What is a Subscription Business?

The short answer is that a “subscription business” is simply any business that generates some or all of its revenue from subscriptions.

But when we look at this more closely, we begin to see that really any business that wants to, can become a subscription business…if it has the imagination and tools to make it happen (more on that later…)

But first  – why would you even want to build a subscription business? Well, the real question should be “Why not?”. Probably the biggest driver of the move to the subscription business model is the recurring revenue subscriptions generate.

Less obvious, but possibly more valuable, is the ability to create an ongoing, close relationship with each of your customers. Knowing when, where, and how, they are using your product (or not using your product for that matter) allows you to continuously tweak and optimize your offering, further enhancing those relationships and your business.

So, what are the top 3 benefits of the recurring revenue model?

  • A Higher stock valuation multiple
  • Predictable revenue streams
  • Increased customer loyalty

For traditional businesses, every month starts with a need to climb a giant mountain of sales, simply to cover its costs. For recurring revenue businesses however, every month starts with a predictable revenue coming from its already established customer base.

What’s more, any growth in subscribers (or revenue per subscriber) that particular month contributes to compound growth of the company’s revenue for the following months to come, further fueling the company’s growth.

Needless to say, every recurring dollar of revenue has a much greater value to the shareholders and investors than a non-recurring one. As recurring revenue businesses are more predictable, they are less risky and have longer longevity baked into them. Hence, they are valued as much as 4 – 5 times higher than their equal, non-recurring counterparts.

 The fundamental challenge of scaling a recurring revenue business is to build, develop, and nurture the customer relationship to the point at which a high level of loyalty is created. This reduces churn and a better understanding gives the opportunity to increase the value of each customer. This is the Holy Grail of subscriptions.

 The fundamental challenge of scaling a recurring revenue business is to build, develop, and nurture the customer relationship to the point at which a high level of loyalty is created. This reduces customer churn and offers businesses a better understanding of how to increase the value of each customer. This is the Holy Grail of subscriptions.

However, businesses are not the only ones benefiting from those long term relationships. Customers get to enjoy predictable costs and quality, ongoing user experience upgrades, as well as levels of personalization that one-off services are simply unable to offer.

Take the example of a Netflix or Spotify account – the longer you use the service, the better they get to know you. With that knowledge, they can provide you with personalized service and experience that would be difficult to replicate for a competitor. The longer you stick with the service, the harder it is to leave and start over again! 

Accessibility is at the heart of subscriptions. Why buy something, when you could simply “access” it, whenever you need it?  Making a purchase usually involves larger upfront costs, a need for storage, maintenance, upgrades, and possibly insurance. With a subscription, your monthly payment takes care of all of the above for you – you can sit back and relax knowing that whenever you need to access the service, it will be in top shape.

The context
 
As companies seek to jump on the subscription bandwagon, “as a service” model is no longer reserved for tech, and has now spread into almost every area of business imaginable. 

Almost any business can become a subscription business – and most companies are thinking about how to become a subscription-based business, or at the very least how to create some subscription-based products.   

Don’t you think the execs of Uber, Starbucks, Avis, United Airlines, and any number of other S&P 500 companies won’t be planning how much of a certain product or service they could sell a part of a monthly subscription?

 Innovative business models and the use of technology have been instrumental in this “as-a-service“ shift. A few examples of less obvious subscription businesses:

  • ”Printing-as-a-service” – HP,
  • “Clothes-as-a-service” Stitchfix Baumfeldt,
  • “Toys-as-a-service” – Loot Crate, Brickbox,
  • “Food-as-a-service” – Blue Apron, EAT Club, Soylent,
  • “Travel-as-a-service”- Inspirato, Velocity Black.

So, what are the tools for subscription success…?

The motion of moving almost everything into the cloud fueled the subscription economy model. Software sold as “as-a-service” was the pioneer of the motion. Paul Graham’s Viaweb was perhaps the first company to do this, and now SaaS has become the go-to model for all of the software sales.

Successfully scaling a subscription business or pivoting into a subscription business requires a flexible platform that can manage your subscriptions and has the ability to work within your business model and existing processes. This is a critical requirement – and can be a significant challenge. Many people underestimate the complexity of this.

 A level of complexity goes hand-in-hand with subscription businesses. Imagine a company that sells a service with 3 levels – bronze, silver, and gold. Now on top of this, let’s add an element of “pay-as -you-use” on top of that basic subscription. Plus, a part of your business serves enterprise customers, meaning thousands of subscriptions for their employees and a constant churn of employees within those companies

But that’s just the start. Now let’s take it one step further – imagine that a company wants to be able to test new plans and iterate its business offering on the fly, and it needs to be able to review all of that activity within its existing CRM system. 

Within just a few short steps, you got yourself to a stage where the in-house capabilities of Excel (or any off-the-shelf finance package) just won’t be enough, and building an entire subscription platform from scratch won’t make sense – after all, you have your own product to focus on.

 Not only does it highlight why you need the right subscription management and billing platform, but more importantly it highlights the giant opportunities that can be seized from a subscription-based business.

Whatever platform you choose doesn’t just need to be able to bill customers correctly. It also needs to be a tool to enable customer success. It should offer analytics and facilitate a greater understanding of customers to allow them to generate the most value from your product or service, making you predictive not reactive. This ultimately creates loyalty.

If you are interested in finding out how BillForward can help you do all this and more please contact us at hello@billforward.net

 

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