Subscription revenue models began hundreds of years ago. Think milk delivery men and newspaper men.
And it’s making a comeback.
The movement began in the business-to-consumer (B2C) market. Subscriptions in ecommerce doubled every year since 2013. As of now, a whopping 15% of online shoppers are subscribed to a box service (like razors, pet food and such), and 46% subscribed to streaming services (like Netflix and Spotify).
So if you’re in the B2C market and are still relying on single transactions, you might want to consider opening up a different revenue stream.
Now the movement’s hitting business-to-business (B2B) companies. Since the boom of software-as-a-service (SaaS) companies, businesses are realising it’s probably one of the most sustainable business models.
What is a subscription revenue model?
Subscriptions are recurring revenue models, where customers pay regularly — often monthly or annually — for ongoing access to a product or service. This is a customer-first approach that builds stronger relationships between vendor and buyer.
Why build a subscription model?
Predictable revenue and cash flow
Stop getting surges of revenue and dry seasons every few quarters. Companies with subscriptions start each quarter with a known baseline revenue and just have to build on top of that.
Satisfaction in customer demand
Customers want subscriptions, whether they’re B2C or B2B. And why not? It’s less of a commitment upfront to purchase a subscription, plus they get flexible payment options like pay-as-you-go.
Better customer retention
It’s easier to renew subscriptions and upsell existing customers when they see ongoing results using your product/service. A lower churn means longer lifetime value, so you don’t have to constantly find new customers
Easier fulfilment
Because it’s standardised, your processes are streamlined, your team knows exactly what they need to do for every customer. It’s easier to allocate resources.
Better customer retention
A predictable sales pipeline can increase your valuation by up to eight times that of a comparable business with little or no recurring revenue.
There are three different types of subscription revenue models
Pure subscription model: Revenue is fixed. The amount payable (and timing of payment) is predetermined.
Pure usage (aka consumption model): Here, revenue is variable. The amount that gets paid — and when — is determined by use. For example: a service like Uber, Lyft, or where a mobile wallet is involved.
Hybrid model: In this case, 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 fixed recurring monthly bill.
Subscriptions add another dimension to revenue generation. As shown in the illustration below, revenue goes from one-off (one transaction) to a line of many points (a subscription).
Having a subscription model allows you to flow with market trends. Sales, discounts, and promotions can be easily integrated. It’s so much easier to promote yourself (with a much lower customer acquisition cost) and you create a much lower barrier to entry.
What To Note Before You Transition to a Subscription Revenue Model
Getting started will require you to repackage yourself. It can be scary doing something you’re not used to, but you have to think long term.
Smart business leaders will look at the right metrics; Customer Acquisition Cost and Lifetime Value
Challenge #1: You will see revenue drop
Your accountants will freak out (but we promise they will thank you later).
Since payments are smaller, you might have less float in the first few months. At this point, you have to hold yourself back and let the numbers balance out over the next few months. But you’ll most likely see a massive uptick in year-on-year earnings.
Challenge #2: You will need a suitable tech stack
If companies do not use suitable software for their subscription model, having new revenue streams would be difficult. Now for companies that are freaking out that they have to use technology, sorry but it’s not an option anymore. If you want to survive, you have to adapt.
Challenge #3: Some customers might not be used to it
For a successful subscription model to occur, you’ll likely need to implement automated billing.
It’s inevitable that some will welcome the change and some will be resistant.
When this situation arises, you have to decide if the sustainability, scalability and predictability of your business matters more, or does this account matter more.
How To Get Started With a Subscription Revenue Model
Building a subscription product means your teams will need to focus on a new North Star: the customer. Here are three strategies to consider.
1. Understand how your customer wants to buy.
Speak to your customers and find out how their payment needs. Subscription models are more able how you charge more than what you charge.
2. Review the customer lifecycle
Recurring revenue means you’re “winning” customers on every renewal cycle. So you need to be more customer-centric than ever. Delivering better quality is a basic. Delivering timely support is expected. You’ll need to start tracking customer usage of your products and measuring overall customer satisfaction.
Also, don’t forget about product development. If you’re able to improve your offering on every renewal, that’s another reason for a customer to stay with you.
3. Rethink the way you sell
Focus on product activation, not just sales. In traditional sales, it’s easy to have a “won and done” mentality. But what we’re going for is loyalty.
You’ll need awareness, acquisition, activation, retention and referral if the aim is a resilient revenue stream.