Why are companies transitioning to subscription-based models?

Subscription-based models have become increasingly popular in recent years. This is especially true among technology companies. 

There are several reasons for this surge in popularity, including:

  • Deeper customer relationships

  • Pricing flexibility

  • The predictable revenue stream of an annuity-based business model

But, as with any trend, it's important to look before you leap. 

Switching to a subscription-based model is a big change. There are significant differences between a transactional model and something like software-as-a-service (SAAS). It can affect everything from customer relationships to business management, reporting, and processes. 

You need to understand how the change will impact your business if you want to succeed. 

For example, it's common for companies to run into issues with their systems and processes. They jump over to a new business model - but keep their old systems. Then they run into trouble because it wasn't designed for that purpose. They struggle to manage subscriptions, account for revenue, or handle complex system requirements.

Whether you're transitioning to a subscription-based model or already using one, there are four key areas to consider. Senior leadership must consider how the change will impact:

  • Customer interactions

  • Systems and processes

  • Pricing and monetisation

  • Reporting and metrics

In this article, we'll explore those four key focus areas for companies shifting to subscription-based models.

1. Customer Interactions: Adapting to a Subscription-Based Model

Before shifting to a subscription-based model, consider how it will affect customer interactions. 

Unlike one-off transactions, subscription-based models need more frequent touchpoints with customers. They must continue to receive ongoing value to stay engaged and subscribed. Keep in mind that customers' needs and preferences may change over time. Stay adaptable and offer personalised experiences. 

As a business grows, customers may want to add or adjust features, which can be challenging to manage. The good news is all you need is the right tools and systems.

Automation tools can help businesses plan and manage customer interactions. Customer relationship management (CRM) is a common example. 

One way to build strong relationships with customers is by adding a customer success function. This should focus on customer health and growth. Then set up a renewals process and team to proactively manage the customer relationship.

Follow these steps to maintain strong relationships with your customers as you transition.

2. Systems and Processes: What You Need to Know for a Successful Transition

Transitioning to a subscription-based model can be a daunting task. Your existing systems may not be well-suited to manage subscriptions. This can lead to difficulties in handling subscription processes from a transactional system. Accounting for revenue complexities can also be a challenge. 

Departmental silos can also hinder cross-functional processes. After all, it's hard to bring in cross-functional processes if everyone is in their own silo. A successful subscription model needs collaboration across departments.

To break down silos, use integrated systems that support cross-functional processes. Create end-to end processes with clearly defined business rules. This provides flexibility for customers and gives you better understanding of their behaviour. 

For companies that sell directly to consumers, payment automation might prove challenging. Automating provisioning and entitlements for new customers can be complex. As can suspending service for non-payment. These can cause delays and negatively impact the customer experience. 

Plus, remember those new pricing and bundling strategies? Customers love them, but they also impact how revenue is recognised and accounted for. You need an enterprise platform that can handle the new strategies. 

These might seem like big obstacles, but you can overcome these challenges. You simply need the right systems and processes in place. Ensure that you have a well-architected enterprise application stack to manage subscriptions effectively. This should be integrated to sell, bill, collect, modify, and renew at scale. 

Try to focus on the end-to-end customer experience. Create cross-functional processes internally to support the transition to a subscription model. 

By addressing these challenges, you can make the transition to a subscription-based model and achieve long-term success. 

3. Pricing and Monetisation: Strategies for Subscription-Based Models

Yes, subscription-based models are an exciting opportunity to increase revenue and customer retention. However if you're considering a subscription model, it's important to get pricing right.

The flexibility of subscription-based models allows customers to pick and choose the features they want to use or opt for an all-you-can-eat option. This makes it a win-win situation for both businesses and consumers. Customers enjoy products and services tailored to their specific needs, and businesses generate more revenue and retain customers.

To get the most out of subscription-based models, leadership teams must learn to create effective pricing and monetisation strategies. This involves putting together a puzzle of sorts. First, deciding on the pricing model, such as per user or tiered pricing. Then, determining the appropriate price point while balancing the value provided to customers with revenue goals and competitive pressures.

But pricing is just the beginning. Companies also need to enable their pricing and monetisation models to operate at scale. This can be challenging due to the different pricing variations, like tiered pricing and global pricing. These variations can create significant complexity in the company's price books.

Additionally, forecasting revenue and managing cash flow can be difficult with subscription models. Revenue is spread out over the duration of the subscription. This makes it more challenging to forecast and manage cash flow than with a one-time purchase model.

Companies also need to follow generally accepted accounting principles and recognise revenue appropriately over the subscription period. They should also demonstrate the value of their subscription offering by:

  • Providing clear pricing and subscription terms

  • Educating customers on benefits and features 

  • Offering flexible pricing and bundling options

Monetizing a subscription offering may seem daunting, but it is achievable. To address these pricing and monetisation challenges, companies should carefully consider their pricing strategy, revenue forecasting, and revenue recognition practices. They should also be transparent with customers about their subscription offering and provide clear pricing and flexible options. 

By taking these steps, companies can successfully monetise their subscription offering and achieve long-term success.

4. Reporting and Metrics: Tracking Performance in a Subscription-Based Model

When it comes to transitioning to a subscription-based business model, many companies are in for a big change. In fact, the shift to recurring revenue means that businesses will need to completely overhaul their reporting and metrics system. This will ensure they're capturing the right data and using it to make informed decisions.

Leaders will need to monitor the health of their subscription business to identify areas for improvement. This is where reporting and metrics come in. Businesses need to track recurring revenue metrics, like monthly recurring revenue, annual recurring revenue, and churn. This data is essential for making data-driven decisions about pricing, customer acquisition, and retention.

Transaction-based models that can be lumpy and unpredictable. In contrast, the subscription model creates a deeper, stickier relationship with customers. In some cases, it also makes revenue more predictable. This shift also requires a different approach to reporting - one that is much more forward-looking based on active subscription contracts. 

Overall, transitioning to a subscription-based business model requires significant changes to reporting and metrics systems. Companies need to track recurring revenue metrics to make data-driven decisions about pricing, customer acquisition, and retention. By monitoring the health of their subscription business, leaders can identify areas for improvement and make informed decisions.

Best Practices for Succeeding in a Subscription-Based Model

Moving to a subscription-based model involves a significant transformation that affects every aspect of a business. It requires a new mindset and approach that must be embraced by the entire organisation. That means everyone from sales and operations to finance and leadership. 

Sales teams need to change their approach, whether they are engaging in new sales, upsells, or renewals. Meanwhile, finance teams must adjust their processes to accommodate the unique needs of a subscription-based model. Executive leadership teams should also carefully evaluate different systems and processes to ensure that they can effectively support the new model.

As subscription-based models become increasingly popular, it's crucial for businesses to understand what it takes to transition and succeed. Companies must prioritise customer interaction, establish the right systems and processes, create effective pricing and monetization strategies, and track key metrics. This will lay a solid foundation for a thriving subscription-based model that provides value to customers while driving revenue growth. 

Do not be afraid to embrace change. With the right approach, transitioning to a subscription-based model can be a rewarding and profitable experience.

For more information

If you have any questions or need assistance with transitioning to a subscription-based model, please contact your local team of experts.