Business

Running a profitable subscription-based business

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1. Do research to determine if the subscription model is right for your business. “The entire scope of the business has to make sense for a subscription model,” says Francisco Gimenez, cofounder and CEO, eSalon, which provides made-for-you hair color. “First, it is important to have a product that your clients want and need replenished on an ongoing basis.” Then ask yourself the following questions, he advises: “Is there a large enough market to sustain the business? Does anyone else have a similar offering? Can you deliver your product on a consistent basis? How does your subscription service fix a problem or add value to the lives of your customers?”

2. Test your concept by using Kickstarter or Indiegogo. “Use crowdfunding to validate your market,” says Scott Lininger, CEO of Bitsbox, a subscription box that teaches kids to code. “Before we launched Bitsbox, we ran a Kickstarter campaignto make sure that people actually wanted our stuff. This gave us a production scale to shoot for and was a lot of fun, too. The capital you can raise (equity free) is nice, too.”

3. Let people try before they buy. “Give people the opportunity to try your product and get hooked on it before charging them,” says Chris Bumgardner, CTO, UrbanSitter. “Consider testing a free trial. Also keep pricing simple. At first, our subscription pricing structure was $25 for the first month, then $10 for each additional month,” he adds. “Customers found this to be confusing, so we simplified to $15 per month and saw an increase in subscription rates.”

4. Offer discounts for longer-term subscriptions. “There really are two types of consumers: ones who see themselves using your product forever, and those who are looking to give it a try,” says Chad Reid, director of Communications, JotForm, a form builder. By offering customers a variety of subscription options, and offering a discount to those who agree to pay upfront for six months or a year, you have a better chance of attracting more customers and increasing your revenue.

5. Stay on top of your customers – and make renewing easy or automatic.“Through our retention marketing work with companies such as The Honest Company and Dollar Shave Club, we’ve learned personalized communications is one of the biggest factors in reducing churn and re-engaging customers,” says Jerry Jao, CEO, Retention Science. “Collect as much data as you can about your customers and email them personalized offers and information to coax them to renew before they churn, which is usually at the three-, six- or twelve-month mark.”