Selling memberships and subscriptions has become increasingly popular throughout the last few years. The reasons are compelling: predictable cash flow, deeper customer relationships, and the ability to create sustainable, long-term value for businesses and customers.
If you wish to explore the membership world, this guide will help you learn about what a membership business model is and the pros and cons so you can start building your membership business.
What is a membership business model?
A membership business model is a business model that focuses on generating recurring revenue by providing ongoing value to members instead of focusing on isolated purchases. A membership gives members access to exclusive content, products, and premium services.
Some examples are clubs and gyms. Purchasing a membership gives you access to the facility and a community.
The online membership model is the same; many entrepreneurs and creators have built a membership site that provides exclusive content to their members and/or a community where they can interact and support each other.
Below are the pros and cons of membership business models for you to consider before starting a membership business.
Pros of Membership Business Models
Predictable Recurring Revenue
Membership models provide a steady, predictable income stream that can be forecasted months in advance, and if you offer the option to subscribe annually, you will benefit from a larger upfront payment. This revenue predictability and cash flow into your business give you the confidence to invest more into your business, hire necessary talents, and make long-term commitments without having to worry about money.
Higher Customer Lifetime Value
The cumulative value of a membership customer typically far exceeds what you’d earn from a single transaction. For example, a $47/month member who stays for 14 months generates $658 in revenue—often significantly more than what customers would pay for a one-time product. Because you are constantly improving your products or content, they continue to be amazed by the value they receive and stay with your business.
Strong Customer Relationships
Membership models naturally foster ongoing relationships with customers, compared with giving them your product and never speaking with them again. This continuous engagement creates stronger brand loyalty and provides constant feedback loops that one-time transactions simply cannot match. It also leads to valuable insights about their needs, creating opportunities for additional products and services that directly address their evolving challenges.
Lower Marketing Costs
As your membership base grows, you become less dependent on constantly acquiring new customers. With a solid retention strategy, you reduce the churn rate of your business and the marketing costs. Not only that, it’s a significant relief when you don’t have to constantly chase customers.
Built-In Community
Depending on your business model, memberships can create communities around shared interests or goals. This community aspect becomes a powerful retention tool as members develop relationships with each other, not just with you. Strong membership communities with members providing support, accountability, and motivation to each other often deliver value that you don’t have to create yourself.
Content Leveraging
Once you create a piece of content for memberships, it can be leveraged multiple times across different customer cohorts. Unlike service businesses where you’re constantly trading time for money, membership content can be created once and monetized repeatedly. This scalability allows you to serve more customers without a proportional increase in work, creating significant operational leverage.
Cons of Membership Business Models
Continuous Value Delivery Pressure
Perhaps the most significant challenge of membership models is the constant pressure to deliver ongoing value. You have to constantly review and reassess your product or content to make sure that they are not only up to date and relevant but also still valuable for your members. Without a plan and a team, this perpetual production treadmill can lead to burnout.
Higher Customer Expectations
On top of the pressure of just creating ongoing value, you will, at the same time, face pressure for your customers’ expectations. Membership customers typically have elevated expectations compared to one-time buyers, they need a reason to convince them why they should remain as members. They expect regular updates, responsive support, and continuous improvements to justify their ongoing investment, which are all reasonable demands you have to satisfy.
Increased Payment Processing Complexities
Recurring billing introduces unique challenges, including failed payments, expired credit cards, and complex refund scenarios. Each failed payment can lead to potential lost revenue and hence requires recovery systems. Studies show that 35% of recurring payments fail on average, where it can go as high as 70% for some businesses. Despite subscription or membership business models being increasingly common, payment failure is still a major concern for many businesses.
Higher Customer Support Demands
Membership businesses typically experience significantly higher customer support requirements than one-time purchase models. Members expect quick responses and support when they have a problem or issue, as they are part of the reason why they signed up to be members. You will be required to build efficient customer service systems, potentially hiring staff or virtual assistants at the very beginning of your membership business, which increases operating costs.
Different Types of Membership Business Models
The “All-Access Pass” Model
This model provides members with unlimited access to a comprehensive library of content, tools, and resources for a recurring monthly or annual fee. This type of membership model is best if you have extensive materials to provide for your members and works well for educators, trainers, and media companies.
One example of a successful business with this model is Foundr. Foundr membership gives you access to its entire library content, all of its courses, a community, and tools when you purchase its membership.
The challenge with this business model is that it takes significant upfront investment as you are offering so much value in your membership. As you are unlikely to be creating all the content, templates, and tools all by yourself, you will need to hire professionals or a team to help you create and manage your content. Therefore, this type of membership model is often not one you start with but one you evolve into.
The Community-Centered Model
The community-centered model prioritizes member-to-member interaction and community engagement over content delivery, creating value through connection, networking, and peer support. If your focus is building an engaging community where your members can exchange opinions and support each other, this is perfect for you.
Sometimes, getting an online course is not enough, many would prefer to have a group of supportive individuals who are at a similar stage to walk the journey with them.
The Dynamite Circle is a successful community-centered business that aims to help businesses grow to seven figures through interactions and support with other entrepreneurs. They hold events, workshops, local and virtual meetups, online conversations, and more to help entrepreneurs connect.
Creating a loyal and engaging community is not an easy task. You have to establish clear community guidelines and community traditions and design onboarding to make new members fit in. Not to mention that as your community grows, there will be disagreements and conflicts. Sometimes, no one is in the wrong; different members have different personalities, opinions, values, and principles, and getting them to get along will be challenging.
The Tiered Membership Model
Tiered membership model offers multiple membership levels at different price points, each providing incrementally more value, access, or personalization. This model is most often seen in SaaS (Software as a Service) businesses. However, it’s not limited to Saas and can be highly effective for other sectors like online education too.
Many online coaches applied this tiered membership model to businesses. For example, online coaches offer a basic plan that gives them access to resources like downloadable guides, templates, business plans, and one live group coaching session. The premium plan may offer two one-on-one live coaching sessions per month, priority chat support, and a success-guarantee package.
With the tiered membership model, clear value differentiation is important. You have to make sure that the pricing aligns with the value offered in each tier. There is a chance of imbalance and risk of cannibalizing higher tiers with overly generous lower tiers. Additionally, it can be complicated to manage multiple member experiences at the same time, which will require a learning curve if you have never done it before.
The Fixed-Term Membership Model
Unlike ongoing memberships, this model runs for a predetermined period with a specific outcome or transformation promised. It is common in education and fitness sectors where coaches offer programs with definite endpoints or transformations, something like “We will help you lose 10kg in a month” or “Learn how to code in 6 months.”
You can see why the fixed-term membership model is suitable in these cases, as your members will be likely to achieve their goals after the predetermined period, and they will no longer need to be members. Contrary to a typical membership model with a recurring revenue, the payment structure for this type of membership is often a one-time payment.
For example, Building a Second Brain offers fixed-term membership where members will learn how to achieve their full potential through the Second Brain system, a methodology to help you get more work done better, with less time and stress. This model works particularly well in this case because it gives the potential members a clear goal and a promise of achieving a specific outcome within a defined timeframe.
You will need some proof and testimonials from your previous members in order to create an appealing and convincing offer. Furthermore, creating a clear roadmap to help your members visualize their progression toward the promised outcome is important.
The Freemium Membership Model
The freemium membership model combines a free membership tier with premium paid options, using the free level as both a lead generation tool and a value-delivery mechanism. Free members will get access to limited content, features, or community areas, and paid tiers unlock the full experience.
Duolingo, Spotify, Notion, and CapCut are all successful examples of the freemium membership model. Offering a free membership plan is a highly effective strategy to attract customers and turn them into paying members. Instead of trying to convince customers to purchase your membership from the beginning, you offer benefits to them and slowly convert them to premium members through in-app advertising.
Some members will stay on the free plan for the rest of their lives, creating natural “friction points’ where they would benefit from upgrading. One good example of this is CapCut. CapCut used to offer a free plan without watermarks for years, but removing watermarks has become a feature for paid members. After using it for such a long period of time, many creators and agencies cannot live without CapCut anymore, so they choose to upgrade to a premium plan to remove the watermarks.
Choosing the Right Membership Model for Your Business
It might be obvious right away which membership model is suitable for your business, each of them has different features, advantages, and challenges. However, if you are unsure, here are some of the factors you can consider.
Your Content Creation Capacity
Be brutally honest about your sustainable content creation ability. How much content can you create? Are you a solopreneur, or do you have a team that can consistently deliver high-quality content and help you manage the community effectively? The all-access library model might seem appealing, but it requires substantial ongoing content development. It’s better to gradually extend your content library.
Your Audience’s Needs and Preferences
Survey your existing audience or examine your niche to determine what your potential members truly need. Are they primarily seeking information, a community, or direct access to expertise? There is no better way to validate your assumptions than by asking your existing audience what they want.
Your Long-Term Vision
Consider where you want your business to be in 3-5 years. Some models (like the all-access or community models) create valuable assets that can eventually be sold, while others may be more dependent on your personal involvement.
Ready to build your membership site? Check out our comparison of the 6 Best Membership Site Platforms now to find the perfect fit for your membership business!
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