Strategic Guidance

Subscription Business Model: How to Turn Customers into Subscribers

Have you noticed? Over the past decade, there’s been a fundamental shift in people’s relationship to products. More than 70% of adults across the globe believe that a person’s status is no longer defined by what they own. Customers now want access to services that are free from hassles, maintenance costs, and constant upgrades.

Who’s serving the customers adopting this new trend toward usership instead of ownership? The companies who know the ins and outs of what it takes to succeed with the subscription business model.

At Zuora, we’ve worked with thousands of subscription businesses and studied millions of data points across the world’s leading companies. We’ve seen patterns of success, pitfalls to avoid, and lessons that other companies can learn from.

We’ve compiled all of these learnings into this guide that outlines the four stages your company will go through and the five focus areas to succeed with the subscription business model.

Whether you’re just thinking about subscriptions or you have an offering in the market today, you’ll find actionable insights here that can help you on the path to the hallmark of success in the Subscription Economy: long-term customer loyalty and sustainable, predictable revenue growth.

Let’s get started with a quick overview of how the subscription business model works.

How the Subscription Business Model Works

The subscription business model is a way for businesses to provide access to their product or service on a recurring basis, for a fixed fee. This type of business model has become increasingly popular in recent years, as it offers many advantages for both businesses and customers.

For businesses, the subscription model can provide a predictable and stable source of income, as customers are typically locked in for a certain period. This can help businesses to better forecast their cash flow and budget for future growth. Additionally, subscription models can help to build customer loyalty, as customers are more likely to stick with a service that they’re already paying for monthly or annually.

For customers, the subscription business model can offer convenience, as they can set and forget their payments and know they will always have access to the latest services. Additionally, subscription models often come with discounts or other perks, which can make them more affordable in the long run.

Unfortunately, despite the potential win-win situation for the business and its consumers, many businesses make avoidable mistakes when attempting to make this shift, as they adopt a subscription business model.

The good news is that this path is well worn and your business can benefit from what Zuora’s learned from helping 1000s of businesses make this shift before you. Enter the “Journey to Usership”.

The Journey to Usership™

In 2020, the pandemic forced companies to wake up to the power of the recurring subscription business model. Whether it’s in education, consumer devices, or software technology, customers are increasingly searching for ways to access services rather than own another product.

So how can you capitalize on this trend? 

The first step is figuring out where your company fits in the Journey to Usership. There are four stages:

The Journey to Usership™

Path for growth and maturity in the Subscription Economy

Launch

Stay Simple and Flexible

You are launching a new subscription business or service offering.

Optimize

Test and Learn

You are optimizing to increase subscribers and drive growth.

Scale

Automate and Standardize

You are ramping, expanding and scaling your business through automation.

Lead

Perfect and “Wow”

You are leading your market in platform, data and ecosystem.

  • LAUNCH
    Your company is launching a brand new subscription business or a new subscription offering (often in a dedicated business unit). Your goal at this stage is to keep it simple and stay flexible while getting started on the journey.

  • OPTIMIZE
    You’ve achieved the right market fit for your service and need to develop additional growth strategies: upmarket, digital commerce, upsell/cross-sell, international expansion. Your goal at this stage is to test and learn what works—and what doesn’t.

  • SCALE
    Your financial model is set, your growth strategies are successful, and you’re entering new markets. Your goal at this stage is to scale operations and drive efficiency by automating and standardizing your operations so you’re able to run what you can on autopilot.

  • LEAD
    You’ve entered that rarified air of Subscription Economy leaders like Zoom, Salesforce, Amazon, and Netflix. Your goal at this stage is to deliver the “wow” factor, gain market dominance, and widen the competitive gap.

From our experience, the companies that become true leaders in their space and develop world class competencies, move along the Journey to Usership by focusing on five key focus areas.

5 Focus Areas of a Subscription Business Model

While each focus area is critical to master on its own, it’s the coordination between all five areas that separates the great companies from the rest of the pack.

In this section, we’ll dig into why each focus area deserves your attention, provide examples of strategic initiatives for your business to take, and some common KPIs to target.

Before we begin, here’s a quick overview of the 5 focus areas and a key question to use when evaluating how your business performs in each area:

  • Offering Design:
    How do you design, price, and package your subscription offerings to optimize for growth?
  • Subscriber Experience:
    How do you create a frictionless subscription experience that drives competitive advantage?
  • Financial Model:
    How do you architect the business model that delivers recurring revenue growth and profitability?
  • Business Operations:
    How do you operate with greater agility and efficiency across order-to-cash processes?
  • Enterprise Architecture:
    How do you architect your technology architecture to grow and scale with your business?

1. Offering Design

To succeed in the Subscription Economy, you need to have an offering that’s useful, reliable, desirable, and delivers on its promise. How you price and package that subscription offering plays a critical part in attracting, retaining, and, most importantly, growing your customers.

Companies that excel in Offering Design understand how to evolve their pricing, packaging, and promotions over time, always staying one step ahead of their customers.

Examples of Business Initiatives for Offering Design

  • Monetize a new offering
    Get your first subscription service on the market or add a new offering to the portfolio. To optimize your pricing and packaging strategy, you’ll want to test (and test and test) to find the sweet spot between your price point and your customer acquisition rate.
  • Refresh pricing strategy
    As your offerings expand, oftentimes pricing and packaging can become too complicated for customers – customers want pricing to align to the value that they get from your offering. Refreshing your pricing strategy to realign with customer value is a cross-functional effort.
  • Adopt a usage-based pricing model
    Companies are increasingly adopting usage-based pricing to provide customers with more flexibility. Explore the possibility of adopting a usage-based pricing model, whether it’s pay per use or overages, and figure out which model is most applicable for your offerings.
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Common KPIs for Offering Design

  • Reduce “Time to Launch” a New Offering – Can we quickly go to market with a new offering?
  • Increase Pricing Changes per Year – Are we iterating on pricing every year?
  • Increase Usage-Based Pricing – Are customers adopting usage-based pricing?

2. Subscriber Experience

Think about your own experience with a subscription service you use. How easy is it to sign up? Change or add services? See value? Pause or renew your subscription? A customer-centric subscription experience is associated with lower churn and higher net retention. 

Companies that excel in Subscriber Experience make it as easy as possible for customers to manage their subscription in exactly the way they want and need. They craft an experience that facilitates growth, not hinders it.

Examples of Business Initiatives for Subscriber Experience

  • Optimize onboarding and engagement
    Customer relationships are the lifeblood of subscription companies, so you need to monitor customers that are becoming less engaged. 

    Communicate regularly with them to learn how they’re using the product and to make sure they understand the value they’re getting from their subscription. You’ll also want to be analyzing their data for signs of expansion or churn.

  • Enable multiple payment methods
    Customers in different regions want to pay in different ways, and adding payment methods like direct debit, Apple Pay or local payment methods like Boletos can allow you to add more customers and maintain the payment relationship on their terms.
  • Drive a seamless renewal experience
    The easiest and “cheapest” sale is getting a current customer to renew. So you want to do as much as you can to make it easy for customers to stay with you: auto-renewal, evergreen subscriptions, or promotional renewal offers.

Common KPIs for Subscriber Experience

  • Increase Subscription Changes – Can customers easily upgrade, downgrade, and more?
  • Reduce Support Tickets Related to Subscriptions – Is the experience seamless?
  • Increase Sign-ups and Changes through New Channel – Are new channels well adopted?

3. Financial Model

In the Subscription Economy, your finance organization can literally see into the future. Your customer contracts stretch out over time, giving you a baseline amount of recurring revenue at the start of every month. 

But because the subscription business model introduces new risks into financial reporting, managing this requires new forms of financial control, reporting, and processes.

Companies that successfully architect their Financial Model for their subscription business  maintain control of the growth levers in their model while effectively adopting new financial processes and metrics. 

Examples of Business Initiatives for Financial Model

  • Track business metrics for strategic planning
    Improve the time and effort it takes to produce your operational, management, and subscription reports. Common subscription metrics include annual recurring revenue (ARR), net dollar retention (NDR), annual contract value (ACV), and more.
  • Automate SOX and audit controls
    Automating your internal controls and audit processes protects shareholders and the general public from accounting errors and fraudulent practices in your enterprises, as well as improves the accuracy of your corporate disclosures. 

    Although SOX is a US compliance requirement, the internal controls and principles apply universally, with some variances by area or country. To decrease the cost and the time invested in your audit, you’ll want to move from a process audit to a system audit.

  • Automate & scale revenue recognition
    Automating how you recognize revenue can dramatically reduce your costs, your effort, and your error risk. 

    Manual revenue recognition processes include: grouping transactions, identifying performance obligations, establishing a standalone selling price, calculating revenue allocations, assessing contract modifications and reallocations, and recording journal entries. 

    This process is timely, costly, and creates risk or inaccuracy. With the new ASC 606 / IFRS 15 revenue standards, revenue automation is now more critical than ever.

Common KPIs for Subscriber Experience

  • Reduce Time for Reporting – How long does it take to find the metrics needed to make business decisions?
  • Reduce Time for Audits – How long does it take to complete audits?
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4. Business Operations

Order-to-cash is more complicated for companies using the subscription business model. Here’s why: Instead of a simple and linear process, subscription companies face an ongoing and complex order-to-cash cycle as customers make ongoing changes throughout the lifetime of their subscription. 

Every upgrade, subscription change, or overage event can impact downstream billing, collections, revenue, and reporting.

Subscription companies that excel in Business Operations design processes and invest in systems that can scale with changing order-to-cash operations are better able to scale as the number of subscribers and level of business complexity increases.

Examples of Business Initiatives for Business Operations

  • Streamline billing operations
    Improve the time, effort, and cost you invest in billing. This can include improvements like managing seasonal spikes, monitoring overages, standardizing new billing policies, or driving more efficiency as new customer segments are added.
  • Minimize involuntary churn
    For businesses with a high volume of electronic payments, even a percentage difference in payment failure can lead to a large amount of money left on the table. Given that the payment environment is complex and difficult, you need to select the right payment gateways and set up processes to minimize involuntary churn from payment failures.
  • Maximize collections
    Effective Accounts Receivable and collections processes are key to preventing revenue leakage. Companies use a variety of methods, from dunning workflows to automated credit card updaters, to ensure that customers are paying on time.

Common KPIs for Business Operations

  • Increase Automated Orders – Are new subscriber sign-ups efficient? 
  • Increase Billing Automation – Are billing-related activities efficient?
  • Reduce Days to Close – Are accounting close processes efficient?

5. Enterprise Architecture

To make your full entrance into the Subscription Economy, you’ll need to make sure your business’s architecture is up for the task. 

The key characteristics of a modern-day, enterprise-level architecture framework include ease of integration and fast time-to-market capabilities, both of which are critical when it comes to supporting the iterative nature of subscription businesses. One note of caution: if your framework is too rigid, it can crack under the pressure of a subscription business at scale. 

Enterprise Architecture can be an accelerator or a roadblock for a company’s growth and success. The best architecture ensures that a company can stay agile as the business continues to grow and evolve.

Examples of Business Initiatives for Enterprise Architecture

  • Rationalize the enterprise tech stack
    Legacy systems can become a bottleneck for your growth. This can be measured in the costs of actual infrastructure, FTEs required to keep the system running at the current functional levels, and the opportunity cost of the inability of these legacy solutions to meet new business demands. Redesign the enterprise architecture and build what’s needed for the future of your subscription business.
  • Onboard new lines of business
    As you acquire new businesses, the task of merging data, processes, and subscribers onto a unified stack can be challenging. But doing so will create a more seamless transition for your customers, as well as a more central technology stack for future business lines.
  • Improve deployment and testing agility
    As your subscription business scales, you’ll want to make sure you have agility in how you test, iterate, and deploy updates for your subscriber base, especially as the business evolves and new offerings need to be pushed into the market.

Common KPIs for Enterprise Architecture

  • Increase automated workflows – Does the architecture enable the business to automate?
  • Consolidate integrations – Does the architecture integrate key systems?
  • Consolidate systems – Does the architecture plan for consolidation and simplification?

Final Thoughts

As companies work to recalibrate their businesses to meet the demands of the subscription era, a proven framework for transformation is crucial. And the good news is that in the Subscription Economy, we can all learn from each other; you don’t have to reinvent the wheel by yourself.

The Journey to Usership and 5 Focus Areas reflect the experiences of other subscription businesses who’ve gone before you and shine a bright light on what to do—and what not to do—to find your way.

No matter which stage you’re in, what industry you’re in, or where you’re located, the subscription business model strategies and tactics we’ve covered can help you build a subscriber-centric business that’s ready for today, tomorrow—and for decades to come.

Want more resources and insights to help you take the right path when you reach a fork in the road of the Subscription Economy? Go to zuora.com/journey-to-usership/ for more articles, playbooks and other content that explore all the concepts described here in more detail.

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With Zuora running in the background, we are well-equipped to deliver sustainable value to our customers, based on dynamically evolving offerings that fit the healthcare industry & care providers’ demands.

– Rahma Samow

Head of Siemens Healthineers Digital Health Global

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