Membership vs. Subscription: Which Fits Your Business?

The one-time fee business model is slowly, but surely becoming obsolete. Instead, businesses now rely on a much more customer-oriented, and long-term approach. 

That is why subscriptions are becoming the preferred business model for both merchants and customers, with their popularity expected to keep growing. 

Why?

For businesses, it is a great way to ensure a steady and reliable income. For consumers, it allows them much more flexibility regarding their payments.

Keep on reading, as we talk about the pros and cons of each, and ultimately find out which one wins in the battle of membership vs. subscription.

Membership vs. Subscription: A Comparison

What Is a Membership Model?

A membership business model is one where people pay a specific membership fee, in order to get access to discounts, exclusive products or experiences, or services. Usually, there are different membership levels, which provide different levels of access.

Example: A fitness center membership allows you to use all the equipment, spa, and sauna facilities, personal training, nutritional guidance, supplements, etc.

Pros

• Steady and Recurring Revenue. Financial planning is a lot easier with the steady monthly or annual cash flow that comes from membership fees.
• Higher Customer Engagement, Loyalty, and Satisfaction. More often than not, this model develops long-term relationships and higher retention rates among members. This is mainly because there is a sense of belonging, community, and commitment. All of this leads to a higher level of satisfaction and loyalty from members.
• More Upsell and Cross-Sell Opportunities. Since you already have an established relationship with your members, it is a lot easier to offer additional services, products, or upgrades.

Cons

• High Initial Costs. Building a membership business model requires a solid initial investment to attract members. The upfront cost is something business owners need to be aware of, as it requires careful consideration.
• Limited Audience. A lot of people could be unwilling to commit to long-term payments. It is vital to present immediate value to them if you want to keep them interested and engaged.
• Ongoing Maintenance. To keep members happy, engaged, and committed, you need to invest in a few key areas, including customer support, new offers, marketing, and equipment improvements.

What Is a Subscription Model?

A subscription business model is one where people pay a fixed fee to access certain products or services. There are various types of subscription pricing models, including:

• Usage-based pricing. Users pay for the amount they’ve used or consumed. This is usually tracked with metrics such as bandwidth, data volume, or active user hours.
• Tiered-based pricing. Customers can choose from different packages with different costs and value. Every tier aims to cover the needs of a specific user group, with the business goal being to promote the highest-priced tier.
• Flat rate pricing. People pay a single, fixed price for using a product or service. There are no upgrades, and everything the product/service offers is at your disposal.

Customers pay a recurring fee on a weekly, monthly or yearly basis. 

Example: Streaming services like Netflix, Spotify, and Disney+ use a subscription-based model, providing unlimited streaming in exchange for a recurring monthly fee.

Pros

• Customer Retention. Subscription-based services tend to have a higher customer retention rate, due to the recurring nature of payments, which encourages users to use the product/service continuously. This also fosters ongoing customer relationships, leading to lower churn rates than one-time purchases.
• Scalability. This business model is easier to scale as the business grows. SaaS companies, for instance, can afford to onboard more users with a relatively low additional cost.
• Personalization and Insights. Long-term relationships with customers allow businesses to gather data on their behavior and preferences. These insights can then be used to increase personalization and improve customer retention.

Cons

• Lower Immediate Revenue. With subscriptions, you accumulate funds through smaller payments over time. Initially, you will not get a cash burst, which could be challenging, particularly for companies that need immediate cash flow.
• Complex Billing. Managing subscriptions-based billing can be quite difficult, due to the large volume of upgrades, downgrades, cancellations, and month-to-month payments. This often leads to businesses investing extra funding in automated billing systems and customer support.
• Subscription Fatigue. Nowadays, more and more businesses are using the subscription business model, and a lot of people have several subscriptions (software, products, streaming services, etc.). This leads to the so-called subscription fatigue. Essentially, users get overwhelmed by the amount of subscriptions they are paying, and this leads to more cancellations, especially if they don’t find the product/service essential to their needs.

Key Differences Between Membership and Subscription

1. Customer Engagement
2. Value Proposition
3. Cancellation Rates
4. Audience Commitment

1. Customer Engagement

More often than not, memberships mean stronger relationships and a sense of belonging. Meanwhile, the nature of subscriptions is more transactional and doesn’t spark the same feeling of community.

To quote Robbie Kellman Baxter:

“Membership is about belonging to something bigger than yourself. It’s about gaining access to benefits that grow over time. The best membership models are designed to build trust and loyalty, not just to facilitate transactions.”

2. Value Proposition

Being a member of something creates a sense of belonging. Being part of a club also means exclusive offers, and that is a great value proposition for your business. On the other end, subscriptions focus on accessibility and ease of use, without any real exclusivity.

As Harley Finkelstein, President of Shopify, says:

“The membership model taps into the psychological need to belong. It builds community and brand loyalty, which creates a deep connection that’s much stronger than a simple one-off purchase.”

3. Cancellation Rates

The lower levels of engagement in subscription-based businesses lead to higher cancellation rates. Alternatively, the churn rates are much lower in memberships, because of the higher engagement of members.

John Warrillow, author of Built to Sell:

“With membership, the goal is not just to sell a product, but to build a lasting relationship. Membership drives engagement and fosters a two-way connection that’s hard to replicate with traditional transactional models.”

4. Audience Commitment

Another important difference, in the membership vs. subscription debate, is the commitment of the audience. Memberships typically require a yearly fee, which translates into a longer involvement. 

Subscriptions, on the other hand, have a more volatile structure, with month-to-month payments that can be canceled at any time. 

This provides a bigger challenge for subscription businesses, as they need to constantly work on creating value for their users so that they stay committed.

As Tien Tzuo, CEO of Zuora, states: 

“In the Subscription Economy, the end goal isn’t to sell a product, it’s to establish a long-term relationship with the customer. It’s about providing ongoing value, so customers keep coming back and paying month after month.”

Membership vs. Subscription: How to Choose?

In order to establish which business model is more suitable for your business, you need to consider a few major aspects.

For example, a membership model would be appropriate for companies that are targeting highly engaged, loyal customers, offer exclusive services, and want to emphasize their community as a key selling point.

A subscription model would be more suitable if you are offering continuous products or services. Subscription services are ideal for streaming platforms, meal kits, and other businesses that deliver their offers on a regular basis.

To summarize, here are the factors you have to consider before choosing a subscription or membership model:

• Target audience
• Product or service offerings
• Short and long-term goals
• Scalability

Make sure to perform sufficient research and testing before you pick a model, and ask for customer feedback.

How Can Electronic Transfer Help?

Are you considering a membership model for your business? We, at Electronic Transfer, understand that reliable and secure payment processing is essential. 

As a leader in monthly membership credit card processing, especially for industries like health clubs or fitness centers, we offer specialized services to streamline recurring payments.

We have over 30 years of experience, and our level of commitment towards delivering the perfect solutions for your business is unmatched. Give us a call today (800-757-5453), and you’ll see for yourself why ETI is the best choice for your business.