What is a subscription model?
It’s transformed our lives as consumers (think Netflix, Prime, Deliveroo) and it’s a model that’s well on the way to dominating B2B.
The subscription economy is defined as a model where customers pay a recurring fee at regular intervals (weekly, monthly, yearly, or just based on a customer’s usage) to access a product or service.
This phenomena is not limited to the consumer market, but instead is spreading across nearly all industry verticals – especially B2B.
Salesforce is one of the most prevalent B2B subscription model examples. Their main revenue generation strategy is based on a subscription-based cloud service, with over 92% of Salesforce revenues come from four categories of cloud CRM (Customer Relationship Management) services, that span from the sales cloud to marketing cloud.
Salesforce also created the subscription model’s greatest advocate, Tien Tzuo. Tzuo, who started his career at Salesforce and was inspired by their business model, founded subscription management service Zuora. He coined the term ‘subscription economy’ and by 2018 was predicting that subscriptions would soon be the defacto operating model for the vast majority of businesses. Zuora estimated a total addressable market of $102 billion from 2016-2020.
What are the primary benefits of a subscription model?
Let’s start by taking a look at the broader subscription economy where the results speak for themselves. This is an economy that has grown over 435% in the last 9 years, where 78% of international adults currently use subscription services (up from 71% in 2018) and subscription services have consistently grown 5-8x faster than traditional business models.
Specifically, there are some really good reasons B2B should be considering the move towards subscription:
- It’s great for investors – because it’s predictable. Companies that implement this model correctly are able to predict revenue and profitability with a lot more certainty and focus.
- It tends to attract more customers – in most cases subscription payments lower the barrier to entry because cost is no longer prohibitive, allowing more customers to purchase. It also makes global markets easier to reach.
- It increases return on customer acquisition costs – one time payment models have a set rate of return on your cost of acquisition. With subscription there is no standard return, in theory it should just increase over time.
- Cross selling becomes easier and more effective – because you’re continually building a relationship with your customer through constant contact, cross selling new or complementary services becomes easier
- Easier to offer proof of concept – trial periods or tasters can be offered for one off purchases, but the customer journey and ultimate purchase still carries friction. With subscription it’s easier to build your product features into phased categories that can be priced differently, but remain affordable.
How are subscription models working for B2B and what do you need to consider before you jump in?
It’s a total shift towards measurable revenue. Annual Recurring Revenue (ARR), Monthly Recurring Revenue (MRR) and Lifetime Value (LTV) are the cornerstones of why B2B businesses should be looking to implement subscription models to their relevant services, and where it works, products. These are the measurable benefits that come with what Ledger Bennett are calling ‘The Forever Customer’.
There are few key points it’s worth considering when thinking about a move to subscriptions:
- The subscription model is not limited to the software-as-a-service model – SaaS is only one of several subscription model options. Prepare to compete with “anything-as-a-service.” The type of subscription model depends on and speeds up your innovation approach.
- Customer success is paramount – subscription business depends on contract renewals by customers. Together with keeping customers happy, subscription businesses have to look for cross-sell and up ell opportunities to get customers “addicted” to their services. Companies have to constantly interact and make their customers happy to create demand for their services.
According to Forrester a company must become customer obsessed in order to successfully transfer to a subscription business model.
“What sounds straightforward on paper can be a tall order. For most traditional firms, this means redesigning their operational DNA.”Forrester, ‘The Rise of the Subscription Business Model’ (2020)
- Consider hiring a Chief Revenue Officer – To date, the conventional (read: pre-subscription economy…) approach has seen 90% of marketing and sales budgets diverted toward the invest and convert phases – and are thus seen as a heavy cost to any business. A good CRO will look to reassign this spend, with a heavy portion now directed toward the revenue phase.
- Say goodbye to MQLs and SQLs – truth be told MQLs and SQLs are a failed experiment that’s now being exposed. Getting customers onboard and keeping them onboard to maximise LTV is the name of the game. Removing the reliance on the transactional, and focusing more on building an effective long term relationship between brands and customers.
Ledger Bennett have long been championing the use of subscription models for B2B growth. B2B buying has changed, and we know a lot of B2B businesses haven’t caught up yet.
There’s a better way of marketing, designed specifically for the subscription economy, where marketing, sales, customer and product join forces to have customer conversations that start with the first touch and continue to forever, so if you’re looking for more detailed advice on how to survive and thrive in the subscription economy, read our latest whitepaper here.