Switching To A Subscription Model: What to fix and why
When your sales are flatlining – when you’re struggling to increase market share or break into new markets – it can feel like your product or service is stuck in an outdated selling model. Maybe the time is right to switch to a subscription-based model? But where do you start?
It’s not as simple as just making the leap. A subscription business operates very differently to single-purchase products and services. So before you either make the switch, or get started for the first time, here’s a guide to what to fix and why.
What is a subscription model?
In a subscription-based pricing model, customers pay for a product or service via a regular, recurring payment. Charges are typically incurred on a rolling monthly or annual basis, with the option for customers to renew or cancel at any time.
In this respect, the subscription model uses a rolling contract between the business and the customer, whether that’s B2B or B2C. Subscription-based pricing has gained traction in multiple industries, and continues to find new applications. Here are some examples:
- Consumer Goods
- Customer Services
- Internet of Things (IoT)
Why do companies switch to a subscription model?
Whether they’re stuck selling licences, single purchase products, or not able to directly connect with customers because their product or service is handled via a third party vendor or distributor, each company has a different trigger for switching to a subscription-based solution. The subscription model has a number of advantages for both customers and companies.
- For customers, smaller, regular payments can make a larger purchase feel more affordable and less of a financial burden. They also lower the barrier to entry when an expensive purchase is available in affordable instalments. And with the ability to cancel at any time, there’s no long term lock-in or commitment on the customer’s part.
- For companies, there’s less fluctuation and therefore greater predictability in monthly revenue, therefore a steady flow of income. With more predictable income, it’s easier for businesses to manage their inventories. It also creates the chance to better understand customers and provide both personalized offers and the opportunity for them to buy relevant add-ons.
Key considerations for your subscription model
Sometimes, the right subscription solution can seem simple.
For example, software companies which previously used a licence model see the opportunity to package their offering on a monthly basis. However, when it comes to selecting the right approach, there is an additional layer of complexity which needs to be overcome.
Key decision-making is required in order to package software as a service (SaaS) in the most appealing way. The two most common approaches are to either provide different levels of subscription, or ‘membership’, and to offer a core base product with the additional add-ons. In the first example, it is usual practice to provide the equivalent of bronze, silver, and gold products. In other words, three levels of functionality: simple, more sophisticated, and all-inclusive solutions.
For existing businesses built around a pure licence or physical goods, it gets more complicated. They need to consider things like pricing, delivery, and schedules. It can also be a significant challenge to transition from the old to the new business model. For different types of business, there are also processes to consider, such as fulfilment and how to activate and deactivate live features of a particular subscription.
If you’re switching from a one-time payment to a recurring payment model, this has an impact on billing and payment. A wire transfer might be good for single transactions, but a subscription model needs to offer easy, flexible, and generic payment methods such as credit cards, direct debit, or PayPal. There’s also an impact on financial and management reporting, and of course performance indicators.
With KPIs, there’s a shift in what’s measured and relevant. Instead of looking at how much has been sold, the focus is how much monthly revenue has been made. In non-subscription models, there’s an end date to a particular time period, and the quantity of sales within that are measurable. If a customer buys a product or service for one year, then towards the end of that time period they have to be re-sold.
With the subscription model, most customers are happy to keep paying as long as the service meets their needs. In this scenario, companies typically offer additional services and discounts in order to keep the relationship going in the right direction.
The true success of any subscription model can be measured by churn rates. Businesses that only focus on new customers run the risk of everything falling away – because they’re building on nothing. On the other hand, if an entire subscription model is aimed at low churn rates, business growth is almost certain to follow.
Make the right choice
When it comes to choosing the right solution, customers often find out how similar businesses have made the move and now operate.
Especially, for new applications, if there’s no precedent set, it can be difficult to understand how to price your product or service.
Learn more about the implementing subscription models by reading on blog on how we use Zuora’s Nine Keys.