subscription model

Get started with a subscription model with these 6 considerations

by Kevin Willemse

The business landscape is changing for tech and software vendors, and it’s not just the COVID economy pushing the change. Subscription models have been spreading for years now, so much so that essentially all new software vendors (and 80 percent of existing vendors) are offering subscription-based access to their products—a trend that shows no logical sign of slowing down. In fact, IDC estimates that 53 percent of all software revenue will be generated through subscription business by 2022.

Officially, the tide has turned towards subscription models, and it’s accelerating quickly. But before you pivot your organization likewise, it’s imperative that you take the time to prepare core operations and adjust go-to-market capabilities and offerings to be successful with a subscription-based revenue and product strategy. 

Based on our years of firsthand experience implementing quote-to-cash systems for subscription-based product lines, we’ve seen the dos and don’ts of subscription models. Here are six areas of consideration to work through before you make the switch:

 

What are your COGS?

Organizations looking to establish subscription-based revenue must have a precise, encompassing, and accurate understanding of their associated costs. This critical data helps business stakeholders ascertain the price model of a potential subscription-based offering. Be sure your organization has taken a thorough look at its current  model and how to retain or improve current revenue with the added element of subscription billing. 

Questions to consider:

— What are the direct and indirect costs to bring a subscription model to market?

— What is the target margin? Over how many years? What is the anticipated vs. target churn or term?

— How much discounting on subscriptions can the organization handle?

— What new costs will be introduced with the new subscription model?

 

What does the customer market look like?

If your organization is going to enter the subscription market, you have to be ready to present an appealing and successful subscription offering that matches the customer market. As opposed to traditional selling methods, subscription selling is far more aggressive and volatile, which means you have to work hard to keep a solid customer base and continue to meet changing expectations. Many firms that have already adopted subscription-based revenue do regular rationalization exercises to address bloated costs—that should be both a caution sign and an opportunity to newcomers in the subscription game. Make sure you keep customer relationships alive and find the gaps in your competitors’ offerings that you can take advantage of. 

Questions to consider:

— Who is the competition and what are their/your differentiators?

— How will existing customers react to a new subscription offering?

— What do our customers want in terms of price, product, and contract modeling?

— What other subscription services do our customers already use?

— How will we use cross and up-sell opportunities in our customer base?

— What is our average customer lifespan and how does that translate to subscription term lengths?

 

Can marketing and customer service support a subscription model?

If you’re going to enter the subscription game, you have to have the team and processes ready to support it. This means your marketing and customer service teams need to be prepared to sell the offering and answer any and all questions about it. With repeat revenue models you have to perpetually nurture the customer relationship beyond a “closed deal” to keep each subscription alive as long as possible. You’ll have to consider technical support, knowledge libraries, customer communities, and go-to-market strategies all in a new light to keep your credibility churning not just more deals but long-lasting deals. 

Questions to consider:

— Do you have the necessary tools and platforms to offer outreach on the customer’s terms?

— How will you communicate vital information like renewals and automated payments?

— Will you merge tiered service options into the catalog or build into the product catalog?

— Does your marketing team have a winning strategy ready for a new competitive landscape?

— Are there possibilities for strategic partnerships with related vendors to further grow the susbcription’s value and success?

— How will you handle inevitable churn risk and events?

 

How will product development be impacted by the new subscription model?

Product development also takes on a new meaning under the subscription model. Traditionally, a product could be sold “as is” and then left untouched with the exception of maybe some minor warranty and support requests. With a subscription model, however, customers anticipate regular updates, improvements, bug fixes, and more as part of their ongoing loyalty and payment to you. Your product development team needs to be prepared to adjust its typical timelines and release planning to become far more agile and flexible, and adapt to a valuable but unrelenting demand for improvement across many functional or operational asks. Make sure your go-to-market teams are also aligned with the strategic decisions made by product development so they are not caught unaware. 

Questions to consider:

— Does your product development lifecycle extend beyond the average subscription term length?

— Will you share release information on a regular cadence?

— Which improvements will come at an additional add-on cost and which ones are built in as part of the subscription fee?

— What are the rules for group or bundle offerings?

— Will you sell subscriptions alongside their one-off counterparts?

 

Is your organization rev-rec ready?

If your organization doesn’t have the automation and technology to support subscription product models, your big plans will be cancelled before they even had a chance to take off. Your business will need a system that can manage the added complexity of subscriptions and ordering lifecycles, as well as the growth and scalability inherent to the subscription model. Salesforce CPQ and Billing is built with subscription models front and center, equipped to handle recurring revenue recognition needs, additional licenses, additional services, and more. Making sure this technology is implemented, understood, and well adopted is all something that must happen before you even sell your first subscription in order to manage a subscription model appropriately. 

Questions to consider:

— How will first and last invoices be automated?

— How will mid-contract changes affect the recurring billing system?

— How will compliance reporting and revenue recognition data be managed?

— Will your system support the share of relevant financial performance with sales and service departments to improve their methods?

 

How will contract management work with the subscription model?

Finally, contract management will also change with a pivot to subscription-based revenue. Subscription customers expect and are entitled to ongoing service levels as part of their signed contracts. There may be varying tiered levels of this support, but the obligation to continue excellent performance even after the first payment is received changes the way your organization views contracting. 

Questions to consider:

— Do you have a contract lifecycle management tool in place to automate the details and ensure recurring obligations are documented?

— How will you know if a contract is broken by you or by the customer? How will you react?

— How will you make the terms and conditions of a contract clearly known during customer interactions?

— Will you automate renewals or changes to contracts?

 

Subscription-based models may be the way of the future for business, but they still need careful consideration and extensive planning to be a success in any organization. So if you’re ready to take the next steps and learn more about the technology to support your revenue with a subscription-based model, reach out to our team of experts today. 

 

Kevin Willemse - Simplus CanadaKevin is a Director in Simplus’ Strategic Advisory Practice, focused on bringing valuable transformation to customers looking to maximize their investment in Salesforce.com alongside their integrated systems and business processes.

[email protected]

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