Lots of creators have started shifting from a one-time payment pricing structure to a subscription-based pricing structure. And the reason is simple: the recurring payment allows them to generate recurring revenue.
Just look at successful creator of Sew it! Academy: Mimi Goodwin as an example.
She charges about $12.00/month for access to her constantly updated sewing courses. With this membership/subscription pricing model, Mimi has become one of Thinkific’s top creators. You can read her story here if you want more info on how she did it.
The average one-time selling conversion rate across industries stands between 2.35% and 5.31%. This means that if you launch an online course with an upfront pricing structure, less than 5% of your audience will buy it. The initial revenue may seem like a lot at first, but there’s no way to know how much money you’ll make the following month — especially if the traffic to your sales page is sporadic.
If you use a subscription business model instead, the initial payout may be lower, but you’ll be able to predict how much money you’ll make in the following months. So instead of trying to acquire new customers, you can focus on improving your online course for existing students.
This improves your learners’ experience, makes them loyal, and encourages them to advocate for your course — which, in turn, leads to more subscribers.
Read on to find out:
- What is a subscription business model
- How a subscription business model works
- Benefits of using a subscription business model
- How to incorporate a subscription business model in your business
- Examples of products that use a subscription business model
What is a subscription business model?
A subscription business model is one where customers have to pay a weekly, monthly, or annual fee to get access to your product or service. Depending on the length of time they choose, customers can periodically renew their subscription for as long as they’re using your product.
So instead of an online course where students pay $299 upfront for lifetime access, you can ask them to pay $22 per month. If they fail to renew their payment, they lose access to the course. But as mentioned earlier, a subscription business model isn’t limited to monthly payments. You can ask students to pay quarterly or annually, too.
Subscription-based business models benefit both the course creator and the customer. As a course creator (and business owner), you can leverage your existing customer relationships to get predictable recurring revenue. This allows you to keep investing in your business and prevents you from bombarding your audience with your course too frequently. As a student, you’ll have the choice to cancel your subscription anytime you like, without spending as much money as you would’ve if you’d paid upfront.
If you offer the right product/service in the right industry, a subscription business model can be a very lucrative way to generate revenue.
How does a subscription business model work?
The mechanics of a subscription business model is simple.
You charge your customers on a recurring basis for your product/service and provide an option for them to renew or cancel at any time. Your customers choose how long and how often they want to pay for your offer. As long as a customer keeps renewing their payments (usually with a credit/debit card), the offer is open to them. But once they fail to renew, they lose access immediately.
The subscription business model was introduced in the early 17th century by publishers of newspapers and periodicals. With the advancement of technology, many websites, businesses, and software-as-a-service (SaaS) platforms use this business model.
Popular examples of companies that charge their customers on a subscription basis are Netflix, Microsoft, and Spotify, and they have been reaping the benefits of it for years. The good news is, this business model isn’t limited to large companies. You can use it for your own product, too.
Benefits of a subscription business model
A subscription business model has tons of benefits. Here are five of them:
Predictable revenue stream
One of the most appealing aspects of a subscription business model is that it makes it easier to forecast how much revenue your business will get each month (or year). Since your customers pay repeatedly, you’ll know how much they’ll pay and the exact time they’re due to renew their payment.
When you factor in your churn rate, you’ll be able to predict your monthly recurring revenue (MRR) near accurately.
For example: Say you have a 7% churn rate and 2,500 students enrolled in your course at $20/month. Even if you get no new students the following month, you’ll still make at least $40,000.
The longer your course is up, the better you’ll be able to predict how many customers you gain and lose in a given period of time. This makes it easier to predict your MRR and annual recurring revenue (ARR).
Better customer acquisition
Say, you earn $2,000 per month from your part-time job as a barista and you’re looking to upskill by taking a project management course. The best one you find has two pricing structures: $1,000/one-time payment and $70/month. Which pricing structure seems more feasible for you at the moment?
My money’s on the monthly subscription payment.
Sometimes, the price tag of a product can be too expensive for a prospect. Breaking down the price into weekly, monthly or annual payments make the product more affordable, and lets prospects include it in their budget. This way, more people who can afford to pay monthly will convert and enroll in your course.
Lower customer retention spends
Since your students repeatedly pay for your course, you don’t have to set aside as much money to target them as you would have if your course operated on a one-time pricing structure. And because they renew their payments, it is safe to say that they’re committed to a long-term association with you. This makes it less likely for them to churn, so you don’t have to spend a lot of money to retain them.
Stronger customer relationships
With a one-time payment structure, customers pay once for your course and that’s it. Apart from the select few who might reach out to tell you of their progress, most of them likely won’t interact with your business much.
A subscription business model, on the other hand, allows customers to have access to you (and vice versa) for as long as possible. When your customer service team is always there answering your students’ questions and solving their problems, the students will grow to trust your brand. This contributes greatly to their decision to renew or not renew their subscription.
Opportunities for upselling and cross-selling
In 1968, social psychologist Robert Zajonc devised the mere exposure theory, which states that when an individual is repeatedly exposed to a stimulus, they develop a stronger attitude toward that stimulus.
In business, this means that the longer your customers have access to your product, the more familiar you’ll feel to them. When this happens, your customers will be more likely to buy other products/services that you offer.
That’s where upselling and cross-selling come in.
With cross-selling, you’re adding complementary offers to an existing offer for a higher price. For example, if you only offered your online course at $25/month, you could add your exclusive membership program to it and offer both for $35/month.
With upselling, you’re convincing existing customers to buy a higher-priced product. So if you’re offering a course at $25/month, you could market your related, but higher-priced course to your students at $30/month.
A new prospect may not want to take the more expensive option right away, but a customer who’s been subscribed to your course for 6 months will likely upgrade their plan (or buy the higher-priced course) because they know the value your course offers.
Pro tip: Adding a community membership to one of your pricing tiers can reduce churn. An online community allows students to meet like-minded people and forge relationships they’ll be reluctant to leave behind.
How to move to a subscription business model
If you’re considering using a subscription business model for your product, here are 6 steps you should take:
Figure out if your business is a good fit for this pricing structure
Before setting up a subscription-based pricing structure for your business, figure out if it’s the right pricing model for your business. For example, if your product is one that customers need to access continuously — such as a fitness program or an online boot camp — then a subscription business model will work great for you. But if it’s a one-off course, then it likely won’t be a great fit.
Once you’re sure a subscription business model will be a great fit for your product, take the next step.
Set realistic goals for your subscription-based business
The goals you intend to achieve through your business will determine the price points and tiers you set. So before you pick prices, ask yourself: What do I hope to achieve with a subscription business model?
Is it faster growth or more revenue? Or is it better customer acquisition and retention?
For example, if you’re trying to get your first set of customers or increase sales for a particular product, you may want to make your pricing tiers affordable for your target audience (without sacrificing profitability). But if you’re trying to attract high-ticket clients, such as enterprise businesses, you may include an expensive pricing tier.
Not only will your goals help you set prices that’ll help you attract your ideal clients, but they’ll also influence the messaging of your website/sales page copy.
Choose a subscription pricing strategy
Now, it’s time for the fun part: creating your subscription packages.
If you’re just trying out a subscription-based pricing structure for the first time, you can keep things simple by creating one or two packages. As you measure your conversions and gather feedback from your customers, you can create more pricing tiers that cater to their needs.
With a subscription business model, you want to set prices that lower sales objections. You want your customers to feel like they’re getting your product at a steal compared to your competitors.
To do that, pay attention to these factors:
- The way you communicate the value of your product to your subscribers
- The industry standards
- The pricing incentives on your packages
To know where to start, look at the packages your competitors are offering. The goal is to make your packages more appealing to your target audience.
For example, if you’re teaching Pilates to new parents, you could check the pricing packages of other Pilates programs on the internet. If you find that the pricing tiers range from $20/month to $60/month, you can use this as your baseline.
Making your packages attractive doesn’t necessarily mean pricing your product lower than your competitors. You could still charge in that same price range but offer slightly more incentives or perks. You could even charge a bit higher than your competitors if you’re offering perks that they’re not.
The bottom line is that your customers should look at your pricing tiers and feel like if they do business with you, they’d get a bang for their buck.
Make it easy for prospects to sign up
If you’ve used subscription-based products before, you’ve probably come across a product that is a nightmare to sign up for. Not only does this make for a terrible customer experience, but it also robs the business of revenue.
Signing up for a subscription package should be easy and straightforward. You don’t want your prospect to be at a loss as to how to sign up once they get to your website. You also don’t want them to spend an exasperating 30 – 60 mins navigating your sign-up form.
Once prospects get to your website, they should find the link to sign up immediately. Most businesses put the signup call-to-action (CTA) button in the top-right corner of their homepage (above the fold).
Also, include a link to your pricing page in your website’s navigation menu so prospects can find it easily. On your pricing page, your subscription packages and their prices should be clearly listed in a language your audience will understand.
Finally, include ways for subscribers to update their billing information, and upgrade or cancel their subscription plans.
Scale your business with the right technology
Since the plan is to receive recurring payments from customers, you want to make sure that your subscription billing system is supported with the right tools to accept and process those payments.
Make sure your website integrates seamlessly with your payment gateway, logistics companies, and, if need be, fulfillment companies. If you’re keeping inventory on physical products, you may consider using a warehouse management tool that works well with your eCommerce website.
If you often ship a lot of products to customers at once, a bulk shipping service can help streamline the shipping process and reduce costs.
Provide exceptional customer service
No matter how great your product or pricing tiers are, some customers will have questions about them. Prepare for this by assembling a stellar customer service team that will answer questions and solve problems for prospects and customers alike.
On your website, include several ways for prospects and customers to reach your customer service team when they have questions or run into problems. Some contact options include chatbot, live chat, email, and phone calls.
The ease at which people can reach your support team and the quality of support they receive may very well determine if they’ll renew their subscription or not. So you need to ensure that you’re delivering the best possible support to your client base and forging relationships with them.
Examples of products that use a subscription business model
The subscription business model is used in different ways by businesses across several niches. Below are five businesses that successfully use a subscription-based pricing structure.
Online courses – Copy School
Copy School is a robust online course that teaches individuals how to write all kinds of strategic copy — including copy for websites, social media ads, and emails — for companies. This course is intensive and has produced amazing copywriters who work with billion-dollar companies and earn top dollar.
Because of this, the price for Copy School is expensive — $3,997 one-time payment for lifetime access (or $1,998 one-time payment for the ad-supported course). However, Copy School has two subscription packages that make it easier for their customers to pay for it — $348/month (ad-supported) or $697/month for 6 months.
Streaming platforms – Netflix
When it first launched on the market, Netflix was a DVD rental service. But with the emergence of broadband internet, smartphones, and smart TVs, Netflix rebranded to be a video-on-demand (VOD) platform. Now, it’s a subscription-based streaming platform that allows users to watch movies and TV shows on internet-connected devices.
Netflix’s pricing tiers range from $6.99 to $19.99. The plan you choose depends on video quality and the number of devices the user wants to connect to one account.
Software-as-a-service platforms – Thinkific
Thinkific is a software-as-a-service (SaaS) platform that allows creators to create and sell online courses, build communities, offer memberships, and grow their businesses. Thinkific has subscription packages that range from free to $149/month. The more expensive the package, the more features users get access to.
Memberships – ClassPass
ClassPass is a membership program for beauty and fitness enthusiasts. With a ClassPass membership, customers can book classes and appointments at top-rated gyms, studios, salons, and spas around the world. ClassPass’ subscription packages range from $19/month (for 8 credits) to $159/month (for 80 credits).
Physical products – BirchBox
Birchbox sends its customers boxes that contain two to six beauty products every month. The beauty boxes are personalized based on a quiz that the customer takes at the start. This arrangement allows the customer to try out different beauty products, as the same product is never sent twice.
When a customer finds a product they love, they can buy it directly on BirchBox’s website. The monthly subscription starts at $13/month and there are discounts for 3-month, 6-month, and 12-month subscriptions.
Increase your revenue with a subscription business model
With subscription-based businesses, you can’t just set random prices and wait for customers to sign up. You have to put in the work. Your customers will only renew their plans if they feel like they’re getting enough value for their money.
To offer this value, you’ll need to get close to your target audience, speak with them about their pain points, and give them tried-and-true solutions. Only then can you ascribe prices to your product that your audience will happily subscribe for.
