Book publishers invented the subscription revenue model 400 years ago, but the real subscription renaissance is happening right now.
The movement began business-to-consumer (B2C). Subscriptions in ecommerce doubled every year from 2013 to 2018. By the end of that period, 15% of online shoppers were subscribed to a box service (like razors or pet food), and 46% were subscribed to streaming media (like Spotify or Netflix).
Now the movement’s hitting business-to-business (B2B) companies. One early adopter in this area was tire company Michelin. They outperformed in their market with a pricing model called “The TK” (short for ton-kilometer), charging their customers by the mile. Since then, we’ve seen a rise of software-as-a-service, engines-as-a-service, elevators-as-a-service – you name it.
So how can you get in on the action? Read our primer below, or dive deeper into our ebook, How to Speed Up Revenue with Subscription and Usage Models.
What is a subscription based revenue model?
Subscriptions are recurring revenue models, where customers pay regularly – often monthly or annually – for ongoing access to a product or service. Think Netflix, Amazon Prime, or *ahem* Salesforce. Flexible pay-per-use business models like usage (also known as consumption) are a kind of subscription. What all these models share is a customer-first drive, since recurring revenue needs recurring relationships (and renewals) to thrive.
There are three different kinds of subscription models
- Pure subscription model: Revenue is fixed. The amount that gets paid (and when) is predetermined. For example: a flat-rate monthly subscription fee for Spotify.
- Pure usage, also known as a consumption model: Here, revenue is variable. The amount that gets paid – and when – is determined by use. For example: a service like Uber or Lyft.
- Hybrid model: In this scenario, customers are served a combination of subscription and usage options so that revenue has both fixed and variable elements. For example: overage fees tacked on for additional mobile phone minutes on top of a flat-rate monthly bill.
Subscriptions and usage add another dimension to revenue. As shown in the illustration below, revenue goes from a point (one transaction) to a line of many points (a subscription).
Why build subscription and usage products now?
Subscriptions can speed up profit; as a company attracts more subscribers, revenue increases exponentially. But the benefits of a subscription model go beyond profit. We’re living through great economic uncertainty, and building a subscription model can make your business more resilient. Here’s how:
- Make revenue predictable. Stop hitting the revenue reset button every quarter. Companies with subscriptions will often start each quarter with a baseline revenue at or near the previous quarter (depending on churn), then build on top of that.
- Build recurring relationships. Subscription products let you build a long-term base of regular customers. It’s easier to renew (and upsell) existing customers than constantly find new ones.
- Respond to customer demand. Customers want subscriptions, whether they’re B2C or B2B. And why not? It’s less of a commitment upfront to buy a subscription, and they get flexible payment options like pay-as-you-go.
- Get more agile as a business. Long-term customer relationships make for valuable ongoing datasets. You can learn from customer behavior – mining the Customer 360 – and respond with new offerings that match.
Maybe a subscription model was already on the horizon. But 2021 is leaning on you to clear your calendar and move up your transformation roadmap.
How to get started
Building a subscription product means your teams will need to track to a new North Star: the customer. Here are three strategies to consider.
1. Understand how your customer wants to pay
Price is more than just a dollar figure. It’s an indication of what customers want, and how much they want it. When you discover what customers value, and what they’re willing to pay, you can build the right thing.
Getting flexible with your revenue models means you can focus more on how to charge than what to charge. As you experiment with different forms of subscription and usage pricing, you’re in a great position to iterate your way to the perfect sweet spot of product-market-pricing fit.
So focus on how the customer wants to pay – and buy. B2B companies are taking a page from the B2C playbook and making their products faster and easier to access. Let your customers buy on their own terms.
2. Connect touchpoints across the new customer lifecycle
Recurring revenue calls on you to “re-win” your customer every renewal cycle, so you need to become more customer-centric than ever . You’ll need to track customer usage of your products and measure customer satisfaction. And you’ll need to work on creating a great, omni-channel buying experience.
Combining omni-channel buying with subscription selling means following one single thread as a customer travels from quote to renewal. Teams across the company will need to be able to access the same customer data, and act on it.
Marketing needs a better way to capture leads. Sales needs a structured and guided selling process that lets reps configure, price, and quote for any emerging revenue model. Finance needs a way to bill for any transaction type (and accounts receivable needs a good way to collect for it).
Other functions like customer success and service will need to be developed and matured so that you can focus on provisioning for self-service, revenue lifecycle automation, and low-touch offerings like free trials and freemium products.
Revenue Cloud has allowed us to easily manage our subscription business and create recurring relationships.
Ruchika Chopra, head of business operations, Juniper Networks
3. Reimagine how you sell
B2B buyers want to buy services, not products. Selling services means changing the way you sell – and change is never easy. Over 90% of tech companies are shifting to subscriptions, but only 55% consider themselves to be ready for the shift, according to EY Research.
To get ready, sales teams should change the way they segment customers. Selling services makes some metrics – like cloud usage – more important, and other metrics – like headcount – less important.
Then focus on adoption, not just sales. In product sales, customers are “won and done.” In service sales, customers need to be won and won again. To nurture customer adoption, not just customer acquisition, sales teams need to perform against recurring revenue metrics like annual recurring revenue (ARR) and average revenue per user (ARPU). Sales reps need training on how to drive customer usage, and they’ll need new compensation incentives that are tied to customer success.
Open new paths to revenue – and speed it up
It’s amazing to watch as we go into companies and help them make this change. Once you get into that recurring revenue stream, you’ll never want to get out. Our customer Ruckika Chopra, the head of business operations at Juniper Networks, said, “Using Revenue Cloud has allowed us to easily manage our subscription business and create recurring relationships.”
As you make this move, be thoughtful about the new customer journey, and do everything you can to improve the customer experience at each touchpoint. By making things easier for your customers, you’ll make things easier for your teams as well, and build a valuable, resilient revenue stream in the process.
Sell into the future with subscription and usage models
Reimagine your products and envision a new customer lifecycle. Learn how recurring revenue models can offer the revenue and agility needed for future growth.