Subscription Business Model: How and Why It Works

A subscription business model is convenient for customers and offers predictable revenue. Here's how it could work for you.

The subscription market has experienced significant growth in recent years, with projections indicating it will continue to expand. By 2028, the value of online subscriptions is expected to reach $2.3 trillion.

A substantial portion of this revenue is driven by major players in streaming and e-commerce, who have transformed the subscription model and made it a regular household expense. However, small businesses are also leveraging subscriptions to offer customers convenience while generating stable, recurring revenue. E-commerce businesses now offer subscriptions for everything from premium content to monthly deliveries of goods such as groceries or specialty items.

In this article, you’ll learn how to implement a subscription business model to sell your products online. We’ll explore the benefits and challenges of launching a subscription-based business, as well as highlight popular subscription apps for Shopify stores.

What is a Subscription Business Model?

A subscription business model is one where customers pay a recurring fee to receive products or services over a set period. Subscriptions have long been a staple in industries like print media, cable TV, software, and grocery delivery services, but they have recently gained widespread adoption in e-commerce.

For instance, many software companies offer their products via subscription, while streaming services grant subscribers unlimited access to content. Independent designers and creators also use subscriptions to sell digital products.

Subscription boxes—curated selections of products—have become a popular way for online sellers to generate steady, recurring revenue, while offering customers convenience and added value. Businesses selling consumable goods or products that need replenishing can use subscriptions to make it easier for customers to reorder.

Ultimately, many businesses favour the subscription model for its ability to build stronger customer relationships and provide more predictable revenue.

Benefits of Subscription Business Models

There are several advantages to adopting a subscription-based approach over one-time sales.

• Predictable Revenue: A solid subscriber base provides recurring revenue, making it easier to forecast sales and plan for inventory. This predictability also supports better investment and growth strategies.
• Upfront Cash Flow: Subscription businesses often receive payment for the full term of the subscription in advance, which can provide a boost to cash flow and reduce the need for heavy upfront investment, especially in the early stages.
• Cost-Effective Customer Acquisition: Unlike traditional pay-per-product models that require ongoing investment in marketing, subscription businesses benefit from lower customer acquisition costs. Retaining an existing subscriber is much more affordable than acquiring a new one.
• Customer Loyalty: Subscription models help foster deeper customer loyalty by encouraging repeat purchases. Customers often become more engaged with your brand, increasing their lifetime value. Research indicates that repeat customers can spend up to 67% more than first-time buyers.
• Easier Cross-Selling Opportunities: Because subscriptions often involve regular communication with customers, it’s easier to market complementary products or services, thus increasing overall sales.

Types of Subscription Business Models

Choosing the right subscription model for your business is a crucial first step. There are three primary types: curation, replenishment, and access. Below is an overview of each model, including its advantages and potential challenges.

1. Curation Model

The curation model, exemplified by subscription boxes, allows businesses to offer a carefully curated selection of products to customers for a recurring fee. Popular examples include Birchbox, ButcherBox, and Stitch Fix. The curation model works well in industries like apparel, beauty, and food, where customers are eager to try new items.

Pros:

• High profit potential from recurring revenue.
• Flexibility to adapt curated products based on customer demand and trends.
• Potential for strong customer engagement and loyalty.

Cons:

• High customer churn rates can occur if the novelty of the subscription wears off.
• Subscription boxes may be seen as luxury items, making them vulnerable to shifts in consumer spending.
• Sourcing products from multiple suppliers and managing logistics can be complex.

2. Replenishment Model

This model focuses on providing customers with essential items that need to be replenished regularly—such as razors, diapers, vitamins, or pet food. The key benefit is offering convenience and cost savings to customers who want to automate their purchases.

Pros:

• Replenishment models tend to have higher conversion rates and more stable long-term subscriptions.

Cons:

• The need for regular replenishment may limit the types of products you can offer.
• Competing with single-purchase models may require offering discounts, which can lower profit margins.

3. Access Model

Access subscriptions provide customers with special perks, discounts, or exclusive access to content or services for a monthly fee. Examples include JustFab, Amazon Prime, and Thrive Market. The value proposition lies in offering exclusivity or added value to subscribers.

Pros:

• Opportunities to strengthen customer relationships through personalised perks.
• Ability to build a sense of community among subscribers.

Cons:

• Subscribers may expect a continuous stream of new offers or perks.
• As customer expectations grow, the cost of providing exclusive content or services may rise.

4. Hybrid Model

A hybrid subscription model combines elements of different types of subscriptions to create a flexible offering. For example, you might run a curation service alongside a replenishment model, allowing customers to choose between different subscription options.

Pros:

• The ability to experiment with subscriptions alongside traditional sales.
• Adds a new revenue stream to your business, stabilising cash flow.

Cons:

• Managing both subscriptions and traditional sales can complicate inventory and fulfilment.
• Customers may become confused about your core product offering.

How to Decide If a Subscription Model Is Right for Your Business

Subscriptions are not suitable for every business. Before implementing a subscription model, consider the following:

1. Does your product fit?

Assess whether your product offers continuous value or can be used on a recurring basis. Products that meet ongoing needs—such as software, curated experiences, or replenishable goods—are typically well-suited for a subscription model.

2. Is there market demand?
Conduct market research to understand whether there’s demand for your subscription offering. Some categories are more competitive than others, so be prepared to offer a unique value proposition to stand out.

3. Can you personalise your product?
Personalisation is a key element in many subscription models, particularly subscription boxes. Consider whether you have the resources to personalise experiences based on customer preferences.

4. Do you have a retention strategy?
Subscription businesses depend on retaining customers over time. Focus on creating strategies to keep customers engaged and reduce churn. A high retention rate leads to greater customer lifetime value.

5. Can you stay in touch with subscribers?
Regular communication is vital in subscription businesses. Subscribers expect ongoing engagement, so having effective channels—such as email marketing—is essential.

How to Start a Subscription Business

Starting a subscription business involves several key steps:

1. Choose your subscription idea.
Decide on the type of subscription model that fits your business. Whether it's a curated box, replenishable items, or exclusive access, define your offering and how it will benefit customers.

2. Select your subscription products.
Identify which products you will include in your subscription offering. Consider partnerships with brands or suppliers to keep costs manageable.

3. Price your subscriptions.
Determine the price for your subscription service. Consider offering different pricing tiers or subscription lengths to appeal to a wide range of customers.

4. Create your online store.
Build a section of your website dedicated to your subscription service. Ensure it is easy for customers to sign up and manage their subscriptions.

5. Market your subscription business.
Once your store is set up, focus on marketing to build awareness and drive sign-ups. Use social media, influencer partnerships, email marketing, and advertising to spread the word.

By implementing a subscription model, you can create a more predictable revenue stream, build deeper customer relationships, and ensure your business thrives in the long term.

Boost Your Revenue with Shopify Subscriptions
With Shopify, you can easily set up a subscription service for your store. Enhance customer loyalty and increase your revenue by offering subscription options directly through your store’s checkout.