Have you ever heard about the subscription economy?
The term refers to the business of offering subscriptions to consumers. For some companies, their entire business relies on a subscription business model. Examples of these include Netflix, Spotify, Zipcar, and all SaaS companies such as Salesforce and HubSpot.
It’s actually not that new: the subscription business model has been around since our great-grandparents had their milk delivered to their door, but over the last two decades it has been increasingly adopted by technology and media companies. Businesses have been selling monthly subscriptions for all sorts of goods and services, offering anything from online software to food for a flat monthly fee.
Subscription is fast becoming the default business model for any company looking to accelerate growth, maximize cash, and increase its value. Currently, there is an increase in subscription companies as part of a larger shift from the product economy to the subscription economy. Businesses now need to handle customer loyalty, pricing, and selling very differently.
Running a subscription company means there is a continuing relationship with the customer. No longer does the business-customer relationship end with the swipe of a credit card. And that’s the beauty of the subscription model: you don’t have to worry with one-time sales anymore. Once you acquire a new customer you got a recurring revenue, which means you don’t have to worry about one-off sales every month. Different from traditional sales, it gives you new challenges such as retention and churn.
A new customer behavior
Today, many powerful business platforms are easily accessible. In many cases, business users can get a 30-day free trial by simply sharing their email address. That’s a pretty low-risk requirement for a business buyer to check out a platform that could save them time and money on the job, help them collaborate better with teammates or create some impressive charts or graphs to add value to their next business initiative.
If a product provides value for today’s B2B market, a “tryer” will become a “buyer” by utilizing the platform on a trial basis with a current work project or initiative. If your product successfully adds value to a current initiative, that value will become associated with your company and your products.
Many subscription economy companies base their sales strategy on ways they can acquire the masses. By design, their strategy is to continuously provide more “free access” to increase usage, embed information, establish value and build loyalty. If done well, at some point, users of your “freemium model” are going to want to collaborate on projects with others, share more information and have more security controls.
That’s when it happens. Your tryers officially become buyers. They raise their hands and cross the threshold into the world of a paying customer.
The shift to subscription
Last year, Adobe decided to move its software suite for creatives to the cloud. The transition was far from perfect, but the results have mostly been positive. The company says 20% of customers that are purchasing the updated online tools weren’t Adobe customers before the switch. And now that the software is cloud-based, Adobe can better track how customers are using it and constantly push updates to individual users.
Most of the complaints primarily seem to be coming from users who don’t wish to have every upgrade or those who don’t need an entire suite of apps. However, Adobe’s managed to move over 500,000 cloud subscriptions in just under a year, so they’ve decided to ignore that hue and cry. On the other hand, users say many of the new upgrades are too good to resist, and spreading out the pain over time let them invest the bucks elsewhere – like the inevitable hardware updates required to keep such software running smoothly.
Other companies who have made the switch have found they’re able to attract a broader customer base by offering a subscription-based model, which has a much lower upfront cost to consumers. But the transition is sometimes easier on the customer than on the company, where the transformation to a new business model can be incredibly disruptive to the way sales and marketing are run.
Why should your company consider it?
Paying customers mean recurring revenue for your company, and it’s a driving factor behind a company’s decision to decide for the subscription model. It helps companies maintain profitability and make informed decisions about future operational initiatives, creating what Aaron Ross calls predictable revenue.
In the subscription model, sales process decisions are more likely to be focused on “buyer first,” versus the “product first” approach of traditional models. Internal conversations focus more on customer success metrics determined by changes in your customer acquisition cost, changes in your customer lifetime value and your success rate in upselling a percentage of your accounts to a premium product or service model.
This new approach requires a very different way of looking at your sales process and your overall business model for your SaaS business growth. The luxury of having more predictability in your business model comes with some caveats: (1) the responsibility of successfully navigating scores of customer interactions and (2) the inherent risk that each interaction will either strengthen or weaken your customer experience.
Transitioning to or enabling the integration of a subscription-based sales model will fundamentally change the way you operate your business. It will also affect many key functional areas of the organization.
History shows us that it worth the shot, and the present says that’s the future ahead of us. Are you ready to make the shift?