Salesforce com : How to Move to a Subscription Business Model in 2021

Jan 26, 20216 min read

Book publishers invented the subscription revenue model 400 years ago, but the real subscription renaissance is happening right now.

The movement began business-to-consumer (B2C). Subscriptions in ecommerce doubled every year from 2013 to 2018. By the end of that period, 15% of online shoppers were subscribed to a box service (like razors or pet food), and 46% were subscribed to streaming media (like Spotify or Netflix).

Now the movement's hitting business-to-business (B2B) companies. One early adopter in this area was Michelin. They outperformed in their market with a pricing model called 'The TK' (short for ton-kilometer), charging their customers by the mile. Since then, we've seen a rise of software-as-a-service, engines-as-a-service, elevators-as-a-service - you name it.

What is a subscription based revenue model?

Subscriptions are recurring revenue models, where customers pay regularly - often monthly or annually - for ongoing access to a product or service. Flexible pay-per-use business models like usage (also known as consumption) are a kind of subscription. What all these models share is a customer-first drive, since recurring revenue needs recurring relationships (and renewals) to thrive.

Dive deeper into our ebook: How to Speed Up Revenue with Subscription and Usage Models

There are three different kinds of subscription models

• Pure subscription model: Here, revenue is fixed. The amount that gets paid - and when it gets paid - is predetermined. (For example: a flat-rate monthly subscription fee for Spotify.)
• Pure usage, also known as a consumption model: Here, revenue is variable. The amount that gets paid - and when - is determined by use. (For example: a service like Uber or Lyft.)
• Hybrid model: In this scenario, 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 flat-rate monthly bill.)

Subscriptions and usage add another dimension to revenue. As shown in the illustration below, revenue goes from a point (one transaction) to a line of many points (a subscription).

A one-time sale creates revenue that happens once, like this single point.

A subscription sale creates revenue that recurs again and again, bringing in revenue at several points moving forward, like the multiple points on this line.

Why build subscription and usage products now?

Subscriptions can really speed up profit; as a company attracts more subscribers, revenue increases exponentially. But the benefits of a subscription model go beyond profit. We're living through great economic uncertainty - and building a subscription model can make your business more resilient. Here's how:

• Revenue becomes predictable. Stop hitting the revenue reset button every quarter. Companies with subscriptions will often start each quarter with a baseline revenue at or near the previous quarter (depending on churn), then build on top of that.
  
• Sales teams get upskilled.90% of sales have gone virtual. A structured selling process for subscriptions will let your sales reps enter new digital channels, like ecommerce.
  
• Product teams are free to innovate on pricing. Managing subscriptions requires sales and finance to work together as never before. In this new mode, teams can iterate much faster toward product-market-pricing fit.
  
• The business becomes more agile. Recurring revenue comes with recurring datasets. You can better mine the Customer 360 for insights - and respond with offerings that match - when your customer relationships are ongoing.

Maybe a subscription model was already on the horizon of your plans. But 2021 is leaning on you to clear your calendars - and move your transformation roadmap up.

The challenges of starting a subscription based revenue model

If you're a chief financial officer at a company that just launched a subscription product, we feel your pain. Legacy back-end systems were built for one-time product sales, and the architecture for this transactional model has disconnected systems for quoting and billing, with spreadsheets in between.

When you try to use this multi-system approach for recurring revenue streams, things start to break. Here are some of the challenges:

• A lack of dynamic contracts means you struggle to manage the new and extended customer lifecycle. Most transactions now happen after the initial sale (renewals, add-ons, up-sells).
  
• The inability to support multiple channels means you can't provide a consistent experience for high-touch customers on one hand, and self-service customers on the other.
  
• Siloed front and back offices means there's no single view of the customer. Finance is left with a lot of manual re-entry, and too many invoices don't reconcile to contracts.

The good news is that 40% of time can be reduced with finance automation and behavior change.

How to get started

Building a subscription product is all about building recurring relationships. Your teams will need to rally around a new North Star: the customer. Here are three strategies to consider.

1. Rethink your product structure and delivery

When a business enters the subscription model, SKUs tend to multiply out of control. Now's the time to redefine your product structure so you can consolidate your SKUs and enable dynamic pricing.

Next, you'll need to rethink delivery. B2B companies are taking a page from the B2C playbook, and making their products faster and easier to access. Do what you can to let your customers buy on their own terms.

2. Connect touchpoints across the new customer lifecycle

Recurring revenue calls on you to 're-win' your customer every renewal cycle. So, you need to become more customer-centric than you ever were. You'll need to track customer usage of your products and measure customer satisfaction. And you'll need to work on creating a great, omnichannel buying experience.

Revenue Cloud has allowed us to easily manage our subscription business and create recurring relationships.

Ruchika Chopra, head of business operations, Juniper Networks

Combining omnichannel buying with subscription selling means following one single thread as a customer travels from quote to renewal. Teams across the company will need to be able to access the same customer data, and act on it.

So, marketing needs a better way to capture leads. Sales needs a structured and guided selling process that lets reps configure, price, and quote for any emerging revenue model. Finance needs a way to bill for any transaction type (and accounts receivable needs a good way to collect for it).

Other functions like customer success and service will need to be developed and matured, so you can focus on provisioning for self-service, revenue lifecycle automation, and low-touch offerings.

3. Build new business capabilities

After you map out the connected value streams around the new buyer's journey, it's time to identify capability gaps - and fill them with the right technology.

Building a subscription product is all about building recurring relationships. Your teams will need to rally around a new North Star: the customer.

For example, marketing will need a way to manage customer journeys. Sales will need a way to automate renewals. And customer success needs a way to manage service level agreements (SLAs) and entitlements.

Managing recurring revenue also brings shiny new metrics into the picture: annual recurring revenue (ARR), average revenue per user (APRU), and churn. Bring in capabilities that let you report on leading indicators so that you can learn from your subscription and usage business, and make your revenue more predictable.

Open new paths to revenue - and speed it up

Maybe this all sounds complicated, (and maybe it is complicated), but the principle is simple. To build a successful subscription model, you need to become easy to do business with.

It's amazing to watch as we go into companies and help them make this change. Once you get into that recurring revenue stream, you'll never want to get out. Our customer Ruckika Chopra, the head of business operations at Juniper Networks, said, 'Using Revenue Cloud has allowed us to easily manage our subscription business and create recurring relationships.'

To build a successful subscription model, you need to become easy to do business with.

As you make this move, be thoughtful about the new customer journey, and do everything you can to improve the customer experience at each touchpoint. By making things easier for your customers, you'll make things easier for your teams as well, and build a valuable, resilient revenue stream in the process.

Sell into the future with subscription models

Reimagine your products and envision a new customer lifecycle. Learn how subscription business models can offer the revenue and agility needed for future growth.

Read the How to Grow Your Business with a Subscription Model ebook