A Beginner’s Guide to Subscriptions: Part 1 – Understanding the Basics

A Beginner’s Guide to Subscriptions: Part 1 – Understanding the Basics  The ‘Beginner’s Guide’ blog series is designed to help companies build their own successful subscription businesses. In the first part of this blog series, we address some key questions that will give businesses a greater understanding of the subscription industry and help them pivot towards recurring revenue-based business models. Shashank Venkat presents the details 

We recently published our Top Five Subscription Business Trends for 2018 report, and it is clear that this year promises to be a big one for the subscription industry with more and more companies launching subscription services. However, to fully appreciate this revolution, it is important to first look at some of the common questions that businesses entering the fast-paced subscription industry need to understand. In this first Beginner’s Guide we look at the basics of subscription management:

 

What is a subscription business model?

If you’ve ever used Netflix, Spotify or Amazon Prime, then you will be familiar with paying monthly or annually for access to a service – a subscription. And the chances are that if you look carefully at the other products and suppliers you use, there may be many more that you use regularly which also follow the same subscription business model. Now, subscription models work very differently for customers compared with traditional ownership-based models. Instead of owning a product permanently, customers subscribe to it for a fraction of the cost which offers a great balance of value to both businesses and their customers. Subscription models are customer-centric and give companies a chance to cultivate valuable relationships with their customers. Subscription businesses are not focused on immediate profitability but are geared towards long-term value generation.

 

Why are more companies adopting subscription business models?

Many now recognise the limitations that come with traditional product-based models – high cost of sales and the difficulty of generating repeat business. Subscriptions help lower the barrier to sales and enable businesses to more accurately predict revenue through recurring sales. This makes subscription businesses more valuable than traditional businesses which are usually less sure about their growth prospects in the long term. This helps companies to allocate resources and manage their inventory in a more efficient manner. It also offers greater flexibility and allows them to offer more personalised services. More importantly, subscription models allow organisations to create deeper relationships with their customers because of the long-term commitment that is inherent to the model, thus creating more value for customers over time.

 

What do businesses need to consider when pivoting towards subscription revenue models?

While recurring revenues may be an exciting prospect, companies really need to dig deep and perform an audit of their current business models first. What are the problems that exist that can be solved with a subscription-based model? What is the value generated by your existing business model? After tackling some of these fundamental questions, organisations need to shift their focus to customers and understanding customer relationships. How can you offer more value to your customers? Is your product compelling enough for customers to be ready to subscribe?

If a product company really wants to adopt a subscription-based model, it may require an overall digital transformation to support a more customer-centric business. Everything has to stem from the customer, and all your decisions have to work towards delivering the perfect customer experience. This mindset shift is one of the biggest challenges while transitioning towards a subscription model. And once you get the subscription engine running, it is crucial to track customer behaviour using analytics and make constant improvements to your subscription service.

 

What are the key subscription pricing models?

For your subscription business to be successful, you need to carefully evaluate the different pricing models that may be applicable. Here are some of the most commonly used subscription pricing models:
  • Fixed recurring pricing – The classic subscription billing  model, where a service is offered at a fixed recurring cost. For instance, Amazon Prime is a subscription bundle which adopts this model.
  • Tiered pricing – Again, quite commonly used by subscription-based businesses, this model offers customers a range of tiers or plans according to their need and budget. Typically, the first tier is a low-cost version, while other tiers will have more features depending on the cost. Our subscription management platform, Cerillion Skyline, follows this model based on editions.
  • Freemium – This offers a great way for onboarding new customers with a free version of the product, who can then be upsold premium features on a subscription basis to drive recurring revenues. Popular storage service Dropbox has built a very successful business around a freemium model.
  • User-based pricing – This is a slightly more advanced recurring billing model used by many software businesses like Salesforce, for example. In this model, the subscription price is determined by the number of users (often referred to as ‘seats’) with access to the platform.
  • Usage-based pricing – Commonly offered by cloud infrastructure providers, this subscription billing model allows customers to pay only for what they use. This helps businesses to scale up or down according to their own unique needs.
 
In our next blog in the series, we will look at some of the key metrics that subscription businesses should keep in mind.