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The success of a software startup lies in how well the company can implement a scalable subscription business model.
The good news is there are almost endless opportunities for customizing your software subscription model. This means you can choose to charge customers (or, subscribers) based on items that make the most sense for your business, rather than trying to force a particular model to work simply because it’s what your closest competitors are doing. You also have plenty of freedom to adapt as your business grows and changes.
See also: SaaS Accounting Basics: A Comprehensive Guide for SaaS Startup Founders
Keep in mind: Every subscription business model operates differently; a software subscription business (e.g. Hubspot, Zoom or Asana) will have a completely different customer offering, pricing strategy, and financial infrastructure than a subscription box company (e.g. Birchbox, StitchFix or Blue Apron) or subscription entertainment company (e.g. Spotify, Netflix or Disney+). Be smart about which subscription companies you’re following for inspiration, and what advice you take.
This guide will run through some subscription-based business model examples commonly used by SaaS startups and point out a few considerations to keep in mind as you build your own.
3 Common Examples Of Subscription Business Models
Flat Fee
Under a flat fee model, a business charges a specified amount for each service or package of services, no matter the volume or scope of the customer’s usage.
Zeni’s business model, for example, is to charge customers a flat fee that differs based on tiers of services. The tiered fees increase based on the customer’s average monthly expenses, but the fee within each tier remains the same for all customers at that level.
In this case, the work required to handle complex accounts—those with a greater number of invoices to manage, more reports to produce, etc.—is offset by the higher price of the service tier. Clients with fewer needs, meanwhile, pay less for comprehensive financial services because their accounts are relatively easier to manage. Zeni’s straightforward subscription model keeps it simple for customers and the company while still allowing for scalability.
Variable Fee
Not all businesses do well charging flat fees across the board, even within different subscription service tiers. This tends to be the case when costs go up at one end of a given service spectrum but not the other. If it costs proportionally more for your business to support clients with a lot of user accounts compared to those with just a few, for example, it may make sense to charge based on the number of users who will be accessing your system.
Other elements commonly included in variable fee models are:
- The number of clicks on a given item
- The number of active data lines
- Duration-based memberships (annual versus monthly plans, etc.)
- The number of messages sent on the platform
- The level of support needed for specific customers or services
A Combination Approach
Keep in mind that you may opt for a hybrid approach between flat and variable fee models as well. If a small cohort of your customer base is increasing your costs more than most others, you could charge a flat fee as your base and then add itemized extras on top. This is a good way to handle customer relationships that require much more customer support or other services that act as a drain on your resources.
5 Key Things To Understand About Subscription-Based Business Models
1. Scalability is the primary objective.
One reason SaaS startups have adopted subscription-based business models in droves is because these models allow for scalability.
Hopefully, as your business grows and matures, it will eventually look very different than it did in the early stages. If all goes according to plan, you won’t be charging the same fees for the exact same services ten years down the line.
Subscription models are standardized across all customers. A business may opt to offer multiple service tiers, but at the end of the day, each customer within those tiers is charged the same fee as their peers. This uniformity builds in an easy way to upgrade your products and services, change prices (or offer pricing tiers) as needed to cover your costs, and strengthen your recurring revenue streams.
See also: Everything SaaS Startups Need To Know About Calculating ARR And MRR
2. Well-implemented subscription models can be highly profitable.
With time and data on your side, you can optimize your service plans toward a number of different goals. These could include:
- Improving your services to be more attractive than those of your competitors
- Attracting long-term relationships with recurring revenue clients to ensure customer retention, as opposed to short-term, transactional users
- Driving innovation toward new solutions that don’t yet exist in your market
3. Before implementing a subscription model, you’ll need to understand which components generate most of your costs and revenue.
The best subscription-based business model for your company will depend heavily on the costs incurred and the revenue generated by each of your services.
The reasons for this are fairly obvious — you want to balance your costs for each service with the revenue it brings in, so you can turn a profit off of each service tier. So instead of expounding on the basics, let’s look at an example of how some companies get it wrong.
Many businesses identify as primarily SaaS companies, when in fact much of their revenue also comes from providing professional services to customers. Zeni falls under this category, as we provide professional services from our expert team in addition to AI-powered bookkeeping software.
The mistake happens when companies try to force these professional services to work under the same business model as their SaaS offerings, while still trying to market the two separately. In reality, the two options likely have very different costs and bring in vastly different income.
It’s important to make your service options very clear and remember where your revenue comes from before you choose to place certain services together in a package. Otherwise, you run the risk of certain service tiers bringing in disproportionate amounts of revenue, while others earn next to nothing.
4. When in doubt, keep it simple.
Most people want to know ahead of time how much they will be charged for a service, even if it’s a ballpark estimate. If you clearly lay out your service tiers and the contract for each, your customers will be able to get an idea of how much it will cost before they sign up. If your business model is frustratingly complicated, however, you will have trouble retaining customers.
Keeping it simple also lessens the chances of accounting errors that lead to accidental over- or under-charges and simplifies your billing and invoicing processes.
5. A strong foundation paves the way for a successful subscription business model.
Perhaps you’ve decided a subscription model would be wonderful but you aren’t sure how to make the transition.
Before you think about doing a major overhaul of your company’s pay structure, you must iron out all the wrinkles. For most startups, this means working on the following foundational items:
- Subscription Pricing. Make sure your pricing model is structured appropriately in the marketplace for the produce and value that you are offering.
- Long-term strategy. If you’re looking to acquire new companies down the line, for example, or want to offer lengthy free trials in the hopes you can convert more customers, those strategic decisions should heavily influence your business model.
- Standardization. Subscription-based SaaS businesses are successful when they are predictable and consistently meet the needs of their users as a whole. One of the fastest ways to kill your scalability is to try and modify your services to meet the needs of individual customers. You simply can’t recover enough revenue to make up for the costs of constantly changing your product. Nail down your market, your services, and the value you provide before attempting to charge a subscription fee.
The Financial Advice Doesn’t Have To Stop Here.
Our experts at Zeni know what it takes for SaaS startups to be financially successful. After all, we’re a SaaS business ourselves. Day in and day out, we help our startup customers develop robust financial plans while saving them time and money every single month.
Over the course of your company’s life, you may need assistance with everything from simple accounting and bookkeeping to advanced metrics and insights, CFO services, and annual tax management. Let Zeni help you every step of the way as you grow from humble startup to flourishing enterprise.
Schedule a free demo to get you started.
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