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. Enter the rise of the Subscription Business Model.
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.
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”.
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:
Path for growth and maturity in the Subscription Economy
You are launching a new subscription business or service offering.
You are optimizing to increase subscribers and drive growth.
You are ramping, expanding and scaling your business through automation.
You are leading your market in platform, data and ecosystem.
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.
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:
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.
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.
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.
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.
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.
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.
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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.
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.
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.
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