Should Your Small Business Consider Running a Subscription Service?

If you’re looking for more ways to generate recurring revenue and strengthen customer loyalty for your small business, a subscription service can be a great option, depending on your industry and the products/services you offer. The subscription economy (the trend where companies shift to a subscription model) is expected to reach $1.5 trillion by 2025, having grown 435% in the last nine years.

How your subscription service works will be unique to your business model— it can include certain products or services that customers renew weekly, monthly, or, in some cases, yearly. Your subscription model will be personalized, but there are some universal elements that you can consider before diving into this type of revenue model for your business.

Here are some of the questions you should ask yourself to determine if a subscription service is right for your small business and customers.

The benefits of a subscription service

Before we get started, let’s identify some of the benefits of incorporating a subscription. One of the more significant benefits is recurring revenue, which can mean more predictable income. Once your subscription service is established and you have a set (or growing) number of subscribers, you can better forecast your expenses, revenue, profit, and what needs to be allocated back to your business to support the subscription.

Depending on how you set up your subscription, you may also experience an increase in upfront payments. For instance, if you have 20 customers who all pay an upfront monthly subscription fee, that means money in your pocket at the beginning of each month. This can be beneficial, particularly for small business owners seeking to enhance revenue so funds are available for payroll, inventory, and other expenses.

Another benefit is the feeling of security that comes from a stable customer base. For example, when a customer signs up for a monthly subscription, you can rely on their continued business for that month. That means you won’t have to spend as many resources enticing them to make additional purchases, such as retargeting ads, email marketing, etc.

As you add more customers to your subscription service and generate the necessary revenue you need for the month, you can allocate your resources to other areas of customer acquisition, such as marketing your subscription. Of course, keeping customers on the subscription model will require retention strategies, but trying to keep them as customers won’t have to be as much of a concern if they’re benefiting from their subscription.

Do your products/services allow for recurring usage?

This question might have a simple yes or no answer, but it will set the stage for whether you can consider offering a subscription service. If your products or services are mainly geared toward one-time purchases or occasional re-purchases, transitioning to a subscription model may not be a suitable option. However, it may be worth exploring if you can develop and introduce a new, complimentary product or service that can be used regularly.

Assessing your current offering and finding gaps that can lend well to a subscription is an important first step. For example, if you own a small jewelry brand, your subscription service could be a subscription box of new bracelet charms each month for a reduced price. If you own a pool cleaning business that offers services only for a couple of months in the summer, a year-round subscription service could include offering your summer service with winter maintenance and spring reopening. If you own a fitness-related business, a subscription could include a set number of classes each month, virtual sessions, etc.

Will it meet your customers’ needs?

Answering this question requires you to determine whether there is an existing customer need that can be met with a subscription that they can’t get otherwise. You should have a value proposition that you use to promote your subscription to customers. For many, a sense of convenience can be a major benefit. For example, if your subscription model offers unlimited drop-in yoga classes each month, it may be more convenient for someone to opt for this for a discounted price than scheduling and paying for classes one by one.

If you’re unsure your customers would benefit from a subscription model, a customer survey can be a great way to assess your current customer base. Questions like whether they would pay (and how much they would pay) for a subscription, the rate at which they’d pay (weekly, bi-weekly, monthly, etc.), and what types of products/services they would be interested in can help you start gathering insights.

Could you start today?

Hypothetically, could you start your subscription service right away? If you own a brick-and-mortar store, where does your current inventory status stand? Are there conversations you need to have with vendors/suppliers to ensure your inventory can support a subscription?

If you own a service-based small business, do you have enough employees to offer recurring services or any of the additional elements you add to a subscription? Do you need to hire more employees to maintain a subscription model?

Do you have the means to deliver the subscription?

It is important to consider how you will deliver the subscription to the customer. If you offer a subscription box, you will need to set up a shipping plan to get the item(s) to the customer. If you offer a digital subscription, will it exist on your website? Will you need to print subscription cards to provide those who have opted in? Determining what your subscription will be can help you answer the follow-ups that come with it.

You should also consider the software that will carry out the subscription. How will you track each customer’s subscription and billing? Several software programs have these features, so check your current software’s capabilities or seek additional ones.

You will need to change the way that you record revenue

As a small business owner, you likely wear many hats to run operations—an accountant might be one of them. When determining whether you should run a subscription service, it’s important to consider that you may need to adjust how you record revenue.

Subscription revenue recognition requires you to spread out the revenue you receive from customers over the period during which the subscription is provided.

For example, if your business primarily offers subscriptions, and your customers pay for a six-month subscription with payments in January and July, recording all the revenue you received in January (the sum of everyone’s payment) could result in minimal revenue for February, despite continuing to provide services from the subscription. With revenue recognition, you would instead spread the upfront payment over the length of the subscription. Therefore, the money received upfront would be considered deferred revenue because you have not yet fulfilled the entire subscription. For instance, if you receive $300 upfront for a three-month subscription, you will record $100 each month. Doing so will help you keep track of your true earnings.

Possibility of churn

Although it’s not fun to contemplate the downsides of running a subscription service, they are important to consider. It’s not promised that your customers will stick with the subscription for the full term. That is why customer retention and assessing your customers’ satisfaction while they are subscribed to the service are important, as you always want to make sure your subscription still meets a need.

If your churn rate increases when you launch a subscription service, it is important to have a backup plan to help you reach customers and generate revenue outside of a subscription.

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