by Felix Krohn
The “Subscription Economy” is a term originally coined in the United States and since then picked-up by many media, describing a trend throughout most industries where traditional pay-per-products/services offerings are moving toward subscription-based business models and, consequently, transactional revenues are shifting to recurring revenues. In this guest article by Felix Krohn, you will learn which factors are decisive for the subscription monetization.
This Subscription Economy has emerged due to select changes in market conditions, with digital technology being the main enabler that paved the way for new business models. For example, cloud-based software sets the basis for ongoing usage and customer behavior analytics allowing vendors to gain a much better understanding of customer needs and the value their software provides in responding to these needs. Sensors, mobile, cloud, Blockchain & IoT are creating unparalleled amounts of data, which allows for the creation of new customized services with different offerings and pricing models. At the same time, customers switching from buying things to buying experiences are demanding instant access to such services rather than traditional ownership and thus, growth is achieved by developing and monetizing long-term relationships. Customer centricity as epitomized by the likes of Amazon, Netflix, Spotify, Salesforce and Adobe and it is not just a trend, but a significant revenue driver that is relevant to nearly every industry: 80% of all companies are seeing a change in how their customers want to access and pay for goods and services, which is no longer limited to tech companies, but increasingly includes traditional markets such as fast-moving consumer goods, books, travel & leisure, etc., but also industrial goods, for example Industry 4.0.
Subscription monetization through radically sustainable customer orientation
With these developments in mind, some companies already go after the subscription opportunity by offering their customers a portfolio of different pricing and billing options, while others have not yet figured out whether and how to do this. The following aspects help to delineate subscription versus product-focused businesses:
Sustainable customer relationships
The business objective shifts from the traditional creation of “hit products” to increasing customer lifetime value (CLV). Subscription businesses regard the customer relationship as a continuum where the service offering – i.e. the subscription – will evolve with the customer, ensuring that value is generated by consistently focusing on customer benefits and thereby driving CLV. On the org chart, a new and vital function is on the rise – Customer Success Managers who are tasked to help Product Managers develop, improve, and update subscription products based on their intimate knowledge of their customers’ needs (in B2B, at least).
Subscriber journey as the key to customer loyalty
The service needs to include a positive customer experience, as it goes beyond the traditional product/brand value. Unlike licensing models that require a longer term upfront commitment, a subscription-based model allows customers to try the service in advance – if the experience does not match expectations, customers will look for better alternatives. Understanding the subscriber journey is therefore key to ensuring customer growth, satisfaction and retention.
Focus on added value
The marketing & sales pitch shifts from presenting features to focus on outcomes. Customers cannot easily translate features into value by themselves, so vendors need to help explain the problem they set out to solve and quantify the value of their service in financial terms.
KPIs for measuring monetization
Financial measurement needs to be reshaped. To assess a subscription business’ health, backward-looking KPIs such as sales or order volumes will be replaced by portfolio value metrics: e.g., annual or monthly recurring revenue (ARR, MRR), average CLV, and revenue retention rate or dollar-based net expansion rate (RRR, DBNE). These latter figures measure customer attrition, and how effectively new customers are purchasing additional services:
If RRR or DBNE is <100%, this means customers are churning, that is cancelling their subscription, which is often alarming as even small changes in your churn rate can have a dramatic impact on growth over time, unless you overcompensate with new business.
If it’s at 100%, this means customers are staying, but not adding new subscriptions/features nor upgrade to higher value packages.
>100% means that customers are not only staying, but also incorporating additional services over time and/or bear an annual price increase, making the lifetime value of each customer even greater.
The role of pricing
Last, but not least, the role of Pricing is evolving as the focus moves from stand-alone, one-off prices to relationship-based price models. Bundling becomes more important and – together with well-designed add-on features – determines the subscription customers will eventually pay for. With better information about their customers’ behavior subscription companies better understand the value they provide to each customer specifically and drive to fully capture it through constant price optimization. Packaging & pricing constitute an ever more important discipline for every business.
About Felix Krohn:
Felix Krohn is a seasoned transformational leader with significant international experience, mainly in the digital, media, publishing, information services, software, SaaS, IoT and consulting industry. The author of +50 international business publications and is also a conference speaker on subjects including strategy, innovation management, business models & monetization.