The subscription-based economy is here to stay. Companies in various industries are quickly developing and offering new customer engagement models that focus on recurring revenue and attaining customers for life, as opposed to the "one big transaction deal" approach from the past.
For some transactions like cable/internet bills, club memberships and insurance, the subscription approach is natural. In fact, some companies were created with the subscription model in mind, such as Netflix and NetSuite.
But, for most companies, it is a challenge and an evolution to develop a new model, while still maintaining current business needs.
One common mistake is to take the change to a subscription model lightly. Bundling current products, services and charging on a monthly basis does not equate to the subscription approach. It is understandable to want to reuse and redeploy current assets but engaging customers on a continuous basis with a new revenue model requires a fresh way of thinking.
Build a Successful Subscription Model
Here are the top things you need to consider:
- Engagement Model: Selling a subscription model requires a different approach than landing a big deal. Revenue will not be realized in the short term but rather as the customer adopts and expands the use of the solution. While you still need a marketing engine and sales team to sign customers up, the importance of a success team that drives these opportunities is now paramount. As discussed in my recent blog, customers are looking for outcomes, not installations.
- Portfolio Management: How solutions are offered and priced is significant. Low prices and easy adoption will help gain market share but this approach will most likely affect profitability in the long run. It is important to consider the profit horizon of your offer. Special attention has to be given to acquisition and retention costs. In a world where customers can switch solutions and providers, retaining good customers and expanding revenue from existing customers must take center stage.
- Financial and Operational Metrics: The financial and operational metrics of traditional offers, focused on product and service margins at the time of deployment, no longer apply. Here are some of metrics to consider when evaluating subscription offerings:
- Annual or Monthly Recurring Revenue – Measure all up by customer or by revenue stream (subscription, premium services, professional services, transactional or consumption).
- Customer Acquisition Cost - Depending on the solution and expected revenue, special consideration needs to be given to sales and marketing expenses.
- Subscription COGS (Cost of Goods Sold) – There is a cost that must be considered to maintain the solution and service customers. This is where the opportunity for big profit margins exists. As the customer base expands, you can experience proportionate savings and growth in costs gained by an increased level of production.
- Churn – Percentage of customers that end their subscription. Analytics need to be applied to determine factors that influence or predict including: features use, percentage of additional users adopting the solution and customers ending or reducing subscriptions significantly before others.
- Cost to Renew Customers
- Cost to Expand Customers
Developing a new subscription offer is a major undertaking that requires participation throughout the organization. While the offer and pricing should take precedence, organizational, technical and reporting aspects should also be taken in consideration. A subscription model will influence the way you sell, deploy, support, expand and monetize your offerings.
How Can Technology Help?
A solid contract management solution that can handle different subscription (and non-subscription) components and their combined pricing, quotes, contract terms, billing, renewal management and revenue recognition is paramount.
Tribridge's Advanced Contract Management solution for Dynamics AX and NAV has been developed with these considerations in mind.
Whether your organization is considering or has developed subscription models, we can help. Reach out to discuss your needs.