Subscription Business Models In Digital Products

Starting with the basics

The subscription business model has become very popular in various different areas, from gym memberships to streaming services. Other examples of subscription products include clothing, toys, food, hygiene products, home furniture, and decorations - nowadays businesses and startups are noticing the potential of the subscription model and are trying to compete in this growing field.

What actually is a subscription?

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A subscription service is a business idea in which customers pay the subscription fee on a recurring basis and in return receive access to a product or service they're paying for or exclusive access to a premium version of the product or service.

The most popular model of recurring payments is a monthly subscription fee, but there can also be weekly, bi-monthly, half-yearly or yearly subscription pricing. This is useful because customers can set up a recurring transfer and stop thinking about the need to buy the product - it will pay for itself conveniently.

Subscription-based models require a specific business and financial strategy since you have to take into consideration the subscription pricing strategy, ways to obtain new customers, as well as benefits for existing customers.

How does the subscription business model work differently?

The subscription business model significantly differs from other business models. A traditional business model requires companies to constantly find new customers, as the existing ones are paying once for a product or service and they are not obliged in any way to return to the provider. In this model, customer acquisition is unpredictable, which is why a standard business model's finances and marketing are focused on finding clients in general - they very often don’t mind whether the customer is a new one or a returning one. 

This is much different from a subscription business model, which should invest in marketing and acquiring new clients, but also aim to stay attractive to their existing, recurring customers as well as improve and refine their offer for them. A subscription business model is mostly based on customer loyalty to the brand and product. In return it allows businesses to build stable, recurring and predictable revenue streams. 

A history lesson in subscription models

It's hard to say exactly when the subscription model was invented, but the roots of a subscription model are indeed very old.

The first written trace of a subscription business model was in 1638 when King Charles I of England authorised a fire insurance scheme. Under this scheme, people could pay for the service and in return receive compensation if their property got damaged in a fire outbreak - something quite common in that era. However, the scheme failed to gain popularity due to a lack of understanding.

In the 18th century, several insurance companies offering fire and life insurance started operating under the subscription model. This was followed by many other businesses, the most popular being milk deliveries and magazine subscriptions.  Interestingly, these companies' functioning bears many similarities to how subscription businesses operate today.

How did the subscription-based business model go digital?

Subscription models are very useful in a digital world, especially with the technological progress that is neglecting any kind of physical storage media. The Internet has become a place where you can sell your products and services as a subscription in various ways, allowing your clients to manage and customise the product that they receive, and how they receive it. As more and more products and services become fully digital and the development of ideas such as NFT (non-fundable tokens) progress, the subscription-model revolution will only speed up.

Main characteristics of digital subscription-based business models

Recurring revenue

Recurring revenue is one of the main characteristics of the subscription-based business. The customers agree to receive their product or service for a recurring price, which generates a constant profit for your company. This way you can plan your company’s development and improvement in a more stable way since you know your gained profit in advance. 

In the case of a digitally maintained subscription business, it’s also very easy to generate performance reports for your company. You can easily compare your business costs and revenue and adjust subscription prices accordingly. 

Customer feedback

Customer feedback is very important for every trading and service company, but with digitally sold subscriptions it’s easier to gain 5-star reviews. Customers will get used to receiving subscriptions, which  heightens their loyalty towards your brand. 

It’s also not necessary to contact every customer for them to leave a review - you can conveniently set up a marketing campaign and send messages, emails or create an opening window with a hyperlink for leaving a review. 

A valuable, even if a little unreliable source of reviews is also gossip. A content customer is very likely to recommend your subscription to their peers and a digital platform helps them to show off your product, and for their acquaintances to check it out by themselves. 

Freemium

Freemium is a subscription business model noticed only in digital-based subscription businesses. A freemium model means that a part of the product or service is released as a free product, but the customer must pay for additional content, options or customization. 

Let’s use an example of video editing software. In the freemium model, the basic version of the software would be free and it could contain the possibility to cut a video, merge videos and save the project in one or two popular formats. But if a user would like to change filters, or add music or emojis to the video, they would have to purchase a premium version of the software. 

The freemium version of the software is not considered a loss to the company - it doesn’t require development or much maintenance, so it doesn’t have many costs, and in some cases, it works as a demonstration version for new customers to check your product, so they are more willing to subscribe to the full version in the future. 

Memberships

Memberships are a pretty new concept in the digital world. In an era, where everyone can create anything and share it through the Internet, it’s slowly becoming the best way to support a favourite small artist. 

Probably the most popular membership platform nowadays is Patreon. The platform is easy to use - the artist sets up the levels of membership and additional bonuses that come for subscribing to every level - the higher the cost of the subscription, the better the rewards. 

Let’s take a musician for example: for the lowest level of subscription, the fans can get insight into an artist’s work in progress, for a higher one - they might get this insight, plus the ability to propose lyrics to the artist. For the highest subscription they can get everything from the levels before and additionally they get to hear ideas for new songs earlier than other fans. With this model artists can be much closer to their most loyal fans and the fans can support their favourite artists directly.

Examples of subscription business models in the digital world 

As we were researching various subscription business models and examples for this article, we looked for a good way of categorizing them. What we discovered is that you can divide subscription businesses into four main categories, considering the type of purchased goods and the way of receiving them:

Let's get a closer look at those subscription business models and their specifics one by one.

Physical product subscription

Physical product was one of the first subscription models created. For a yearly, bi-monthly or monthly fee, you receive a physical product. Starting in the 1980s with magazines and food like milk or egg subscriptions, this marketplace has no boundaries in case of what you want to sell.

Advantages of the physical product subscription

A successful subscription business can predict its monthly recurring revenue, which helps to plan the costs of product production, storage and transportation. This way you can plan the product's improvement and use it for your marketing advantage by announcing it earlier and therefore building tension and excitement in the customers. 

What is also a great advantage of physical product subscriptions is their market. It’s still very small and its popularity is rising constantly, so it should be relatively easy to find a niche for your product and spread your company’s wings. 

Challenges of the physical product subscription

The physical product market is one of the most competitive markets since the beginning of trade, so the main objective of a subscription business is not only customer acquisition but also customer retention. It's not a secret that customer acquisition costs are much higher than customer retention costs.

Building a subscription-based product is also more difficult than building a subscription-based service because not every product is suitable for the subscription business model.

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The best subscription products are the ones that are those which are constantly needed, wear out or are of collectible value. 

You also should take into account the services connected to the subscription products' production and storage and fit them dynamically to the number of subscriptions purchased. The subscription-based models demand forecasting on a much greater scale than regular ones.

Notable examples of physical product subscriptions

A popular physical product subscription business model is subscription boxes, also called mystery boxes or blind boxes. The customer receives a package without knowing what's inside - they only choose a "theme" of the subscription boxes. No person hasn't heard of LootCrate, the subscription boxes for geeks and popular culture fans, but you can also find subscription boxes as unique as Hunt the Killer, which provides a box full of clues and witness statements for the customer to unravel the mystery of the crime.

If you would like to get to know more about physical product subscriptions and good examples we wrote a dedicated article about that. 

Subscription Model For Selling Physical Products

Physical service subscription

Physical service is an umbrella term for every service that requires physical work done for the customer. This type of service can also be subscribed to and is lately gaining more customers, mostly because of its convenience - the customer can book a service in any place they want and for the price of the subscription.

Advantages of the physical service subscription

Since you're not selling anything tangible, you can save the costs of the product's production, storage and transportation. It generates more profit for your subscription business to upgrade and flourish. 

One of the most popular models of offering physical services subscriptions are platforms connecting customers with servicers. In this case you also don't need to hire so many employees, since issues like Human Resources are operated by your partners internally, not by you specifically.

The clients are also already used to physical services subscriptions, so transferring the whole subscription purchase process to the Internet is a natural cause of technological progress. Even “offline” businesses can take over their subscription business model and transform into a digital platform that helps them and their customers to maintain their subscriptions. 

Challenges of the physical service subscription

If you’re running a physical service platform, on which you connect contractors with clients, it’s natural that not every contractor will be hired by you internally.  You require a lot of partners, which have to be chosen carefully since they will be the ones your customer would meet with.

This also requires paying them a fee from your services, most possibly a percentage of the service booked, so you have to set up the right pricing strategy - the subscription pricing must be low enough to be appealing to the customers, but high enough to provide recurring revenue for you and your partners.

For example, HomeAlert is a startup which we worked with and provided an UX/UI consultation for their physical service subscription platform. For a monthly fee HomeAlert checks technical reviews of everything that needs it in a house - gas installation, electrical installation, heating devices, as well as provides a possibility to hire an expert for the technical review renewal. The experts are HomeAlert’s partners - they’re not internally hired by the startup, but they’re cooperating with each other for the profit of both sides. 

Another thing you should take into consideration is the need of building a dedicated platform for your physical service subscription business. Every service is different and has different needs in terms of the number of potential partners, customization potential or the contents of the application. An electric scooter renting business would require a GPS-based map for both the customer and the service provider, but an unattended laundry doesn’t need a map - it could use more of a timer, so the customer knows, how much time the laundry would take and when to pick up the clothing after the wash. If you’re considering a physical service subscription platform, using a pre-made solution would lower the attractiveness of your subscription, since it would lack service-dedicated app options. 

Notable examples of physical service subscriptions

Probably the most commonly used physical service subscriptions are gym and swimming pool passes, but also insurance services, medical services subscriptions like Bupa or Aetna or, popular now in Europe, bike or electric scooters rental services.

Digital product subscription

A digital product is a product that you receive through the Internet. After paying a recurring fee, the customer will receive a regularly available product.

Advantages of the digital product subscription model

With a digital subscription, the provider doesn’t have to bear the costs of the product's monthly production, storage or logistics. Because of that, most of the recurring revenue stays in your company. 

What's even more convenient is that the whole process of selling the product has the potential to be fully automated, and a customer receives the product immediately, so they don't have to wait until the product is shipped.

Challenges of the digital product subscription model

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It's important to protect your products from piracy and theft by using the right tools to reduce the risks of stealing and unauthorised downloads of your product.

The availability of free digital content can pose a challenge for you. You need to consider various factors such as your target audience, the nature of your products, and the way you present them. To remain competitive, it's important to offer superior quality products, establish a strong brand, and craft compelling product descriptions.

Another challenge you need to overcome is the issue of attractiveness. A subscription has to offer a new, alluring product for the customers. This can create pressure on your business’ creativity since you have to develop and produce new products with every cycle. Sometimes digital product subscription companies will work together with an external partner to create or offer a new product, for example, ebooks or games, and the subscription business becomes dependent on their partner. 

Notable examples of digital product subscriptions

One example is Sony's PlayStation Plus, where you receive a new game in return for a monthly fee. Other examples are services such as Shutterstock or Envato Elements, where for a recurring fee you can download photos and videos in high quality.

Digital service subscription

This is the most popular digital subscription model. A digital service is a cloud-based computer program that can offer the service over and over again to many customers at once, while a digital product is an intangible good. Every streaming content service like Netflix or Spotify is a digital service based on subscription but there are also many software in various industries that take advantage of delivering digital services through the subscription model. This is called SaaS (Software as a service). 

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Saas allows customers access to software from their Internet browser, without the need to download and install it on their device.

SaaS is cloud-based, which also means that every user of SaaS has exactly the same version of the application - this helps with maintenance because the company has only one version to maintain, develop and support.  

SaaS is one of the best examples of a digital service subscription - the company is selling software access for a recurring fee. At the same time this company is responsible for the software's stability and improvements. The characteristics of SaaS includes also the possibility of high customization of the application and integration with external partners' solutions. 

Advantages of the digital service subscription model

Every customer receives the same version of the software, so its maintenance or improvements will be implemented equally for every user. It's also very helpful for customer support - if every user has the same version, it's easier to provide the necessary help than in the case of multiple versions.

Digital services can also be constantly improved, especially in the light of technical transformations of the last few years such as automation and AI.

Also, many digital service subscriptions have a yearly payment model, which makes it even easier to predict your annual recurring revenue than monthly models.

Challenges of the digital service subscription model

As with digital products, a significant issue is protection from people copying your program, hacking it and theft. Every potential hacking attack can cause your customers' data leakage.

You should also watch out for plagiarism. Creating the whole service from scratch is difficult, but code copyright is an especially delicate issue in the digital world.

Another issue is technological progress itself. As a company, you have to be quick to adapt to the changing technological landscape. If your service is outdated, you're out of the game. You should have a good programming team that will respond immediately to any new features that become available.

Notable examples of digital service subscriptions

One of the most popular digital services is Microsoft’s Office 365, in which for an annual fee, the customer gains access to every Office application they need. 

An interesting business model in the case of digital services is the subscription to e-learning apps such as Drops or Duolingo. Paying subscribers, as opposed to freemium users, are offered more time to learn daily and the possibility to polish more than one language at the same time.

Another example of the digital service subscription business model can be found in leading AI applications. 

Digital services are also present in the gaming world - for example, the Nintendo Family subscription is required to play online games or cooperate with friends through the Internet. Some games such as Final Fantasy XIV require a subscription to play. 

Developing custom subscription software

Every subscription business is different, that's why it requires an individual approach while constructing a website or mobile app for subscription products.

Product/Service development

Firstly, a good product or service development stage is absolutely necessary, since you need to carefully transition your business to a subscription model in a creative way that will be attractive to the customers. Customer acquisition is crucial for the new subscription business, so you should start forming customer relationships pretty quickly.

If you're interested in what the product discovery stage looks like, you can check our article on that matter.

Product Discovery - Where The New Product Development Process Starts

Subscription-based revenue model

Subscription economy experts are also underlining the need to make profound research on competing subscription services - you should set up the subscription pricing low enough to attract paying customers, but high enough to make your subscription business profitable.

Setting up a billing process should also take into account the revenue model issue. In subscription-based businesses, customers can pay on a recurring basis, and they can often choose the interval of payments.

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Being aware of this is important for foreseeing the predictable recurring revenue, which helps to determine your subscription business' future growth.

Product strategy and marketing

When you have your product or service chosen and the revenue model set up, it's time to work on product strategy and marketing issues.

This is the moment where you define your subscription's receivers' profiles - not every subscription offering is suitable for every group of people, so you should decide which type of customers you want to sell your subscriptions to. For example, Dollar Shave Club was so successful because, from the beginning, they targeted a group of grown men, who are not searching for luxury products, but for cheaper alternatives that could be delivered under their threshold. 

You should also consider how you want to announce your product to the public. 

When you have the financial plan developed and know how much revenue you can make in every interval, you can plan your marketing with a bigger chance of success. The market shows that you don't have to offer exclusive cost savings to be attractive in the eyes of customers - what sometimes tips the scales is strong customer relationships with your company, an easy checkout and subscription handling process, or shipping convenience.

Product design

There are some solutions on the market which allow one to manage new subscription businesses digitally, but every subscription business owner should remember that it's not his business that has to match up to the market's solutions to make it successful. As long as the features of the subscription management platform suit your idea, it should work smoothly. Most of the time subscription businesses require custom solutions of web or mobile applications to sell and manage products or services.

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In such a case you should look for a software house that is able to create a solution made for your specific subscription business model.

MVP and your application's future

MVP, short for Minimum Viable Product, is the most basic version of the application that can be released to the audience while working properly. Wise business owners take this opportunity as a big marketing event - and you should utilise this with your subscription model product app. A subscription-based business can take advantage of having dedicated software for their clients and use this in the customer acquisition process.

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But MVP should not be the end of your app. Your subscription business and app development, including adding additional benefits, present a higher customer lifetime value and invite more customers.

You should also take care of the app's maintenance since every bug or failure of the software increases customers' dissatisfaction. Only a happy customer is willing to pay a monthly price and generate your predictable revenue.

How to successfully start an online subscription?

If you've already decided to change your business model to a subscription business model, the best choice to make next is to find a reliable technology partner. A software house with experience in subscription models will help you to stabilize and start your subscription business, as well as take care of it during its existence. We at Memory Squared will be happy to talk about your idea and help you find the best approach to launch your subscription business through a dedicated app or web platform.