription business model is the stuff of entrepreneurial dreams — when done right, it can be a great way to generate a regular revenue stream while driving long-term customer loyalty.

It's a simple idea: Customers sign up to receive goods or services on a regular (often monthly) basis. With dozens of success stories, from Netflix, Amazon Prime and Blue Apron to Dollar Shave Club and Ipsy, many small business owners are tempted by the subscription model's siren song. But is this model right for your unique business? Let's take a look.

Benefits

When customers subscribe, they commit to paying for your products or services on a regular schedule. This can help drive steady, repeat revenue, which can help establish a solid foundation on which to grow your business. The predictable nature of subscription models may also help you manage your inventory and resources. And, as your staff will not have to keep contacting existing customers to encourage them to sign up or buy again, they may have more time to devote to attracting new customers.

Additionally, a subscription model may also help you increase customer retention. With many subscription models, subscriptions renew automatically, meaning that the customer doesn't have to do anything extra to continue their relationship with your company. They only need to take action if they want to cancel or modify their subscription — and inertia can be a powerful force.

Giving your customers a membership mentality and building a community around your products and services can also boost customer loyalty. You're building a long-term relationship with your members rather than selling them one product at a time.

Potential Pitfalls

When you set up a subscription business model, you must be very careful about the contract conditions. There needs to be a clear, straightforward way for customers to opt out without an overly strict cancellation fee. Otherwise, your business could develop a reputation for locking customers into unfair deals.

You also need to stay mindful of your customers wants and needs and continue to evolve your model accordingly. Offering overly similar products or services over the course of a year could inspire some customers to become bored and cancel. Think about it: Would you keep going to a gym that never buys new equipment and never offers new classes?

Keep in mind, too, that you typically need to offer a discount so that those who buy into the subscription will spend less over time — discounted prices are often the reason customers opt into a subscription plan. If you have regular customers already buying your goods every month at regular prices, your income could decrease if those customers move to your new, discounted subscription model.

Suitability

A subscription business model is better for products or services that customers need regularly, like pool cleanings or razors. It's a harder sell for products with more variety. For example, some companies that sell clothes have found success with subscription boxes, but many consumers still prefer to shop for their own clothes on an as-needed basis.

Setting Up Your System

If you think a subscription model makes sense for your business, you should make a map of the services or products customers buy over a year and see if you can bundle some of them in one package. Again, for pricing, make sure to include a discount compared to the "a la carte" prices. Customers will likely only sign up for a subscription if there's a clear financial benefit.

You may want to offer several different subscription options at different prices, maybe even a "freemium" model to let people test your service before upgrading to a paid version. If the subscription service takes off, you could consider getting rid of one-off sales and only selling subscriptions.

If you're not sure whether subscriptions are right for your business, survey your best customers and see what they think. Subscription models only work if customers are excited about being members, so get this important feedback before considering a switch.

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Tags: business model