Prioritizing the needs of customers is a key aspect of succeeding with subscription models. As customers now focus on experiences over possessions, what must businesses do to achieve awareness and retention? This blog shows how you can unlock recurring revenue and loyalty with six proven steps for long-lasting growth.
There are multiple ways in which businesses can generate steady income, including leasing, contracts, and loyalty programs. These business models promote consistent revenue, with the subscription model being the most widely adopted. Many industries, such as software, media (e.g., streaming services), industrials, and retail, make use of it.
The shift from traditional models built on onetime transactions to recurring revenue trend is a response to the volatile economic realities of our time. Companies are turning to profitability and cash flow stability over fleeting market share gains. Such strategic foresight will bolster their resilience against future shocks from unforeseen crises.
For many companies, subscription models have long been viewed as complex and disruptive, particularly in stable or thriving markets. However, ignoring its transformative potential is not a viable option.
Switching to a subscription model is crucial for survival. The initial transition may not be perfect in execution, but it is still necessary.
When subscription models go wrong
Lots of subscription failures exist. While a competitor's failed attempt might make you unsure about switching to recurring revenue, it doesn’t necessarily mean that the subscription model is incompatible for your business. Rather, it’s likely that your competitor fell into one or more of these common pitfalls:
Sloppy design
If you don't know what customers want, the subscription design will not reach its full potential. A single offering cannot encompass the diverse needs of your customers. Companies commonly make the mistake of designing the lowest offer to be too attractive. You want to encourage people to subscribe and get them hooked, but don’t forget your upsell path. A strategic approach is to implement a tiered subscription model, catering to varying levels of willingness to pay.
Make sure there is always a way to get more from that recurring subscription. Over-engineer your lowest tier, and you remove any incentive to move up.
Adding subscription to everything
A subscription is not always the right solution. We’ve seen this in the automotive industry — a subscription for cars just doesn't work.
However, automotive companies have found success in other areas, such as the monetization of data and services.
The goal is to determine which parts of your business you can offer as subscriptions. Furthermore, if you only offer one-time transactions, you must consider exploring related areas.
Tailgating infrastructure
Technical bottlenecks may exist. You will need a billing engine and a customer service team capable of providing the associated support.
Consider the monthly arrival of your money rather than receiving it all at once. This will impact your cash flow. You need to carefully consider all these aspects before diving into a subscription model.
A subscription isn’t a magic formula, and you may already be weighing up the risks in your mind. Is it truly a sensible idea and the right moment to make a business model switch?
You must not switch your entire business to a subscription model overnight. Instead, we recommend pursuing a hybrid approach wherein you can continue to focus on transactions for your business.
As you solidify your core business, explore opportunities to introduce adjacent subscription offerings to create a multifaceted ecosystem built on recurring revenue.
Six key steps for successfully launching a subscription model
1. Chart your transition path
Determine the right speed of change and revenue mix. How rapidly do you want to bring the subscription model to the market? How quickly do you want to shift your revenue from a onetime transaction to a recurring basis?
If you generate revenue primarily from onetime sales but also offer subscriptions, you have the freedom to choose your path. If you have capabilities and resources to rapidly shift your revenue mix to subscription, then your transition path is more revolutionary.
Ultimately, you want to be clear on the goals driving the transition path and plan accordingly. For large companies, even a fast transition can take several years.
2. Set key parameters
To develop the offer structure, you need to carefully consider the key subscription parameters. Will you offer one tier or multiple tiers of subscription? How will you charge for a subscription product? What would be the shape of the payment function as usage increases?
What are the billing and contract terms? Do you offer discounts for early payments? What about offering discounts for multi-year purchases? You need to answer these questions in advance and not leave them as an afterthought.
3. Benchmark your subscription offers and commercial strategy
Competitive benchmarking helps you identify areas to improve and establish a strong value proposition in the future. It will also help find any gaps in your offer before you invest a lot into changing the product.
Whatever your industry, it is unlikely that you are the first to implement a subscription model. Lagging has its advantage: you learn what has already worked, and what didn’t.
4. Test the concept
You must not roll out a subscription model without testing it.
Checking in with your current customers is a good start, but they might have a skewed view of your product or service. You also need the perspective of your prospective customers to validate the value drivers of this application model. Testing prospects will help you measure how many people will likely subscribe and create a realistic financial plan.
5. Build out the unit economic model
Economic modelling starts after step one, but you also need benchmarking and customer testing data for a complete picture. Switch completely or just add a subscription next to your existing onetime revenue model. But it's crucial to understand what cash flow implications the subscription offer will have on your business.
6. Get sales ready for launch
Before pressing go, you need to fully equip your sales team. If the sales team is not ready to sell subscriptions, doesn’t know how to compare them to regular sales, and doesn’t understand how subscription revenue will affect their compensation plan, your subscription journey might fail.
As companies adapt their commercial strategy and operations to customer-centricity, selling directly to customers on a recurring basis is key to long-term growth. At Simon-Kucher, we will transform your commercial strategy and revenue management capability with a customer-first approach to driving value. Ready to discover the elements of a successful business model that aligns with your goals? Contact us today.