How To Move To a Subscription Business Model
Learn how subscriptions can create more revenue from the customers and products you already have.
It’s romantic if you think about it — when business-to-business (B2B) companies focus less on getting new customers and focus more on wooing the customers they already have. That’s what subscription business models are all about: nurturing customer relationships over time and enjoying the growth that follows as customers continue to renew.
That’s the vision anyway. The truth is subscription business models don’t always succeed. They live and die by whether customers stay or leave. If your customers don’t get the value you promised them, they’ll leave, and your growth will stall.
So the task before you is to become more customer-centric than ever. How? By delivering more delightful interactions to your customers across the entire buying and paying journey — driving customer retention and, as a result, recurring revenue growth.
Below, we share steps you can take to put subscriptions to work for your business.
What is a subscription business revenue model?
Subscription business models are when customers pay regularly for ongoing access to a product or service. Think Netflix, Amazon Prime, or *ahem* Salesforce. Subscription business models can speed up growth because they create recurring revenue, or revenue that occurs again and again over predictable intervals (like every month or year) when customers renew their subscriptions.
What are the benefits of subscription and usage revenue models?
Subscription business models are a defensive wall against economic uncertainty. They create a stable base of returning customers and create predictable revenue that you can plan for longer into the future. Here are the benefits in more detail:
Accelerated revenue. As your company attracts more subscribers, recurring revenue increases exponentially. “We all know that going through existing customers is just so much more efficient,” Gainsight CEO Nick Mehta told McKinsey this year. “So companies with high, natural net retention are just going to grow more efficiently and easily.”
Predictable revenue. 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.
Business agility. Establishing long-term customer relationships creates valuable ongoing data that you can use to better understand and serve your customers. You can learn from customer behavior — mining platforms like Customer 360 where you can manage all customer data in one place — and respond with new offerings that match. The more you do this, the more efficient product launches will be.
In essence, subscriptions and usage add another dimension to revenue. As shown in the illustration below, revenue from one-time sales goes from a point (a single transaction) to a line of many points (subscriptions).
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What are different kinds of subscription revenue models?
There are many different kinds of subscription revenue models, but what they all represent is a common shift — you’re charging for access to products rather than products themselves. Here are the three most important ones:
- Pure subscription model: Revenue is fixed for each subscription period. The amount that gets paid (and when) 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 DoorDash.
- Hybrid model: In this scenario, customers are served a combination of subscription and usage options so 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.
How can I implement a subscription model in my business?
To implement a subscription model, bring in tools and processes that help you build one consistent buying journey, even as customers cross different channels and make changes to their subscriptions over time. Then, track new metrics to make sure you’re on the right path.
Here are the steps to get there:
1. Give customers the power to buy and pay over any channel
With subscription selling, you’re interacting with your customers constantly, and they don’t always want to pick up the phone. Increasingly, they want to engage with you on their own terms — and in their pajamas.
In the wake of the pandemic, McKinsey found that “more than three quarters of buyers and sellers say they now prefer digital self-serve and remote human engagement over face-to-face interactions.”
To give customers the kinds of experiences they want, you need to make it possible for customers to renew, upgrade, and pay instantly on the channels they prefer. That could mean setting up a website or a mobile app, for instance.
Customers don’t just want to choose digital channels, though. They also want to cross them. B2B buyers told McKinsey last year that they’re using 10 channels to interact with suppliers. That’s double what it was in 2016.
How can you make it feel smooth and consistent even as customers cross channels — for example, starting a purchase online, but then being routed to a rep when they balk and hesitate at checkout? Subscription management can help. It combines customer relationship management (CRM) tools with the power of self-service to give every team access to the same data, so you can always pick up customer conversations where they left off.
“We want every touchpoint to be amazing,” said Jeff Wechsler, chief orchestration officer at EMyth. “But in order to make that journey exceptional, we need to integrate subscription data for a full view of our customers.” He sees subscription management as a way to connect customer data into one seamless journey with great customer experiences at every turn.
2. Focus on customer value
Subscriptions are all about delivering value to your customers. You’re regularly asking them to renew and pay. If the value isn’t there, customer retention won’t be there either — they’ll leave and your growth will stall.
Shift your thinking from shipping products to shipping value. How can you continuously deliver value-as-a-service to your customers? For example, Netflix doesn’t ship DVDs. They deliver entertainment-as-a-service. Amazon’s value isn’t in shipping products (although they’re darn good at it). It’s in delivering exceptional buying experiences-as-a-service.
Value comes into play as customers access and use the product. This puts the spotlight on two teams — service and customer success — who will need to work together to make sure adoption and satisfaction is high.
A CRM that provides data visibility and automation is key here. Visibility helps you monitor and act on adoption and usage behavior — jumping in to help a customer fix a problem early before it becomes a frustration, for example — and automation helps you make it fast and easy for customers to start using new products or services they’ve bought.
3. Track recurring revenue with new metrics
Move over, customer acquisition. Customer retention and customer value — which lead to recurring revenue — are the star metrics now. You can’t grow customer retention, however, if you don’t have a way to measure it.
First, let’s take a look at customer value metrics. You can measure customer value by monitoring how much your customers are adopting your subscription product or service. An important metric to track is average revenue per user (ARPU), which is calculated by dividing your revenue by your users. As your business matures and you become more effective at targeting customers with the right offerings (while also getting them to stay and renew), you should see your ARPU increase.
To measure top-line revenue growth, track monthly recurring revenue (MRR) and annual recurring revenue (ARR). (More on these metrics here.) These are prized because increasing them means your revenue becomes more predictable and you’re able to plan ahead longer-term.
Ready to open new paths to revenue growth?
A subscription business can only succeed through authenticity. There’s no faking it. Customers only renew when they experience real, ongoing value for their money. That’s the challenge and the opportunity. Get close to your customers, know them, and give them what they want and how they want it. In the end, the value will go both ways — and you’ll have the resilient revenue stream to show for it.
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