This is a guest post by Brooke Webber. Brooke is a passionate content writer with a love for storytelling. Brooke has 5 years of experience in crafting compelling narratives that resonate with audiences across industries. Total coffee addict. During her spare time, she immerses herself in literature.
Long ago, near the midpoint of the eighteenth century, people received the first subscription services from milkmen. And later – from magazine owners.
Today, we’ll talk about the digital subscription market, which is projected to expand from $650 billion in 2020 to $1,500 billion by 2025, according to Statista.
This article explains why companies prefer subscription business models and how they have developed over time. You’ll also learn what customer retention metrics subscription businesses should track and how to keep customers loyal.
Let’s begin!
What Is a Subscription Model and Why Choose It for Business?
Unlike a single-time purchase, in subscription business models, customers make periodic payments for access to services or products. Subscribers may pay a weekly, biweekly, monthly, or annual fee.
According to 70% of companies, subscriptions and memberships are the key to their prospective growth.
Here’s why brands prefer a subscription-based framework among all other business models:
- Ideal match between the price and value
- Auto-scaling and more flexible solutions
- Regular income stream
- Improved cash flow
- Revenue predictability
- Better user commitment and engagement
- Faster business development
Indeed, a subscription-based company typically grows five to eight times faster than a traditional business. Additionally, 64% of people feel a better connection with a brand when subscribing to its product or service, rather than making a one-time transaction.
How Digital Subscription Models Evolved With Time
Let’s explore some of the leaps in the history of digital subscriptions, from Subscription v1.0 to Subscription v2.0.
Subscription v1.0 – The First Digital Subscriptions
Everything started with the birth of eCommerce in the 1990s. Online shopping gave rise to the so-called Subscription v1.0 with the following subscription business models:
- Online Magazine/Newspaper Subscriptions. Media publishers such as The Guardian, The Wall Street Journal (WSJ), Chicago Tribune, and others started offering digital and print subscriptions.
- Subscription Box Service. Food and beverage accounts for 19.3% of all subscription boxes in eCommerce. For example, Blue Apron, Rootberry, Gobble, and other brands offer meal kit subscriptions.
- Replenishment Subscriptions. Under a replenishment online subscription model, customers buy the same items regularly. For example, these can be razors or beauty items (Harry’s, MDAIRE, Clinique).
- Healthcare Subscriptions. You can find tons of health and wellness subscription-based packages and services like CarePass, Fitbit, Chimp Health, Falck, etc.
Subscription v2.0 – New Types of Subscriptions
Rapid technological advancement initiated the metamorphosis of subscription models at the daybreak of the third millennium. And there we have them now:
Streaming Subscription Services
The appearance of a streaming service dates back to 1999, when Netflix launched its subscription concept.
In 2019, 69% of US consumers subscribed to at least one video streaming platform and 41% – for a music service.
Examples of streaming subscription providers: Netflix, YouTubeTV, Hulu, Spotify, SoundCloud
SaaS (Software-as-a-service) Subscriptions
A SaaS subscription, that is, access to cloud-based software and apps, was spurred by cloud computing technologies in the middle of the 2000s.
Examples of SaaS: Salesforce, Dropbox, Adobe, Shopify
XaaS (Everything-as-a-service) Subscriptions
Via an XaaS subscription model, people can purchase literally anything as a service in one place.
71% of IT leaders emphasize that XaaS takes over half of their IT solutions.
Example of an XaaS subscription: Amazon combines streaming, shopping, reading, movies, music, and other services in an Amazon Prime subscription.
MaaS (Metaverse-as-a-service) Subscriptions
A comparatively new tech solution propelling the futurism of the twenty-first century, a MaaS subscription allows access to the Metaverse. In this dynamic, computer-generated space, users interact with each other in virtual reality.
Examples of MaaS providers are Touchcast, Lovelace World, MetaVerseBooks, and Propel.
Top 5 Customer Retention Metrics for Subscription-based Companies
What metrics are particularly important for subscription-based businesses? Let’s take a look.
Customer or Subscriber Retention Rate (CRR or SRR)
SRR is a relevant marker of customer loyalty for subscription brands. It demonstrates how many subscribers (customers) you have retained over a specific time interval (typically, a month or a year).
Here’s how to calculate it:
SRR = ((CE – CN) ÷ S) x 100
In this formula, CE is the subscriber count at the end of the period; CN is the number of subscribers acquired within that time frame; and S is the quantity of customers at the beginning.
Suppose you had 200 subscribers at the start of the month. You acquired 40 new subscribers during this month. But eventually, you have 225 subscribers left. Then, ((225 – 40) ÷ 200) x 100 = 92.5%
Healthy customer retention scores in SaaS hit above 90%.
Monthly Recurring Revenue (MRR)
How much income have you generated from active subscribers in the past month?
One of the most essential financial metrics indicating customer success in the subscription business, MRR, will show you this number.
To evaluate your monthly recurring revenue, you must multiply the fee per user by the amount of paying users per month.
Let’s say you have 300 users paying $20 each per software subscription monthly. Then, your MRR is $6,000.
For example, Hell Gate, a subscriber-funded news outlet, revealed their MRR of $19,000, with a 10% month-to-month growth rate over the last year.
Renewal Rate
By measuring your renewal rate, you understand how many users renew their subscriptions and stick to your company. The better your renewal rate – the stronger your customer retention.
Its measurement is as simple as dividing the number of subscription renewals by the total number of subscribers up for renewal and multiplying that by 100 to obtain the percentage.
For example:
The Walrus achieved a renewal rate of 84%, including 25% of those who subscribe regularly ten years in a row.
As for SaaS companies, a good percentage is 80%, while superb renewal rates are 95% and above. Look at Lisa Home Solutions. The company’s subscription renewal rate is around 99%.
Subscriber Churn Rate
The churn rate helps you identify how many subscribers have stopped paying for your products or services. To see your subscriber churn rate over a month, divide the quantity of users who left during that period by the number of those you had at the start. Then, multiply it by 100.
The lower your churn rate – the higher your customer loyalty.
For example, the subscriber churn rate of Kalix, a SaaS-based telehealth solution for healthcare professionals, is quite low – only 2.3%. It means that the bulk of SaaS users remain loyal to the company.
Net Promoter Score (NPS)
Just as significant for subscriber retention is NPS, or Net Promoter Score. NPS is a superb and easy metric to measure. It shows customer loyalty through the readiness to recommend your service to others. NPS relies on one question: “On a scale of 0 to 10, how likely are you to recommend [service/product/company name] to a colleague or friend?”
The average NPS in SaaS is 41, while a good Net Promoter Score is between 0 and 30. The scores from 30 to 70 are excellent, and those above 70 translate into an outstanding customer experience. For example, Convesio’s latest NPS was 74, which is considered to be “outstanding.”
Best Practices for Improving Customer Retention in Subscription Business (With Examples)
Reach higher retention on your subscriptions with these tips.
Customer Segmentation
Have you thought about clustering your subscribers into groups and delivering relevant content to each segment?
This is what customer segmentation is about. It’s virtually the most basic personalization level. A personalized experience is the first reason to continue subscribing for 28% of customers, according to McKinsey.
To segment your customers, consider using the following characteristics:
- Demographic: age, income, family status, etc.
- Psychographic: personality traits, pastimes, interests, etc.
- Location-based: climate, language, food, clothes preferences, etc.
- Behavioral: time and manner of purchasing
- Needs and values-based: things your customers require and value the most
- Technographic: tools, software, and technologies
- Firmographic: industry, revenue, company size, etc.
Shopify, for instance, targets platform users based on their business size and offers different plans for individuals, small businesses, and medium + large businesses.
In 2023, the brand added a new enterprise version, Shopify Plus, catering to the needs of high-volume businesses.
Another example: WSJ segments subscribers by “technographic” factors, depending on whether they use other resources and apps, like MarketWatch and Barron’s, for reading financial news.
Hyper-Personalization
The next level of personalization can be achieved through hyper-personalized content powered by artificial intelligence (AI). With AI, you may boost overall user satisfaction, spot churning customers, and prevent them from leaving.
Twilio Segment found that 92% of companies use AI to personalize customer experiences and empower their business for growth. There are exceptional cases of implementing AI-driven personalization among companies that operate under subscription business models: HubSpot, Care/of, Netflix, and others.
Let’s put Netflix under the microscope.
The company’s co-founder, Reed Hastings, once noted, “If the Starbucks secret is a smile when you get your latte, ours is that the website adapts to the individual’s taste.”
And that’s true.
Netflix uses AI algorithms and real-time data analytics to monitor the user browsing history, views, ratings, device type, date, and time for predictions and content recommendations.
Modification of Pricing Strategies
Fundamentally, you can create several paid subscription plans and differentiate them via cost and functionality. Two additional ways to branch out your pricing model are free trials and paid add-ons.
Free Trials
What’s the perfect trial period length?
A free trial lasts three days in 32% of mobile subscription apps, and only 8% allow free app usage for two weeks. However, a 7-day free trial may be the golden middle. It leads to a 5.6% increase in conversion and a 6.4% higher retention.
Paid Add-ons
Additional (but optional) paid services create greater flexibility in pricing and increase revenue potential. They also retain subscribers by expanding the product’s potential and strengthening its value.
Look at the example below. Aside from four pricing plans, Salesmate.io has extra add-ons like Automation Journeys, Messenger, Calling Credits, and others.
Smoother Onboarding
While you may be familiar with your product, new users often aren’t. That’s why onboarding is such an important part of the customer acquisition process.
In fact, 63% of people consider the level of support during onboarding a crucial factor for their decision to subscribe, and 90% believe that companies could perform better when onboarding their customers or users.
A smooth and easy onboarding is one of the surest methods in a retention marketing strategy to prevent customer churn.
Smooth out the onboarding path for your subscribers with…
- Assigned onboarding managers for personalized guidance
- Round-the-clock communication and support
- Fewer steps for setup
- Progress indicators for encouragement
- Product tours
- Instructions, guides, and templates
For example, Monday.com created a work instruction template to onboard a new user more effectively:
Holiday Discounts and Exclusive Offers
The Power of Holidays
Due to inflation and jumping prices, 75% of consumers hunt for holiday promos and deals. And this is the best time to create holiday campaigns via emails or websites.
Here are a two examples of real-world brands doing just that.
Check out this Black Friday email marketing example from GetResponse.
Or, here’s a Christmas promotion on the QuarkXPress website:
The Power of Exclusivity
You can offer VIP membership access or build a membership site with exclusive “gated” content accessible only to paying members. Such a tactic can help you grow a loyal customer base eager to learn, develop, and build long-term relationships with your brand.
Want to stand out even more with exclusivity?
Then, follow the example of Amazon and create an exclusive holiday for your customers. The company launched Amazon Prime Day – a unique event for Prime members only, comprising two days of free shipping, discounts, and epic deals.
Note: If you want to build a subscription giant like Amazon with exclusive features, the price for web development may be relatively high, ranging from $50,000 to $150,000. In contrast, a simpler membership site can cost you from $300 to $5,000, especially if you use WordPress to build a membership website.
Enhanced Cybersecurity
How can cybersecurity impact customer retention, you ask?
Consider this. 80% of people will abandon a company if it suffers at least one security breach compromising their personal information.
Are you ready to resist cyber-attacks and cybersecurity risks like malware or data breaches?
Suppose you use WordPress for SaaS operating under a subscription business model. Have you thought about moving to a more secure WordPress hosting environment?
Pick a reliable web hosting provider – like Convesio. Since 2022, Convesio has partnered with Monarx to enhance web security and protect clients’ sites from cyber criminals. If you use a different host, be sure to investigate their security practices.
Bonus Tip: How to Incorporate Subscriptions and Memberships with WooCommerce/WordPress
Building a subscription-based website with WooCommerce or WordPress? Check out our list of recommended plugins below.
WordPress membership-focused plugins
- MemberPress
- WooCommerce Memberships
- Ultimate Member
- S2Member
- Restrict Content Pro
- MemberMouse
- Paid Memberships Pro
WooCommerce subscription plugins
- Native Woo Subscriptions extension
- Subscriptions for WooCommerce by WebToffee
- SUMO Subscriptions
- YITH WooCommerce Subscription
- Subcriptio
Closing Thoughts
In this guide, we’ve taken a long look at the transformative changes of subscription models in business from their origins in the 1800s to the present. We recommend using some of these tactics on your own eCommerce subscription business.
So, why wait? It’s time to act. Convesio is here to help you make your first step to growing your subscription business. Our unique platform is specifically designed to help you grow and scale subscription and other eCommerce-based businesses. Get in touch with our sales team or create an account today!
