How to Set Up a Subscription Business: Everything You Need to Know

These days we tend to treat subscriptions like a bowl of M&M’s at a party—we have way more than we actually should.

To be fair, it’s kind of hard to avoid them. From wine to movies, luxury watches to farm-fresh veggies, there are subscriptions for just about everything you can imagine.

So it will surprise absolutely no one to learn that the subscription economy is one of the world's fastest-growing business models. Why? Because it offers customers convenience and value, while giving companies stable, recurring revenue.

Keen to get in on the action? In this guide, we’ll tell you all you need to know about the subscription business model and show how you can get started with one of your own. Let's get started.

What is a subscription business model?

A subscription business model is when a company provides products or services in exchange for a recurring fee. Usually, this is paid weekly, monthly, or annually.

You know what we’re talking about. These days you can barely open a laptop or turn on your television without being greeted by a new subscription service. Researching this post we even found one for skimpy lingerie.

But, while it might have been popularised by companies like Netflix and Spotify, the subscription model isn’t a recent invention. A fun fact: you can trace its origins back to the 17th century when books and periodicals were supported by patrons and then published via subscription.

What makes the subscription model so popular roughly four hundred years after it popped up? Mostly it comes down to the fact it’s beneficial for both customers and businesses.

A subscription strategy:

• Offers convenience, adaptability and value for customers and;
• Gives companies control over their product and a predictable revenue stream.

While we may have moved from the age of Kant to Kanye, one thing remains key to the success of any subscription business: customer satisfaction.

Customer satisfaction: your ticket to success

Unlike standard pricing models, where folks buy a product and go on their merry way, with subscription businesses you have to win customers back every billing cycle.

Take Netflix for example. People flock to their service for the huge library of movies, TV shows and documentaries that are constantly updated. By continuing to do this over time, they lock in customers and keep their churn rate lower than the quality of Nicolas Cage’s last ten movies.

Your top 10% of customers spend 3x more per order than your lower 90% of customers, and your top 1% of customers spend 5x more than the remaining 99%.

But if they don’t continue to enhance their offerings, add services and functionality that match their customer needs and provide them with value, their subscribers will start to look for other solutions.

Basically, as long as people think your product or service is valuable, they’ll keep paying you for it.

That’s why—more than traditional pricing structures—if you’re serious about running a successful subscription business, it’s integral to sustain a healthy relationship with your customers and do what you can to promote brand loyalty.

The benefits of a subscription business model

Now you know how the subscription model works, the next question is why should you choose to adopt one for your business? Let’s look at the benefits a subscription pricing strategy can provide.

1. Predictable revenue

Recurring revenue is the number one benefit of the subscription model. A steady, dependable cash flow that’s easy to forecast, track and scale is the dream of every business. Who wouldn’t want that?

Plus, the additional benefit of subscription revenue is that you don’t start each month from zero. You've got a base to build on at the start of each period, so you can make effective decisions and minimise operational and financial risk.

2. Cut customer acquisition costs

No matter what company you run—whether it’s a yoga studio or your own eCommerce business—acquiring new customers is one of your largest costs. But this isn’t the case with a subscription model.

When you’ve got the same people buying from you again and again, you can cut down on the costs associated with generating leads and shift focus to customer retention.

By focusing on keeping existing customers satisfied you not only save on marketing, you reduce churn and increase profitability along the way.

3. Stronger customer relationships

A subscription model empowers you to better get to know your customers. Because they stick with you month after month (ideally), you get a deeper understanding of the ways they interact with your business.

What do they value about your product? How are they using your service? Is there an opportunity for you to add services or expand your functionality?

By analysing data and monitoring the customer lifecycle, you can support users and evolve your offering as their needs change.

4. Additional sales opportunities

With subscription businesses its a breeze to upsell or cross-sell features, products or services. Your subscribers are locked into your service for a certain period of time, so you're given a chance to show your product’s worth and make customers crave more.

Do you have another product? A premium tier? Extra features? First, prove that your service is worthwhile, then show other solutions you can offer. This can be anything from a paid tier to a completely different product.

The classic example is the ‘freemium’ model used by companies like Spotify. They draw users in with a free option, and then encourage customers to upgrade to a premium tier for advanced functionality. They're then able to get additional revenue from their existing customer base—with no extra acquisition cost required.

The main subscription business models

There are plenty of benefits to a subscription business model. But there’s no one size fits all approach. Your strategy will differ based on which product or service you sell, as well as the industry you're in.

Taking a broad view of things, there are three different types of subscription models.

• The standard subscription model. This is the go-to model, where revenue is fixed. Users pay a flat fee that comes out at a certain time each month. Paperform is a classic example of this type, and it's by far the most popular model.
• The consumption model. In contrast to the above, revenue is variable. Users are charged based on how much/often they use a product or service rather than an overall monthly rate. A lot of cloud computing companies use this strategy, but the most high profile example would be Uber.
• A composite model. This is where companies blend the standard model with the consumption model. In this case, there are variable costs on top of a fixed subscription. A simple example would be a home internet plan, where you might pay extra on top of your customary monthly bill.

But the term "subscription models" also refers to the types of businesses set up to use subscriptions, from media streaming services to online software platforms. Here's a look at the main ones.

1. Software as a Service (SaaS)

Software as a Service (SaaS)—otherwise known as cloud-based software—is a way to provide digital applications over the internet. This is something we know a thing or two about at Paperform because it happens to be the model we use.

The way it works is simple: a company creates a product, looks after the technical stuff like code, servers and databases, and then hosts the software online. Customers then pay a subscription fee for access, which they can do from any device with an internet connection and a web browser.

Take Paperform for example. We provide online software to make it easy for small businesses to create beautiful forms with powerful automations, which lets them ditch all the boring, repetitive tasks that keep them from loving their jobs.

Customers pay a small fee per month or year in exchange for access to our suite of tools—no downloads, IT infrastructure or crazy computing power required.

(Image Source: Paperform)

Simplicity is the name of the game for SaaS businesses. It’s about getting rid of bloated, single-use software and replacing it with constantly evolving services that offer users a more flexible, customizable and affordable experience that scales as their needs grow.

Over the past couple of years, customers and businesses have grown more reliant on SaaS tech, to a point where it’s now become the norm. (99% of the tech world would shut down without Slack, Notion and Figma.)

2. Publications and newsletters

Remember a few years back when Facebook tried to convince us that written media was dead? That the world had lost its taste for thoughtful long-form articles in favour of cat videos?

Well, surprise, Zuckerberg and co. were wrong. Written media isn’t just alive and well, it’s seeing a resurgence. This is mainly thanks to a bunch of software that has democratised the publication process and offered new avenues for creatives to be directly supported by their readers.

The biggest example of this is SubStack, a web platform that helps writers monetise their newsletters and build an online audience. It's free to use, and creators can use the built-in tools to publish content and lock it behind a monthly subscription if they so choose.

(Image Source: Substack)

SubStack is at the forefront of what’s being referred to as the “creator economy”, a shift away from large media companies toward content produced by independent creators.

Earlier this year the company reported an audience of over 500,000 subscribers, with the top ten authors collectively earning a ridiculous $15M per year.

Traditional digital publications and news outlets are flourishing too. You know the type, where you subscribe to get around that annoying paywall.

In September 2020, The New York Times’s digital revenue grew 34% over the previous quarter to $155.3M, with digital revenue beating out print subscriptions for the first time in its long history.

The takeaway? Folks are willing to pay for written content they think is worth paying for, whether it’s an op-ed from The Guardian or an independent online magazine chronicling obscure Sci-Fi flicks of the 70s.

3. Media subscriptions

The chances are that when you think of “subscription” businesses, streaming services like Disney+ and Apple Music spring to mind. For good reason: the subscription model is all but synonymous with how we consume our content these days.

While each service has its differences, the way they work is the same. For a monthly fee, you get access to a huge library of content to keep you glued to your couch or give you something to listen to on your arvo walk.

(Image Source: Disney+)

Why pay $10-$20 bucks for a Blu Ray when you can pay $15 per month for access to thousands of movies and TV series from the comfort of home? It’s hardly Sophie’s choice.

To say the streaming industry is booming would be like saying LeBron James is okay at basketball—a huge understatement. According to Statista, in 2020 alone, Netflix boasted a total income of more than US$2.76 billion from 204 million subscribers. That’s eight times the population of Australia.

This success carries over to audio subscriptions as well. Gone are the days of listening to your beloved Nirvana album on your Walkman, or loading Akon’s latest track onto your iPod Nano. It's all about streaming.

4. Subscription boxes

Subscription boxes are curated packages of products and goods delivered to folks on a recurring basis—they’re also the latest development in our quest to become those lazy human/babies from Wall-E.

There are boxes across just about every industry and product type, from meal kits to jigsaw puzzles. Folks sign up to subscription boxes for a few different reasons:

1. The convenience they bring (e.g. fresh vegetables delivered weekly)
2. The pleasure of having a curated gift (e.g. a jigsaw puzzle delivered monthly)

Most successful subscription boxes come up with solutions that manage to blend these two motivations. Dollar Shave Club and Birchbox are great examples.

(Image Source: Dollar Shave Club)

Through careful curation, attractive packaging and a tailored approach, they manage to make personal grooming more convenient and somehow make things like shaving and putting cream on actually exciting for their customer base.

A lot of the success of subscription boxes comes down to the fact that people love it when new treats show up on their doorstep. Add a sprinkling of convenience, variety and personalisation into the equation, and it’s no surprise they're the latest trend.

5. Loyalty Programs and membership discounts

The buck doesn’t stop with subscription products. Many businesses have found success with subscription-based customer loyalty programs, where customers pay a fee to gain access to members-only deals and discounts.

A good rewards program benefits both customers and businesses. For the business, it’s a way to incentivise repeat purchases and foster brand loyalty, while customers enjoy the exclusive benefits and rewards that come with membership.

Customer rewards programs are about providing maximum value to the customer, while also encouraging certain desirable behaviours, whether that’s interacting on social media or purchasing a product.

Amazon is the ‘Prime’ example of this. They know that shoppers want fast delivery and cheap shipping. So, they offer that to their Prime members, alongside access to media streaming services, discounts and early access deals, all for a single low cost.

Tips for building your own subscription business

Now we know about each subscription model and what differentiates them from each other, let’s finally look at some tips on building one of your own.

1. Evaluate your idea

The first step to starting any new business is coming up with an idea. Maybe you already have a flash new concept for a SaaS startup, or have been waiting for the perfect time to start your groundbreaking dog sock subscription box.

Now is the time to think it through. Write a business plan to formalise the process—this turns your idea into something beyond a vague concept. Then it’s up to you to evaluate it and determine whether it’s really going to be a viable business.

A key part of this step is market research. What else is out there? If you have competitors, do you think you can give a better customer experience? If there’s not any competition, ask yourself whether it’s because you’ve found your niche or because, well, it’s just not that good of an idea after all.

Let’s say you decide that your million-dollar idea is to start a meal delivery service. You’ll create recipes, collect the ingredients and deliver them right to the door of your subscribers. There’s just one problem: Blue Apron already has this covered.

You have two choices—you either go back to the drawing board or calculate the risk and think about how you can differentiate your business from existing subscription companies.

2. Differentiate your business

You have to figure out what we refer to in the biz as your Unique Selling Point (USP). To translate it from business jargon: why the heck should a potential customer pick your business over the thousands of others out there?

Try to get to a point where you can sum up your USP in a sentence. Think it’s too hard? Well, you can do this with just about any notable SaaS company:

• Canva empowers you to design anything
• Slack is a faster, more organised way for your remote team to communicate
• Paperform empowers you to create intelligent forms that look exactly how you want them to.

Think about how you can set yourself out of the pack. It doesn’t need to be a Da Vinci style invention—you could offer better value, faster shipping or a product that blows the competition out of the water.

Paperform wasn't the first form builder, and we sure won’t be the last. But we are able to differentiate our product and find success in a crowded field.

3. Choose a subscription business model

Choose the model that best suits your business. The good news is that the majority of the time, this'll happen naturally based on the products or services you plan to offer.

If you’re thinking about starting an online newsletter then you’re going to go with a tiered monthly subscription as the obvious choice. While if you plan on selling fresh vegetables, you aren’t really going to opt for a SaaS model, are you?

Choosing a specific subscription type is a breeze. The difficult part is committing to one subscription business model in the first place.

4. Nail your pricing model

If Netflix was $40 per month would you pay for it? What about if Spotify was a lump sum of $1,000 per year? Difficult to answer, right? That’s because the price is more than a number—it’s a reflection of what customers expect and how much they’re willing to pay.

Think about the difference between Tidal and Spotify. Both of these are music streaming services, but Tidal costs double Spotify’s standard $9.99 subscription. Why?

Because it offers “high fidelity sound”. This might not mean much to you, but it means a lot to audiophiles that care about sound quality, so they’re more than willing to pay the extra mula.

Spotify, on the other hand, isn’t worried about recreating the exact sound Elton John wanted to express on Goodbye Yellow Brick Road. They concentrate on giving users an affordable service with a massive library. The difference between the two companies is an example of how pricing changes based on what customers value.

There are a few main subscription pricing strategies:

• Value-based pricing. When you come up with a price based on how much value your customers see in it. This strategy gives you room to move based on add-ons and upgrades you may make beyond your base product.
• Cost-plus pricing. This is where you analyse your costs and expenses and sell the product for your chosen profit margin. Easy as pie.
• Competitive pricing. If you were to suss out your competitors and undercut their pricing, that would be competitive pricing. This can draw customers from other products, but might not be sustainable for long. Demand-based pricing. Exactly what it sounds like, this strategy is about finding the demand for your product and pricing in line with it.

In the subscription economy, things change quickly—be prepared to make tweaks and adjustments to your revenue model on a regular basis, as the market evolves and customers' needs change.

5. Set your customer service values

Seeing that you have to win customers back to your service every billing cycle, top-notch customer service isn’t just desirable for your subscription business, it’s essential.

Customer service is the public face of your company and a key ingredient in building a successful subscription business. When done well it helps you to foster meaningful, long-lasting relationships with customers and better understand their pain points.

In Oracle's Customer Experience Impact Report, the company cites research by Harris Interactive that shows 86% of consumers are willing to pay more for a better customer experience.

Plus, these relationships aren’t a one-way street. You can use what you learn from your customers to refine features, create new solutions and make improvements to products and services based on client feedback and use cases.

6. Build your tech stack

To set yourself up for success it’s important to choose the right tools for the job. John Wick wouldn't be much of a gunfighter if he was using a pool noodle. You’ll want to sign up for a bunch of software to make sure things run smoothly.

What you need depends largely on the kind of business you’re running, the subscription model you’re following and the size of your team. At Paperform we try our best to keep things simple.

For an idea of what you might be looking at, here’s a list of the main apps we use in our day-to-day processes:

• Slack for keeping our remote team connected
• Google Workspace for collaborative work, email and scheduling meetings
• Notion for internal documentation and planning
• Asana for tasks and managing large projects
• Intercom for our customer CRM and live support
• ProfitWell for financial insights and growth metrics
• Stripe for payment processing
• Xero for accounting and bookkeeping

Over time you’ll figure out what’s best for you. Just try to keep your stack as simple and uncomplicated as possible, and be flexible enough to change if you happen to discover a better solution.

7. Create your online presence

Whether you’re starting a newsletter about Pixar movies or intend on being the latest SaaS unicorn, you need to build your new business an online home. These days, at least in a business sense, if you aren’t online you may as well be a ghost.

So what do you need? Well, at the least you’ll want a snazzy website and an engaging landing page. That way you can explain your product and collect signups. Then you’ll also need to make sure you’re on all the relevant social media channels.

You can even sell a subscription directly through your website and stay in full control of things. It’s super easy to do with our platform—Paperform allows you to set up recurring subscriptions using your favourite payment gateways in just a few minutes.

8. Track the right metrics

Metrics can be scary if you’re not used to dealing with numbers, but there’s really nothing to worry about. They're the single best way to measure and assess your business's performance and make sure you're on track.

Here are the metrics you'll want to keep an eye on for your subscription business:

• Monthly recurring revenue (MRR). MRR is the revenue earned from subscriptions each month. It’s helpful for forecasting and tracking monthly growth or decline.
• Annual recurring revenue (ARR). This is the annual version of MRR—just take your MRR stats and multiply it by 12. It gives you a long term view of how you’re tracking.
• Churn rate. Refers to when a customer ends their subscription and doesn’t renew it. It’s calculated by finding the percentage of customers who leave your service over a certain period and dividing that by your total remaining customers.
• Average revenue per user (ARPU). ARPU is the average monthly revenue per user, and it is calculated by dividing your total revenue by the number of customers you’ve got. This helps you spot trends and see who your highest paying customers are.
• Customer lifetime value (LTV). You know how subscription businesses rely on keeping customers for as long as possible? Customer LTV shows you the amount a customer is expected to spend over their ‘lifetime’ with your business.

9. Temper your expectations

Starting a business or side hustle is always exciting, and we’re sure your new venture is obviously going to be a resounding success. But it’s important to remember that there is a lot of planning, hard work—and a fair bit of luck— behind every company.

You’ll have long nights. Early mornings. Unforeseen roadblocks. Days when you wonder what on earth you were thinking when you decided to start a subscription business. None of it's easy, but it's all a part of the process.

But when those doubts set in, think about why you started in the first place. Keep your vision and mission in mind—and consider all those customers your awesome products, services or content is serving.

Over to you

If you’ve made it this far you recognise the potential of subscription models and might even be thinking of adopting one for your own business.

The subscription business model is an exciting space to be in at the moment. If you can come up with an interesting idea that’s valuable to your customers, the sky (or cloud) is really the limit in terms of what you can achieve.

Why not get the ball rolling with Paperform? You can use our built-in tools to collect sign-ups, sell products and capture recurring subscriptions, all from one place.

Get started today with our 14-day free trial—no credit card required.