The 5 Maturity Stages of a Subscription Business

By Erika Malzberg March 2, 2016

Consumers today prioritize access to positive experiences over ownership. In other words, a product’s value lies in the value consumers experience through the use of the product, not the product itself. So, rather than trying to convince consumers to buy more things, smart businesses today are relying on business models that can monetize experiences and relationships. This is why, across all industries, we’re now seeing a shift to the subscription economy.

At last year’s Subscribed conference, Amy Konary, Research Vice President at International Data Corporation (IDC), led a very popular session on The Subscription Maturity Model: Where Do You Fit? In her session, Konary covered the 5 stages of a subscription business, from an ad hoc subscription business to an optimized one in which customer acquisition is high, churn is low, and all functions are in full alignment with the customer experience.

Check out some highlights from Konary’s session below, and register now for Subscribed 2016 to learn from the subscription economy leaders who will be presenting at this year’s conference.

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STAGE 1: AD HOC

The ad hoc stage is the sometimes painfully amorphous period that defines the early stages in a subscription businesses lifecycle. The main focus is on pure customer acquisition resulting in high CAC (customer acquisition cost) with a relatively lower CLV (customer lifetime value). Pricing and packaging is far from a science as businesses scramble to find what draws in customers without great thought to future impact. Likewise, not much thought is given to how to manage these new customers, optimize their customer experience, and/or retain them. Business systems are still in a state of flux, scrambling to catch up with the new model. Metrics are retroactive, tracking in the past rather than the forward-thinking metrics of a real subscription business.

STAGE 2: OPPORTUNISTIC

If a business is able to commit the necessary resources to survive the ad hoc stage, they will find themselves in the opportunistic stage. Here the CAC improves somewhat because of low-touch, self-service sign-ups and growing efficiencies in sales and marketing, but CLV is still low relative to the CAC. The opportunistic company is not giving much thought to the customer lifecycle as a whole or the customer experience – which is reflected in high churn rates. The focus is more on defining the value prop of the offering to influence customer (prospective and existing customer) perception.

STAGE 3: REPEATABLE

The repeatable stage is when the subscription business has matured to the point where it’s starting to focus on customer loyalty. Now all the attention isn’t just placed on customer acquisition, but on the entire customer lifecycle to ensure that customers can self-manage their subscriptions, that the customer experience is positive, and that customers perceive ongoing value. With emphasis on the customer experience, churn finally starts to slow and renewals and increased upsells start to drive greater CLV. It’s at this stage that the subscription business finally starts to use more forward looking metrics like recurring revenue to assess the health of their business.

STAGE 4: MANAGED

There’s a continued emphasis on perceived value in the managed stage, in particular time-to-value acceleration. While systems in place support subscribers as a group and create a unified subscriber experience, every subscriber’s individual experience is unique and treated as such. The goal here is on gaining and retaining subscriber trust. This means transparent pricing and empowering subscribers to self-manage their accounts (including the ability to cancel their service). Key metrics now include profit in addition to revenue. And marketing efficiency and gross sales become areas of focus.

STAGE 5: OPTIMIZED

A successful subscription strategy is all about optimization of the customer lifecycle. You’ll know your subscription business is optimized when the subscriber experience is seamless – from order to cash – and you have systems in place to support the subscriber relationship across all channels. At this stage, you should have a fully built out customer support function that isn’t just transactional. The goal is to build and maintain strong ongoing relationships with subscribers. At this stage, the company has reached a level of operational maturity with systems in place to support greater subscriber insights. A dashboard provides visibility into all key subscription metrics, including bookings, billings, recognized revenue, revenue backlog, and deferred revenue across the company. As customer usage data helps sales to get customers into the right plan, at times this may mean a lower-cost plan, but this doesn’t hurt overall revenue: CLV is 3-4X the CAC.

These subscription model stages aren’t always linear, and subscription businesses may not complete the full cycle from stages 1 to 5. For example, a traditional enterprise business that’s making the shift to a subscription business will experience these stages differently from a startup that was founded as a subscription business. But these stages offer a useful framework for viewing your subscription business as you grow and mature from a CAC focus to one that truly prioritizes the customer experience and your relationship with your subscriber.

Don’t miss Subscribed 2016: April 12-13, 2016 in San Francisco. This is the only conference dedicated to the subscription economy and the place to go to get the information you need to successfully monetize relationships and build and scale a sustainable subscription business.

Register before March 13th to take advantage of our early bird special, only $599. As an added bonus, use promo code ZUORA200 for an additional $200 off your registration fee.

Already registered for Subscribed ’16 or have questions about the event? Connect with other attendees in our Subscribed ’16 Community Group!

Where is your subscription business in the maturity livecycle? And how are you planning on getting to the next stage? Tell us about it in comments below.