As more and more companies turn to subscriptions to secure their long-term revenue streams, Leonardo Hodgson looks at the challenges they face in the transition from product-based sales to recurring revenue services.
Every week that goes by brings a growing list of companies joining the subscription revolution
, following in the footsteps of industry giants like Adobe
and Red Hat
who have already moved away from the old-fashioned one-off product sales model. Last year Gartner
forecast that more than 40 per cent of media and digital-products companies around the world would use subscription services for their fulfilment, billing and renewals by 2015, and from the volume of announcements and stories in the tech blogs and media I can really see this happening.
However, the process to move from one model to the other is not something that is usually advertised or made public. And the truth is, if this change is not carefully planned and executed there can be many pitfalls which may put at risk the whole business. In fact it is not uncommon to see businesses that moved to the subscription model struggling for several months of operation, with little or no profit achieved, before eventually reaching the much sought after benefits of a recurring revenue stream.
One of the key challenges in this transformation is the way your new services
should be priced. The recurring model scraps the whole concept of upfront lump sums and perpetual licences, moving the pricing strategy to a totally new ground for discussion. Your ROI should also be reviewed to consider a longer payback period, typical with this model, and a new set of metrics will have to become part of your operations. According to Kissmetrics
, the five must have metrics to measure the success of your business are: Average Recurring Revenue Per Customer (ARR), Monthly Recurring Revenue (MRR), Cost Per Acquisition, Lifetime Value of the Customer (LTV) and Customer Churn. These will definitely provide you with valuable information to help constantly review, plan and forecast accurately your company’s cash flow.
Sales and Marketing teams must also be incentivised based on a longer-term engagement with your customers, to maximise their lifetime value and revenues at the end of every month – it’s all about customer satisfaction. Similarly, Product Management should be frequently monitoring, redesigning and repackaging offers to keep your services attractive enough to continuously fuel consumption and new customer acquisition.
But, the good news is that there’s a new generation of subscription management solutions to help you take the plunge with confidence. Cerillion Skyline
is built on more than 20 years' experience delivering high-performance charging and billing solutions and offers a wide range of enterprise-class billing features including: flexible product packaging and charging models, free or paid trials, segmented pricing, upsell and cross-sell promotions, powerful discounting, multi-tariff usage charges and a fully integrated reporting and analytics solution.
In summary, the transformation to a subscription business model might be a considerable cultural and business change that needs to be sensibly planned. However, the benefits of a predictable and constant revenue stream far outweigh the initial hurdles, and solutions such as Cerillion Skyline can lead you on the path to subscription success.