Research shows that the subscription ecommerce market is projected to reach over $450 billion by 2025—which makes it a massively interesting opportunity for existing and aspiring business owners.
If you’re interested in adding subscription services to your Shopify store or starting a subscription ecommerce business from scratch, this is the right post for you. Below, learn about the benefits of recurring revenue, the various subscription business models, and how to get started on Shopify.
What is a subscription business model?
In a nutshell, subscription ecommerce businesses offer online shoppers a convenient, personalized, and lower-cost way to buy what they want and need on a recurring basis. This also turns one-time shoppers into repeat (and often lifelong) customers. And with predictable monthly recurring revenue (MRR) coming in, businesses can accurately forecast for future growth and scale.
🏁 How to start a business recommendations
Let’s unpack the benefits of a subscription business model:
1. Predictable revenue
Knowing how much money is coming in every month helps you streamline everything from sales forecasting to inventory planning. It also means you know how much you can reinvest into the growth of your business.
2. More cash on hand
Many subscription businesses ask for full payment upfront, at a discounted price. Besides being great for cash flow, this buffer can provide startups with much-needed peace of mind.
3. Spend less to acquire customers
Businesses with a pay-per-product pricing model have to constantly invest in marketing and sales in order to attract new customers and thereby increase revenue. Increasing customer acquisition costs is a leading source of startup failure. With a subscription-based model, customers make payments to you on a regular basis, so you don’t have to invest as much in new customers to keep your business going.
Acquiring a new customer can cost 5–10 times more than retaining an existing customer.
4. Loyalty, loyalty, loyalty
The recurring nature of subscriptions creates a virtuous cycle: regular purchases offer deeper insights into your customers’ behavior, which allows you to continually improve the personalized experience you offer and, in turn, keeps customers coming back.
If done well, subscription businesses create extremely loyal, repeat customers—and repeat customers spend 67% more than new customers. This is the premise of customer lifetime value, and one of the most important factors in determining a business’ success.
5. Makes upselling and cross-selling easier
With a subscription model, you’re uniquely positioned to make more revenue from existing customers. Because you have continuous contact with your customers, you’re building a trusting relationship with them. This makes it easier to market additional products or services to them, because they already know you provide a valuable service.
Launching a subscription business can be extremely lucrative–if done right. The first step is choosing the subscription model that best suits your business.
Choosing the right subscription business model
There are three overarching types of subscriptions: curation, replenishment, and access. They all have their perks and drawbacks, so identifying the best fit for you will come down to the types of physical and digital products you’re selling, your capacity, and your unique business ideas and goals.
Curation business model (i.e. subscription boxes)
This is the most common subscription business model, popularized by companies like Birchbox, Blue Apron, and Stitch Fix. These are your subscription box businesses, which seek to surprise and delight customers by providing them with new items and highly personalized experiences.
Typically, these businesses sell products in the apparel, beauty, and food categories, but the model works well across a wide range of products and is expanding into more industries every year.
✅ Benefits
- High profit potential. Subscription boxes can be very lucrative—in fact, the growth of and share in the subscription market is fueled by a few curator brands. Considered a “splurge” by most standards, subscription boxes cost anywhere from $15 to $100 a month and promote the discovery of new products. Compounded monthly, this profit model can scale quickly compared to other food business ideas.
🚫 Risks
- High churn. Novelty drives initial enthusiasm for these businesses, so this model can experience higher rates of customer churn. Plus, since these products are typically niche non-essentials, subscription box businesses thrive when the economy is doing well, but are the first to go during a recession.
- Operational complexity. Not only is acquiring customers more expensive in the subscription box space, these businesses also have considerably higher operating costs, including packaging, branding, and regular shipping.
Replenishment business model
This model is all about convenience and cost savings. Replenishment subscriptions allow consumers to automate the purchase of essential items—often at a discount.
Most products don’t need to be replenished regularly, so the types of products that you’re selling are an important consideration with this business model. Commodity and convenience items like razors, diapers, vitamins, and pet food are good fits for the replenishment model.
✅ Benefits
- Higher conversion rates. 65% of customers who consider a replenishment service subscribe, which is significantly higher compared to the other models (50%).
- Higher retention rates. Due to the nature of the products that these businesses sell, the replenishment model has particularly high long-term subscription rates: 45% of members have subscribed for at least one year.
Replenishment services have particularly high long-term subscription rates: 45% of members have subscribed for at least one year.
Fresh Patch delivers hydroponically grown grass patches to pet owners. With over 80% of total revenue attributed to subscriptions, recurring revenue is the backbone of the company’s business model. Fresh Patch
🚫 Risks
- Thin margins. In many instances, this business model requires companies to compete on price and offer generous discounts. This means businesses need to keep their costs very low and operate at scale in order to realize profits (in other words, sell a lot of products).
Access business model
Access subscribers pay a monthly fee to obtain lower prices or members-only perks. JustFab, NatureBox, and Thrive Market are all examples of access subscription businesses, and their primary value is offering exclusivity to customers.
✅ Benefits
- Greater value to the customer. Because customers are paying for exclusive access to perks, there is an opportunity to provide personalized offers that will help deepen your relationship with the customer. That value can be further stretched by creating a community of members, where they can interact through forums or Facebook groups.
- Bundling opportunities. Opportunity to offer customers an array of products (and non-tangibles like discounts for future purchases) as part of a single membership.
🚫 Risks
- Greater time investment. Because access requires not a single service or product you can add on to checkout, you do need to put in work to make sure your membership offering is robust enough and maintained regularly in order for it to be of value to your customer.
Bonus: Add-on subscription business model
OK, this isn’t a business model, but it’s a hybrid approach that allows you to add subscription services to your existing business. More and more companies are shifting toward this revenue model, as it’s a flexible way of exploring the subscription ecosystem without committing to one revenue model (or pivoting your business).
Tips for making the subscription business model work for you
Across the board, churn is the biggest risk for subscription businesses. The good news is that subscription consumers can be extremely sticky once they find a service they like. Here are some tips to curb churn rates and run a profitable subscription business:
1. Evaluate your product viability
The first step in any business is evaluating your product/market fit and your product viability. In the subscription space particularly, some product categories are oversaturated, making it considerably more challenging to enter the market.
For example, the meal-kit category has extremely high rates of cancellation within the first six months, reflecting competitive pricing and broad similarities among the leading players. Do your research to ensure there’s a need for your product in the market and keep tabs on your competitors.
2. Be clear about your business goals
Is it a revenue number, customer acquisition, or number of units sold? Whatever your business goals are, you need to keep them top-of-mind—especially when choosing your business model.
3. Be conservative about pricing at the beginning
Many subscription consumers who churn do so quickly, so you shouldn’t over invest in free trials or heavy discounts unless they have a clear payback. Plus, pricing should always be tested, adapted, and evaluated as your company evolves.
4. Invest in personalization
For all the business models, but especially the curation model, customers expect personalized subscriptions to become even more tailored over time. 28% of curation subscribers said a personalized experience was the most important reason to continue to subscribe.
Do you have the in-house data expertise or technical stack to scale personalization efforts? If not, do you have the budget to invest in it?
5. Prioritize retention strategies
In the early stages, you have to prioritize acquisition in order to get sales. But once you’ve got the ball rolling, it’s time to switch up tactics and focus on customer retention strategies.
Remember: It costs more to acquire a customer than it does to retain one, and you can always draw more value from a loyal customer base. Most subscription companies put all their efforts into acquiring new customers, but that’s not the most effective way to grow a business.
6. Diversify marketing channels and tactics
Subscription business models use different channels to attract new customers and engage with existing subscribers. If you’re just starting out, influencer marketing can help you gain social clout.
And since subscription-based businesses depend on a frequent and meaningful engagement of customers, email is a critical tool for all business models. Keep in mind that each subscription business model has its “marketing match.” For example, for the curation model, affiliate marketing is the top acquisition channel. Recurring packages then offer a built-in marketing surface to engage with those customers.
7. Monitor churn
It goes without saying that you should be monitoring and analyzing voluntary churn—customers cancelling their subscription—in order to continually improve your service.
8. But what about involuntary churn?
Expired, lost, or stolen credit cards; address changes; and network errors all contribute to involuntary churn over the course of a subscription customer’s lifecycle.
According to Profitwell, involuntary churn makes up 20–40% of overall churn, so actively staying on top of these common causes can make a big difference to your bottom line.
How to start your own subscription business
Subscription business models can be added onto an existing business or used as the basis for a new business. If you’re interested in starting up your own subscription business, we have an easy five-step guide for you.
1. Choose your subscription idea
The first step is deciding what type of subscription model your business will use and what product(s) you’ll offer.
If you currently have a successful clothing brand, adopting a subscription model can be a great way to bring in guaranteed revenue each month. On the other hand, you may simply have a great idea for a subscription box theme that you want to start from scratch.
Regardless, your first step needs to revolve around coming up with your subscription idea and outlining what this might look like in action.
One popular subscription business, FabFitFun, sends seasonal boxes with 6-8 full-size products that are perfect for each season—like beach-going goodies for summer and dry skin products for winter.
A few subscription business ideas include:
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 box” or sample subscription so that new subscribers can get an idea of the types of products they’ll be receiving each month. This doesn’t have to be completely accurate yet; just make sure the products you start lining up for marketing photos match the same types of products you’ll actually be sending.
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” that’s cheaper and has more classic snacks and a “Healthy Snacks” that focuses on healthy snack options.
However, you might also offer different prices based on how far in advance your subscriber commits to. A one-year subscription would have a lower monthly cost than a month-to-month subscription.
You’ll need to price your subscription box at a point that is appealing to your target customer but also ensures your business makes a profit. It won’t be feasible for your business to spend $25/box while charging only $20/box.
4. Build your website
Once you know what type of subscription you’ll be offering and how you’ll price it, it’s time to create your website. Here, you’ll share photos of sample products, allow customers to sign up for their next box, and share information about the products they receive each month.
And you can easily create your subscription business website with Shopify. Whether it’s adding an option for recurring orders to your existing business or creating subscription boxes from scratch, Shopify makes launching a subscription business easy.
And since you can manage everything from our all-in-one platform, managing your subscription business is a piece of cake. When starting, there generally are two approaches: add a Shopify app to your store or build your own custom solution.
Add a subscriptions app
You can easily create a subscription offering by installing any of the following subscription management apps:
- Shopify Subscriptions. Easily setup and manage subscriptions within Shopify admin with the free Shopify Subscriptions app
- PayWhirl Recurring Payments. Create, manage, and sell subscriptions through our native platform.
- Awtomatic Subscriptions. The Awtomatic app (Previously Bundle Subscriptions) empowers you to easily add subscription options to your products and is fully integrated with Shopify’s native checkout.
- Assemble Subscriptions. Built by a team of Shopify experts with almost a decade of experience across the platform, this is no ordinary subscriptions app.
- Bold Subscriptions. Built with enterprise companies in mind, Bold lets you customize, manage, and scale a subscription business.
- Recharge Subscriptions. Quickly launch and manage subscriptions for your Shopify store.
- Native Subscriptions. Powering subscriptions payments, seamless checkouts, and recurring orders.
- Seal Subscriptions. Boost sales with subscriptions and automatic recurring payments.
- Appstle Subscriptions. A comprehensive subscription solution that enables you to offer products and services to your customers, on a recurring basis.
For more options, check out Shopify’s subscription app collection to find an app that fits your business.
Build your own custom solution
Using the Subscription APIs and tooling partners and developers can build new subscription experiences directly within Shopify Checkout
The following resources are available to you today:
5. Market your new subscription business
Now that your new subscription business is ready to sell, you have to put it in front of your target customers and start getting signups. Marketing any business is key to success, but it can seem daunting when faced with an empty slate.
Here are a few key tips for marketing a brand new business:
- 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
While it may feel like things are going slowly at first, business growth is exponential. You just have to put in the effort and be patient while you grow your subscription business.
Build your own custom subscription solution
We’ve recently introduced APIs and tooling to enable partners and developers to build new subscription experiences directly within Shopify Checkout. For the first time, developers can now build on Shopify Checkout, meaning merchants no longer have to choose between selling subscription products and using Shopify’s checkout.
Moving forward, you don’t have to manage multiple checkout experiences, and your customers can enjoy the same friction-free checkout experience, regardless of whether they’re purchasing a one-time or recurring product.
The following resources are available to you today:
This is the first step toward improving checkout extensibility so developers can help customize our checkout to meet more merchant needs. Visit our Partner Blog for more information about how to apply for access to the Subscriptions API.
Subscription business model FAQ
An example of a subscription model is a streaming service, such as 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 on either a monthly or yearly basis. 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.
What is subscription based model?
Subscription-based models are business models where customers pay a recurring fee for products or services. This payment is usually on a monthly or annual basis. Subscription models provide customers with access to products or services for as long as they pay their subscription fee. Examples of subscription-based models include streaming services such as Netflix, cloud-based software such as Adobe Creative Cloud, and subscription boxes such as Birchbox.
