But that’s not all. As a business owner, invoicing delays mean you could be left with difficult decisions about whether to pay yourself. You could even miss opportunities to grow your business. 

Ensuring regular cash flow is a universal issue affecting long-established businesses and brand-new start-ups. Fortunately, there are plenty of ways to plug this working capital gap, including up-front deposits and interim billing. 

However, adopting a subscription business model offers many more advantages. Here’s what you need to know about the subscription economy.

What is a subscription business model?

Under a subscription business model, customers buy goods and services on a subscription basis rather than one-time purchases.

Here are some subscription business model examples:

• Streaming platforms like Netflix that charge a monthly fee for content access
• Software companies like Xero and Sage
• E-commerce subscription boxes (think coffee, dog treats and beauty products)

Subscription services don’t have to be your only business model. For example, e-commerce brands like ASOS and Amazon offer a subscription delivery service that lets customers pay a monthly or annual fee for next-day delivery.

How does a subscription business model work?

One of the reasons subscription-based business models are so widely used is because there are many different ways for them to operate.

For example, companies can choose from a wide range of subscription and pricing structures, such as a fixed monthly fee for all services or tiered pricing that allows customers to access premium products for a higher cost.

Conducting industry due diligence is important for business owners because it helps them calculate their customers’ willingness to pay. Before implementation, you should ensure your subscription model meets your pre-defined business goals.

Additional points to consider include using a reliable billing system, and that customers receive consistent service at every stage of the subscription process.

You’ll also need to think about customer churn. Offering as much choice, value, and flexibility as possible can boost customer relationships and encourage them to continue paying subscription fees for longer.

What are the advantages of a subscription business model?

Adopting a subscription-based business model has many potential advantages for both the company and its customers. 

Customers benefit from the convenience of regular access to products, services, and content from a trusted business. Meanwhile, companies can enjoy recurring revenue, customer loyalty, and data-driven insights that help them continuously improve their business offering.

More advantages include:

Easier customer acquisition : Being clear about what is included in a subscription will make It more straightforward for customers to sign up. Digital-age customers are already used to friction-free takeaway ordering and will expect to be able to select their service requirements in a similar manner.

Lower entry bar: Customers can be put off some services due to high annual costs. However, a weekly or monthly subscription tier can make these costs more manageable.  This will help customers manage their cash flow whilst reducing price discrimination, which could, in turn, lead to a greater appreciation of the value of the products, services, or content being offered.

Increased customer satisfaction and reduced churn: Subscription models enable business owners to focus on their subscribers, which can result in a more personalised approach. Customers may also opt to continue their subscriptions if the right levels of flexibility and cost-management are provided, thus boosting the business's overall value. 

Predictable, regular income: Recurring monthly revenue allows for more accurate and reliable business forecasting. This translates into confidence for business owners when deciding on investment opportunities, whether for new team members or technology. Predictable recurring revenue also makes a business more valuable in the eyes of investors.

Better cash flow management and reduced working capital costs: A subscription model helps businesses fund the costs of providing client services at the point of delivery. This reduces or even eradicates the need for funding streams that deliver cost savings and increased profitability. Equally, bad debt exposure is reduced by simply stopping customer access if their subscription payment is missed.

Greater business opportunities: The improved liquidity from subscription payment methods will lead to a much stronger balance sheet, with positive key ratios that convert into improved credit ratings. This may enable the business to seize market opportunities as and when they arise rather than being continuously held back by financial constraints.

Scalability for growth: Predictability lends itself to scale. In turn, the subscription-based model lends itself to more confident customer acquisition, as the business owner understands that working capital barriers are low and that any associated risks are mitigated.

Which subscription business model metrics should you track?

Once your business adopts a subscription-based business model, you can use key metrics to track progress and help measure the company's overall health.

These include:

• Annual recurring revenue (ARR): The revenue your subscription business generates each year.
• Monthly recurring revenue (MRR): The revenue your subscription business generates each month.
• Customer lifetime value (CLV): The revenue your business can expect to generate from a single customer
• Customer acquisition cost (CAC): The amount it costs on average to gain a new customer. 
• Average revenue per user (ARPU): The average revenue you receive from each subscriber. 

Analysing which subscription products and services are the most popular can also present new opportunities for upgrading or cross-selling.

Is a subscription business model right for every business?

Subscription business models offer many advantages, making them an extremely popular choice for a wide range of industries and companies.

However, there are some scenarios where such a model may not be the most appropriate solution. For example, if your customers buy products they only need infrequently, they may not see the benefit of starting a subscription.

Making a subscription-based model work may also be more challenging if your customer acquisition costs are excessively high, the company serves a particularly niche audience, or your business has to customise every product or service to a specific customer experience.

How to adopt a subscription business model

Businesses looking to adopt a subscription model should conduct extensive market research. Start by answering the following questions:

• Who is your target audience?
• What subscription will best meet their needs?
• Why would they subscribe?
• How much are they likely to pay?

It is likely that subscription models already exist in your industry, so it may be worth finding out more about how they work and how successful they are. You may even be able to highlight something your competitors have missed, further strengthening your own offering.

Based on research findings, you can determine exactly what your subscription will include and set a favourable pricing structure. You may also want to invest in a dedicated subscription-management platform to handle customer billing and payments.

The next step involves marketing and promotional activity to attract subscribers. Options to consider include free trials, introductory discounts, and referral programmes.

Offer consistent value to increase customer retention

It is important to remember that your subscribers will expect a consistent level of value from their weekly or monthly payment. This can be achieved by requesting regular feedback, offering subscriber-only discounts, or introducing products, services, or content exclusively for them. You’ll need to keep your offer fresh, too, if you want to have a successful subscription business.