The subscription economy is taking the business world by storm. Gartner and Zuora report that 70% of companies have deployed, or are considering deploying, a subscription business model.
But designing and launching a subscription business model does not mean automatic success. You can have the best design phase, but you still have to make sure an innovative business model succeeds in traditional ownership-centric cultures.
Even in B2C and the pure SaaS (software-as-a-service) world, there are many subscription-centric start-ups that fail or do not scale well. There is no guarantee of success for anyone. In the industrial world, I propose that the key to success is to design your subscription business model with scaling and managing in mind within your traditional business model. I also encourage you to learn from the best practices in B2C and the SaaS world. To make it easy, I list below eight key considerations that can help you with managing and scaling your subscription model.
1. Engage your support functions as soon as possible: There are internal functions that are critical for the integrating and scaling of your subscription business model. First, finance needs to be trained on the opex/capex trade-offs and the implications to revenue recognition and cash flow. Finance also needs to embrace new financial KPIs. IT needs to understand the need to manage a subscription management engine fully integrated into existing ERP and CRM platforms. IT needs to be able to handle a greater volume of customers and transactions. Legal teams need to focus on new general sales conditions and service contracts related to a recurring business model. Finally, and maybe most challenging; sales needs to grasp the challenge of selling recurring offers instead of or in complement to industrial products. There is a need for alignment and proper preparation.
2. Think location, location, location: By location, I mean position in the organization during the design, scaling, and post-scaling efforts. Some industrial companies manage subscription-focused innovations in incubators as part of digital transformations. Others incubate new business models within the core business as part of the innovation pipeline. Finally, I have found many cases where industrial companies acquire or launch subscription-rich startups and keep them totally separate from the core business. There is no right or wrong. All options have implications based on your culture.
3. Focus on experience and simplicity: Recurring and subscription business models focus heavily on the user. The subscriber is at the center of the business model. Therefore, we need to keep things simple for the user across the board. Simplicity means ease of use, transparent prices, simple choices in solution sets, ease of making changes to your subscription structure and model, etc. Users expect progressive disclosure; they cannot be guessing or jumping through multiple screens to find basic information.
4. Leverage the value of the system and innovate: Industrial companies have two advantages versus digital natives: 1) they have a large installed base; 2) they truly understand the hardware/software interface. That is gold! With access to product data and subscription behaviors, industrial natives are in a powerful position to innovate and create the next generation of digital services and products. It is amazing what can be learned from managing hundreds of users and how they consume your offer.
5. Communicate early on the different KPIs and what defines success: Managing a subscription business model means educating your internal stakeholders on the critical KPIs (key performance indicators). At a recent Zuora Institute event where I was a speaker, I discovered lots of new acronyms:
- CAC – Customer Acquisition Cost
- ARR – Annual Recurring Revenue
- MRR – Monthly Recurring Revenue
- ACV – Annual Contract Value
- ARPU – Average Revenue Per User
- CLV – Customer Lifetime Value
Educate your team early on which KPIS are important and which make a subscription business successful.
6. Anticipate channel conflicts and synergies: The richness of a subscription business model is to have a direct relationship with customers and end-users. If your business relies on channel partners, make sure you manage potential objections and conflicts carefully. Easier said than done. Some companies (for example, Caterpillar and Schneider Electric) have found ways to segment their channel partners and jointly go-to-market with those most progressive. Other partners might simply get compensated as part of the existing relationship. With the emergence of the D2C (direct to consumer model), the position of traditional channel partners is potentially sensitive as you engage directly with their customers. Prepare well during the design phase.
7. Embrace go-to-market best practices from the SaaS world and B2C: Do not reinvent the wheel when it comes to pricing and packaging your subscriptions. There are best practices and knowledge nuggets you can use from the B2B SaaS world. There are also pitfalls to avoid. For example, the good/better/best subscription package is by far the most adopted. Most industrial companies might not have the required budgets and capabilities to conduct deep customer research to inform their subscription model. Learn from the success and failure of others!
8. Think about your subscription business model in the context of the maturity model: From the Zuora Institute event, I learned there is also a subscription maturity model. Most companies go through the process of learning and becoming more mature. When designing your subscription business model, you want to keep this in mind and adopt the Crawl Walk Run methodology. The key is to avoid the Wild West of subscription. By injecting design thinking and best practices early in the process, you might be able to leapfrog to more advanced stages.
The subscription tsunami is real. I recently researched case studies of subscription models in industrial companies and found many good examples of subscription-based innovations. Remember that industrial companies will not transition to 100% subscription! It is going to be a blend of transactional and recurring sales. Any industrial company that can profitably reach 20% of their total sales in a recurring format is a true champion. The challenge is being able to manage multiple business models at once and the ability to adapt for each model. Subscription business models do not scale well without applying key considerations listed; neither can they be managed by dozens of individuals who manually process thousands of billing and collection transactions.
Welcome to the subscription economy!
Stephan M. Liozu, Ph.D. is chief value officer at Thales Group and founder of Value Innoruption Advisors, a consulting boutique specializing in value-based pricing, digital pricing, and industrial pricing. He is the author of nine pricing books and is a frequent keynote speaker at industrial and digital conferences.