While they may appear similar, subscriptions and memberships are different business models. Learn what sets them apart.
The increasing internet connectivity has enabled businesses to operate entirely online. Besides creating completely new industries and producing behemoth businesses like Facebook, Netflix, Spotify, and Amazon AWS, it has reconfigured and pumped life into old, dying business models.
Some old business models the internet has revived are subscriptions and memberships. Unsurprisingly, the two business models are both having a moment. They are similar in many ways. And that’s the point of this article: to ask if they are similar, by how much, and in what ways.
Let’s get to it.
What is a subscription business model?
A subscription business model is a contract between a business and its customers where you agree to supply a product or service at an agreed frequency in exchange for payments at the same or other agreed frequency.
The subscription business model leverages the loyalty of regular customers by offering to take care of their needs forever. Instead of buying a product, maintaining it, and using it to solve their problems on their own, you offer to take care of the problem and take away from the customer the burden of owning something.
For example, Spotify sells music subscriptions where customers can play their favourite music on their mobile devices when they want. This way, the customer does not have to buy physical CDs and allocate space in their houses to store or secure them.
Although customers reserve the right to cancel their subscriptions, the regular payments guarantee a recurring income for the business. The monthly recurring revenue (MRR) the subscription business model delivers is the real prize. It can keep a business going during lean times.
The recurring revenue model, as some now call it, has been so successful in industries like SaaS that it has been adopted by businesses that sell physical everyday products you can get with a quick trip to the tuckshop down the road, like milk, razors, and toilet paper.
Benefits of the subscription business model.
The benefit of recurring income is the main attraction for businesses setting up or pivoting to a subscription business model, which lowers marketing costs as you are not constantly looking for new customers.
The task, therefore, is to deliver such a thrilling customer experience that your product becomes an essential part of customers’ lives. Delighted customers don’t usually cancel their subscriptions.
Other benefits of the recurring revenue model include:
1. Predictable revenue.
In the subscription business model, you collect customer payments in advance and automatically, not after you have delivered the product or service or sent an invoice. This unlocks significant advantages from business administration, cash flow, and revenue standpoints.
Since you know how many subscribers you have, you can more accurately predict your sales revenue. While some customers will cancel, barring a major product failure or scandal, they will not cancel en masse. Your task should, therefore, be that of retaining customers:
2. Better customer relationships.
Building strong relationships with customers is easier if you serve them every month. On the contrary, that task is challenging if you constantly sell to new customers.
Most customers will stick with you as long as your product meets a real need and you are responsive to your customers’ queries and suggested product improvements. Customers’ attachment to and loyalty to your brand will improve with familiarity.
3. Lower customer acquisition costs.
It costs more to attract and recruit new customers than to retain existing ones. With stronger customer relationships, one of the benefits of the subscription business model is that you will retain more customers than you lose through cancellations.
With the cushion of customers signed up for up to twelve or more months, you don’t feel pressured to chase new leads relentlessly. This not only frees you time to improve your products and offers, but it also lowers your customer acquisition costs.
4. Longer customer lifetime value (CLV).
Non-recurring revenue business models have nothing tying the customer to a business. Consumers can buy products when needed and change suppliers at will. There is no guarantee that a customer will buy from you again.
The subscription business model makes it easy to retain customers. Customers repeatedly buy from you over a long period, which increases their lifetime value to the business. High CLV means you can expect to generate more profit from every customer throughout your relationship.
What is a membership business model?
Membership businesses ask people to make recurring payments or a one-time fee to access the value they create. This value includes educational content, exclusive discounts, networking opportunities,
and the community and status that fellow members provide.
The membership business model exploits human beings’ innate need to belong and connect by offering the chance to belong to a community of like-minded people.
Membership businesses take one or a hybrid of three features, which are:
- Exclusive access to educational content
- Access to products and services only available to members.
- Networking opportunities with people in the same field or who share common interests.
There is an allure in being part of something that only people with the same interests, tastes, and level of income as yours are a part of. Community, or belonging to something exclusive, separates memberships from subscriptions.
Benefits of the membership business model.
Both subscription and membership business models deliver the benefits of:
- recurring revenue,
- Long-term customer relationships,
- Predictable revenue.
On top of these benefits, memberships offer the added benefit of multiple ways to create value.
For many people, the chance to belong to a community of people in the same profession as yours who offer advice, experiences, and a different perspective on issues you deal with daily is enough incentive to sign up.
Once you sign them up, you can offer people the chance to unlock a higher tier with more benefits, like one-on-one coaching, exclusive discounts, and other perks.
What is the difference between subscriptions and memberships?
Subscriptions and memberships have similarities and drive the same benefits but have one significant difference.
Subscriptions are primarily a payment model where customers pay a recurring fee for access to gated content or supply of a product or service, instead of multiple one-time payments.
On the other hand, memberships charge a recurring fee for the value they offer, extending beyond products and services to community and educational resources.
Here are the other ways subscriptions and memberships differ:
1. Pricing model
As well as recurring monthly or yearly payments to renew the contract, memberships offer the option to pay a one-time fee for lifetime access. With the stability of monthly recurring revenue as the main attraction, subscription businesses only accept one payment option - recurring payments.
2. Customer experience.
Memberships are all about building community to create long-term value for customers. Subscription-based businesses, however, focus on their core product or service, believing that product quality, uninterrupted supply, and shopping convenience are the keys to long-term customer retention.
3. Industry.
Unlike the modern-day subscription business, the membership mode will only fit some companies. It fits products that you can build a community around. The best fits are usually businesses in fitness and education niches.
It’s generally hard to build a community for socks, toothbrushes and toothpaste, sanitary pads, or 15-minute meals, which all have subscription options.
Membership vs Subscription: Which Business Model Should You Choose?
If there’s anything we have learned about the subscription business model, it is you can use it for almost any product or service.
The membership model gives you fewer options. So, it’s crucial to consider your product and customers’ needs when deciding on the best model for your business.
Because many rely on physical locations and products, membership businesses aren’t as scalable as subscription businesses, where companies in software and media industries particularly successful.
The opposite is true regarding growth and scope for innovation, where membership businesses can create more value by adding new benefits and perks. Subscription businesses don’t have as much juice to squeeze beyond the core product offering.
The advice is to do your research. Talk to your target customers and ask what their needs are. Then, consider whether their needs and your business needs converge.
Weigh the opportunity and return for meeting your goals and your customers’ needs with either a subscription or membership model. Which one would offer a scalable or high-revenue business?
Optimise the checkout experience and drive more revenue with the right subscription management software.
Subscription and membership businesses work very well as concepts. However, building a functional business where customers can relax in the knowledge that you will process their payments and deliver what they are paying for on time every time requires an investment in the right technology.
Membership and subscription businesses are challenging to run using manual systems. You need capable subscription management software. Otherwise, things can quickly go pear-shaped.
Whatever model you choose, Intasend will provide the technology you need to create subscription plans and automate billing and payments. We take the pain out of onboarding subscribers, invoicing, revenue recognition, and dunning automation.
Sign up here or request a demo to see what benefits our automatic billing and subscription management software can unlock for your business.
