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 market for subscriptions has been growing for years, and is predicted to continue. By 2028, it’s estimated that online subscriptions will be worth $2.3 trillion.

A significant part of that revenue comes from streaming and ecommerce giants, who have revolutionized the model and made subscriptions a regular expense for many households.

But small businesses are also using subscriptions to offer customers convenience and generate stable, recurring revenue. Ecommerce companies are selling subscriptions for everything from premium online content to monthly meat deliveries.

Ahead, learn how to use a subscription business model to sell your products online. Understand the pros and cons of starting a business by selling subscriptions, and explore the most popular subscription apps for Shopify stores.

Ready to start your business? Create your website today or learn more about Shopify’s tools for selling online and in person.

What is a subscription business model?

A subscription business model is when customers pay a recurring fee to receive products or services over time. Subscriptions are a traditional revenue model in industries like print media, cable TV, software, landscaping, and grocery services. Recently, subscriptions have also become a popular ecommerce payment method.

For example, many software companies license their products through subscriptions, while streaming services and content libraries allow subscribers to enjoy unlimited access to content. Some independent designers and creators use subscriptions to sell their digital products.

Subscription boxes, containing curated items, are used by online sellers to create a steady stream of revenue, as well as offer added value and convenience to customers. Businesses selling products that need to be replenished can offer subscriptions to make it easy for customers to reorder.

Overall, many businesses prefer subscription models as a way to strengthen customer relationships and reliably forecast revenue.

Benefits of subscription business models

There are a few reasons why many businesses prefer subscribers to one-time customer interactions.

Predictable revenue

A subscriber base provides recurring revenue, allowing you to predict how much money a business will generate each period with greater accuracy.

Revenue predictability facilitates easier sales forecasting, inventory planning, and investment in growth.

More cash on hand

Many subscription businesses ask for payment for the full term of the subscription. This provides businesses with upfront cash, aiding cash flow and providing startups with a way to start a business with minimal upfront investment.

It’s common practice to offer long-term subscriptions at a discounted price to incentivize hesitant customers.

Efficient customer acquisition

Pay-per-product pricing models require continual investment in marketing to attract new customers, increasing overall customer acquisition costs. It’s estimated that acquiring a new customer costs five times more than retaining an existing customer.

With a subscription-based model, each customer has a higher lifetime value, so you don’t always have to invest in new customers to keep your business going.

Customer loyalty

Many businesses believe that subscriptions create a virtuous cycle, where regular purchases offer insights into customer behavior. This allows them to create personalized communications and experiences that keep customers satisfied.

Estimates suggest repeat customers spend up to 67% more than new customers, underlining the value of customer loyalty.

Easier sales and cross-sells

Subscriptions are a way to break down larger costs into smaller, more manageable monthly payments, which can make it easier for customers to say yes to your offer.

Staying in touch with subscribers also allows you to market additional products or services to them, a practice known as cross-selling.

Types of subscription business models

The first step in selling subscriptions is choosing a model that suits your business best. There are three main types of subscriptions: curation, replenishment, and access.

Here’s a closer look at each type, with their pros and cons.

Curation

Curation subscriptions are best exemplified by the subscription box format. Companies like Birchbox, ButcherBox, and Stitch Fix have popularized the concept by providing customers with a carefully selected range of products or experiences, for an ongoing fee.

The curation model works particularly well for industries such as apparel, beauty, and food, where customers are regularly encouraged to try new items, and continues to expand into new areas each year. 

Subscription boxes typically range in price from $15 to $100 per month. Over time, this profit model can scale quickly as more subscribers join.

Here are some pros and cons of the curation model:

Pros

• High profit potential due to recurring revenue.
• Flexibility to change curated products to align with trends and customer demand.
• Provides opportunities for customer engagement and loyalty through tailored experiences.

Cons

• The novelty of subscription boxes can drive initial excitement but may also cause a high customer churn rate.
• Subscription boxes can be seen as luxury items, making them susceptible to changes in consumer spending habits.
• It can be complex to source products from multiple suppliers and manage subscription box fulfillment.

Replenishment

Replenishment subscriptions let consumers automate the purchase of essential items, often at a discounted rate. This model focuses on providing convenience and cost savings for customers.

Commodity and convenience items like razors, diapers, vitamins, and pet food are excellent fits for the replenishment model.

A replenishment model also works for wholesale sellers in a business-to-business context. For example, you might promote subscription candles or bath products to hotels looking to stock local goods, or market your food subscription service to independent stores and cafes.

Here are some pros and cons of the replenishment model:

Pros

• Studies suggest that replenishment businesses have higher conversion rates than other subscription models.
• Replenishment subscriptions also tend to have strong long-term subscription rates.

Cons

• Not all products need to be replenished regularly, restricting the types of products you can offer.
• Competing against single-purchase options may require discounts, reducing profit margins.

Access

Access subscriptions typically involve a monthly fee that grants customers lower prices, exclusive perks, or access to a library of items. JustFab, NatureBox, Amazon Prime, and Thrive Market are all examples of access subscription businesses, where the primary value lies in offering customers a sense of value or exclusivity.

Here are some pros and cons of the access model:

Pros

• Opportunities to strengthen customer relationships through personalized perks and offers.
• Opportunities to create member communities with forums or social media groups.
• Market upsells and cross-sells to subscribers who have indicated an interest in premium services.

Cons

• Customers may expect a continuous stream of exclusive offers and perks.
• The cost of providing services and products may rise over time in order to meet increasing expectations.

Hybrid subscription model 

A hybrid subscription model allows you to integrate subscription services into your existing business. This approach is becoming increasingly popular among companies, as it offers a flexible way to explore the subscription ecosystem without fully committing to a single revenue model.

Here are some pros and cons of the hybrid model:

Pros

• Experiment with subscription services alongside traditional sales.
• Create an additional revenue channel to stabilize income.
• Understand customer preferences and their willingness to spend more on your products or services.

Cons

• Managing subscriptions alongside traditional sales can complicate inventory management, fulfillment, and customer support.
• Introducing subscription services may confuse customers about your brand’s core value proposition.
• Additional marketing investment may be needed to promote and maintain a subscription service.

If you’re considering using a subscription model, first explore other ecommerce revenue models to determine the best fit for your business.

How to decide if a subscription model is the right fit

Subscriptions can work well for many products and services, but they’re not a one-size-fits-all solution. Before jumping into a subscription model, it’s important to think about whether it actually fits your business and your customers.

1. Does your product fit?

Evaluate whether your product or service is a good candidate for a subscription model. Consider the benefits it offers and how it meets ongoing customer needs. A strong value proposition is essential—articulate what problems your subscription solves and how it differs from competitors.

For instance, services that provide continuous value, such as software updates, website maintenance, or curated experiences, are often well-suited for subscriptions. If your product can keep customers engaged over time, it may be a good fit.

2. Is there market demand?

In the subscription space, some product categories are saturated, making it more challenging to enter the market. For example, the meal-kit category is flooded with subscription options and has reportedly high cancellation rates among subscribers.

The more competitive your niche, the more you may need to consider competitive pricing strategies and other expenses that can reduce profit margins. Before committing to a subscription model, conduct thorough market research to assess demand.

Consider testing your chosen market with a minimum viable product version of your subscription product.

3. Can you personalize your product?

Many subscribers, especially those who receive subscription boxes, appreciate having options to personalize their experience according to their needs and preferences.

Personalization can include offering customized pricing or allowing customers to choose specific products. As you consider whether a subscription model is right for your business, think about whether you have the data and resources to implement personalization effectively. If you don’t currently have these capabilities, consider if personalization could realistically be developed in the future.

4. Do you have a retention strategy?

When starting a subscription business, your initial focus will likely be on acquiring customers to drive sales. However, once you’ve gained some traction, it’s essential to shift your focus toward customer retention strategies.

Churn, or the rate at which customers leave, poses a significant risk for subscription businesses. The good news is that subscribers tend to be very loyal once they find a service they enjoy.

Retaining a customer is generally less expensive than acquiring a new one, and a loyal customer base can yield greater value over time. Ideally, your customer lifetime value (CLV) to customer acquisition cost (CAC) ratio should be 3:1. This means that for every dollar spent on acquiring a customer, you should aim to earn $3 in return.

5. Can you stay in touch?

As a subscription provider, you are committing to a long-term relationship with your customers. Subscribers expect regular communication and support from you.

Since subscription businesses thrive on frequent and meaningful customer engagement, email will likely be a key tool. In addition, each subscription model has its own effective marketing strategies. For example, in the curation model, affiliate marketing is often a major channel for acquiring new customers.

Building a strong relationship with your customers can help you reduce involuntary churn.

How to start a subscription business

Subscription business models can be added to an existing business or used as the basis for a new business. If you’re interested in starting your own subscription business, follow these five steps.

1. Choose your subscription idea

The first step is deciding what type of subscription model your business will use and what product you’ll offer. 

These decisions are often dictated by your current situation. For example, if you run a successful clothing brand, adopting a curation subscription model can be a great way to increase the lifetime value of loyal customers, by sharing new products they might like.

On the other hand, you may simply have a great idea for a new subscription box business that you want to start from scratch. Take inspiration from popular subscription businesses like FabFitFun, which sends seasonal boxes with six to eight products, such as beach-going goodies for summer and dry skin products for winter.

Regardless, your first step needs to revolve around coming up with your subscription idea and outlining what this might look like in action.

2. Select your subscription products

Pick the types of products you want your subscription business to offer each month. This is also the point where you may want to start reaching out to brands to create partnerships so that you can offer their products in your monthly subscription at a lower cost to your business. 

This is also the time to build a prototype subscription to test your offering. This doesn’t have to be final; just make sure the product can be used for marketing content, so that you can begin building its product page on your website.

Depending on the type of products you choose to sell, you may need to apply for a business license.

3. Price your subscription options

Once you know what types of products you’ll be offering and how much your new subscription service will be able to purchase them for, you can start pricing out your subscription. Depending on your offerings, there may even be different subscription levels. 

For example, the Variety Fun snack subscription box has two different options: a “Regular Snacks” option that’s cheaper and has more classic snacks, and a “Healthy Snacks” option.

You might also offer different prices for subscription commitments. A one-year subscription could have a lower monthly cost than a month-to-month subscription.

You’ll need to price your subscription plan at a point that is appealing to your target customer but also ensures your business makes a profit.

4. Start your online store

Once you know what type of subscription you’ll be offering and how you’ll price it, it’s time to build your online store, or the section of your site that will promote your subscription service. Here, you’ll share photos of sample products, allow customers to sign up for the service, and share information about pricing and features.

One tip for building an online store is to use an ecommerce platform with features designed for subscription-based selling. For instance, you can easily create a subscription website with Shopify.

On Shopify, you can add an option for recurring orders to your existing business, offer an access subscription, or create subscription boxes from scratch.

Add a subscription app to your online store

Create a subscription offering by installing a subscription management app in your online store platform: 

• Shopify Subscriptions
• Utterbond
• Subify
• Recurring Go!
• Propel
• PayWhirl
• Awtomatic
• Bold
• Recharge
• Seal
• Appstle

Find out more details about these subscription apps. Or, visit the Shopify App Store to browse all subscription apps.

5. Market your subscription business

With your subscription products sourced, your store built, and your business registered (if necessary), it’s time to let customers know about your brand and offerings.

Marketing is key to the success of any business. Here are a few key tips:

• Create and brand all of your social media platforms.
• Take tons of product photos so you have creative assets to promote.
• Start building an email list and send regular newsletters.
• Set aside a small ad budget that you can use to start building awareness.
• Reach out to micro-influencers who you may be able to partner with for a smaller fee.
• Write and publish press releases about your new product.
• Network in online communities to further increase awareness.
• Run contests and giveaways to get more people interested in your product.

Build customers and revenue with subscriptions

With Shopify, it’s simple to sell subscriptions directly from your store’s checkout. Give your customers a friction-free checkout experience, regardless of whether they’re making a single purchase or committing to a long-term relationship with your brand.

Subscription business model FAQ

What is an example of a subscription model?

An example of a subscription model is a streaming service, like Netflix or Hulu, in which customers pay a monthly fee to access content. Customers can choose from different subscription plans based on the features they need. Other examples of subscription models include magazine and newspaper subscriptions, software-as-a-service (SaaS) services, and subscription boxes.

Is a subscription business profitable?

Yes, a subscription business can be profitable. A successful subscription business requires a well-defined business model, a strong customer base, and the right pricing strategy. Subscription businesses are often able to generate recurring revenue, which can lead to greater profitability over time. Additionally, subscription businesses often benefit from economies of scale, allowing them to reduce costs and increase profits.

How does a subscription business make money?

Subscription businesses make money by charging customers a recurring fee for access to their services or products. This fee is usually charged monthly or annually. The subscription fee is typically based on the value that the customer receives from the service or product. Subscription businesses may also make money through advertising and upsells.