A:

Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue. They focus on customer retention over customer acquisition. In essence, subscription business models focus on the way revenue is made so that a single customer pays multiple payments for prolonged access to a good or service.

With the rise of technology and software as a service (SaaS) products, many companies are moving from a business revenue model where revenue is made from a customer's one-time purchase to a subscription model where revenue is made on a recurring basis in return for consistent access to the delivery of a good or service.

The easiest subscription business model to understand is that of a magazine company. Instead of selling a magazine as a standalone product where a customer makes a one-time purchase, magazine companies offer a subscription service for the delivery of a weekly or monthly magazine. In this model, instead of having customers make single purchases, magazine companies offer monthly payments for a yearly subscription to access to their monthly magazines.

If a magazine company offers a monthly magazine service, instead of as a single magazine purchase, it offers its service as a 12-month service comprised of 12 purchases. This makes the revenue model of the company stronger because it guarantees itself sales over a 12-month period rather than a single purchase. This makes revenue forecasting and business planning easier, since a company can project its sales farther out with more accuracy.

Magazine companies are not the only model that uses subscription business models. With technology, almost any product or service can now be a subscription model.

RELATED FAQS
  1. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  2. How does LinkedIn (LNKD) make money?

    Selling advertising, premium subscriptions and recruiting tools boosts revenue for the publicly owned job listing and professional ... Read Answer >>
  3. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  4. What are the advantages and disadvantages of the Gordon Growth Model?

    Understand the advantages and disadvantages of using the Gordon Growth Model to value a company's publicly traded stock. ... Read Answer >>
  5. What are some examples of different corporate governance systems across the world?

    Read about the three major types of corporate governance systems: the Japanese model, the Anglo-Saxon model and the continental ... Read Answer >>
  6. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
Related Articles
  1. Personal Finance

    Save Money By Canceling Unused Monthly Services

    Are you really getting your money's worth out of all of your monthly subscription services?
  2. Financial Advisor

    Keep Track of Oil News With These 7 Websites

    Discover some of the best online resources about the oil industry that feature news and analysis on the biggest issues and trends.
  3. Investing

    Financial Models You Can Create With Excel

    The relatively modest amount of time it takes to build these models can pay for itself by leading you to better investment decisions.
  4. Investing

    How Intuit's Transition to the Cloud Has Driven Revenue Growth (INTU)

    Learn how Intuit is transitioning its users to the cloud, and how the company's revenue growth is being affected in the short and long terms.
  5. Investing

    Facebook Is Testing Paid Subscriptions: Report

    Facebook moves ahead with a plan for users to pay for content subscriptions via Instant Articles.
  6. Small Business

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  7. Tech

    3 Predictions for TV in the Next 10 Years

    Understand current technological trends in the TV industry and what has changed in the past. Learn about three predictions regarding the future of TV.
  8. Investing

    TripAdvisor Adds Subscription Products (TRIP)

    Travel website company TripAdvisor Inc. today unveiled subscription products to help its accommodations and restaurant partners engage customers.
  9. Small Business

    The Top 10 Hidden Factors Affecting Software Stocks

    Want to invest in software? Here are the most important factors affecting profits, revenues, and stock price of software companies
  10. Personal Finance

    DCF Vs. Comparables: Which One To Use

    DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
RELATED TERMS
  1. Subscription Right

    The right of existing shareholders in a company to retain an ...
  2. The Accountant's Magazine - TAM

    A Scottish trade publication that covered topics related to accountancy ...
  3. Subscribed

    Newly issued securities that an investor has agreed or stated ...
  4. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  5. Unsubscribed

    Newly issued securities that have not seen much interest, or ...
  6. Versioning

    A business practice in which a company produces different models ...
Hot Definitions
  1. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  4. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
Trading Center