4 Common Challenges Of Joining The Subscription Economy
From freight vehicles and agricultural equipment to home appliances and disposable razor blades, everywhere you look, businesses are making strategic moves towards the subscription-based model.
Beginning in telecommunications and quickly gaining traction through music and video streaming services, almost every imaginable industry is looking for the competitive advantage, and higher profit margins, with recurring revenue models.
But depending on the industry, and whether it’s a physical product or a digital service, implementing this business model comes with its own set of challenges for business leaders looking to innovate and differentiate their offering in a competitive market.
In this GoRecurring blog post, rb2 Business Consultant, Ties Luijendijk, shares his experience and insights into the common challenges of bringing your business into the subscription economy.
1. Sustainability and profitability
As with any business venture, right at the top of your considerations needs to be the sustainability and profitability of your recurring revenue enterprise.
Some companies, which have taken a foray into the subscription economy, have struggled to monetize their offering in the long term, opting instead for short term testing of the market waters. Lessons learned show that sustainable subscription services need a robust business model built around them. For existing companies, this can mean deep organizational change, which is an additional short-term cost to factor in when adopting a more sustainable, long-term recurring revenue approach.
However, in a world of ‘Big Data’ if there’s data to collect, there’s an opportunity to monetize a subscription model. Data generated from connected Internet of Things (IoT) devices and web traffic can give your business actionable insights into customer preferences and behaviour, enabling you to optimize the delivery of your product or service, increase market share, and find new gaps in the market.
2. Balancing pricing with value
Established companies traditionally dependent on single transactions can find it difficult to transition to a regular subscription-based model. Customers want to feel like they’re getting value from a product or service. That’s why it’s essential to adopt adjustable, flexible IT architecture.
Balancing pricing and value can be aided by implementing composable commerce. In terms of your tech stack, this means combining components, such as software, APIs, and plug-ins, to create a custom solution to suit your business needs. By not being dependent on a single solution provider, your organizations can tailor tools to changing business and customer needs, replacing them if they prove ineffective without damaging the rest of your IT ecosystem. This gives you the agility needed to evolve and stay competitive.
At the end of the day, only your data can give you an accurate picture of what new and existing customers will be willing to pay for your product or service. Frequent testing, experimenting, and tracking is essential when you’re trying to make the most out of business analytics. For example, usage-based pricing, which comes with its own pitfalls, means your associated costs increase and decrease with customer demand. On the other side of the coin, your customers are also left with unpredictable bills. Unless you can reasonably predict peaks and troughs, it becomes a variable and potentially volatile revenue stream.
For many businesses, a fixed-price subscription service makes most sense. The biggest challenge can be setting your price points to retain existing customers and attract new ones. At this point, a certain amount of churn should be expected.
3. Customer engagement and loyalty
A successful subscription-based model ideally locks-in customers for the long term, whilst giving them the freedom and the opportunity to cancel at any time.
From a business perspective, it’s important to never assume that subscribers will automatically stay with your product or service, otherwise you run the risk of losing them. Particularly, with physical products which require a commitment to ongoing and regular home delivery, it’s important to be flexible and offer different plans and delivery frequencies in order to align with customer needs.
Long term commitment means your company needs to continually evolve and keep service levels up. Don’t give subscribers a reason to step out. Maintain engagement by providing relevant content and enhancement to your product or service. For example, streaming providers typically provide curated content aligned with their customer’s streaming habits to serve them ever more relevant and personalized content.
4. Anticipating future customer needs
Existing customer behaviour and usage patterns are a strong indicator of the sort of changes you need to make to keep your product or service relevant.
With a subscription model, you also have much clearer visibility over customers, and their habits. This enables you to better anticipate their future needs and evolving your offering accordingly For physical products, it also helps with the technical challenges in the back office. Coupling the predictability of recurring revenue with the availability of customer data enables you to optimize your support for physical products, and as well as processes for things like warehouse management, order management, vendors, recurring orders, frequency, and order fulfilment. This provides more predictable lead times, and oversight of peaks and troughs, which especially useful when you’re handling significant volumes of orders. On the other hand, digital services, such as software as a service (SaaS), tend to lend themselves more easily to a recurring revenue business model.
Go get recurring revenue right
Depending on your industry and existing business logic, switching to a subscription-based model can be a real challenge, a requiring an innovative new approach to business operations.
With the right support and implementation partner, making the decision to adopt a relationships-based, recurring revenue model can provide long term value and customer loyalty. Subscription-based companies can enjoy more efficient and accurate billing and use composable components to grow and evolve their business in line with customer needs.
GoRecurring is one event, over two hours, where you can find out everything you need to know about subscription-based business models, and more importantly, what they can do for your bottom line. Not only that, free spaces are still available for GoRecurring 2022.