From Netflix to Spotify, via Amazon Prime and Adobe Creative Cloud and many more: subscription services are now as much a part of our daily lives as they are of our working lives, so much so that we can talk about a Subscription Economy revolution.
Shifting to the subscription model is a great way to generate recurring revenues and add value to the customer experience, also in the B2B sector. But what are the ingredients for guaranteed success? Let’s look at them together.
What is subscription model and why is it important?
The subscription (or subscription-based) business model is no longer based on one-off transactions, but on recurring revenues on a regular basis (monthly, bi-monthly, yearly…) established through a contractual obligation.
Three categories of subscription models can be distinguished: the first two mainly concern the B2C market, while the third, as we will go into in more detail below, is the one that most interests B2B companies.
1) Subscriptions to consumer products
The customer subscribes to the regular delivery of articles, products and supplies. The model extends to a wide variety of product areas: from groceries to clothing, to beauty and pet care products.
2) Abbonamenti a servizi multimediali
The customer subscribes to platforms offering multimedia streaming services of audiovisual products, e-books and music.
3) Prodotti in cloud “as-a-service”
The corporate customer subscribes to an ecosystem based on cloud infrastructure, platforms or software.
Subscription models not only enable recurring monthly and annual revenues, but can also help you increase revenue at a lower cost by offering services that are scalable and in line with the buying trends of your audience.
Moving from a traditional business model to a subscription model, however, is far from easy: it requires a radical change of set-up, particularly in the B2B sector.
Subscription Model B2B
For some time now, B2B companies have been combining the sale of additional services with the sale of the physical product in a variety of ways: by associating services such as installation, after-sales service, maintenance and repair (hardware add-ons) or software upgrades that rely on the physical asset to enhance the user experience of the product (software add-ons).
Whether it’s software, hardware, services or data, by moving to the subscription model a company chooses to monetize value rather than ownership.
Anything as a Service
In recent years, the digital transition has given companies a promising opportunity: the sale of services as a substitute for the sale of physical goods has contributed to the emergence of various solutions on the market, including:
- Software-as-a-Service (SaaS), one or more programmes or applications;
- Platform-as-a-Service (PaaS), a combination of hardware and software;
- Infrastructure-as-a-Service (IaaS), IT infrastructure for storage and hosting;
- Device-as-a-Service (DaaS), provision of IT devices such as PCs and smartphones.
Thanks to this new business model, which considers anything-as-a-service (XaaS), the technology makes it possible to offer customers a suite of integrated services within a true ecosystem.
The customer will thus see reduced costs and risks associated with the ownership and use of the asset, but will also be enticed to pay more, by virtue of the flexibility and scalability of variable costs that characterise the subscription business model.
B2B sales, characterised by a larger number of stakeholders and longer negotiation times, makes it even more necessary to strategically rethink the factors at stake before moving to a subscription model. Where to start, then?
The ingredients of a successful B2B subscription model
Offer customers several subscription plans so they can select what best suits their needs. Consider further customising the offer, for example with Enterprise plans for large organisations.
Break down subscription rates into different tiers, taking into account any extra costs and customised plans, and track them with state-of-the-art reporting software.
Give the customer the ability to renew, suspend and change the subscription at any time during the billing cycle, coupled with a solid marketing strategy to avoid losing contact during “breaks” from service;
Equip your organisation with an efficient and comprehensive system to monitor and repair products and ensure timely support for digital services on sale.
Subscription model KPIs
Compared to a traditional business model based on one-off sales and ‘lifetime’ licences, the subscription model requires other types of metrics to monitor the health of your business.
Specifically, as you will notice, these metrics focus on the customer and no longer on the company: this is the most important change of perspective to consider, both in numbers and mindset, when deciding to offer a B2B subscription model.
- Monthly Recurring Revenue: the revenue the company will receive every thirty days based on active subscription plans.
- Annual Recurring Revenue: the revenue your company will receive each year based on active subscription plans. This metric is particularly useful for observing trends during the year and setting growth targets for the following year.
- Churn Rate: monitoring the Churn Rate, or churn rate, is essential to understand the state of the business and the internal or external factors that may affect its performance. A low, but constant, Churn Rate is to be considered physiological, while the presence of ‘spikes’ in unsubscriptions is an alarm bell about the state of the service offered.
- Revenue Churn: the percentage of lost subscriber revenue in a given period, for example in a month. In other words, it describes the financial impact of unsubscriptions.
- Client Lifetime Value: the most important metric for a subscription-based business model and indicates the total earning potential of a client. It should always be higher than the cost of acquiring the client.
- Renewal Rate: the percentage of customers who renew their contract at the end of the subscription period. In a healthy subscription business, the renewal rate must be high enough to allow for overall growth in both total customers and revenue.
Generate recurring revenue with B2B Subscription Model
The subscription model opens up new possibilities for B2B companies, fitting into a broader trend of digitisation of products and services that puts the customer experience at the centre of business strategies.
Indeed, switching to a subscription model for the sale of B2B products or services makes it possible to offer customers scalable and customisable solutions, opening up new possibilities for loyalty and engagement on the one hand, and giving rise to new sources of recurring revenue with lower expenses on the other.
In this regard, Forbes synthesizes in three practical tips the change of mindset required to launch and maintain a successful B2B subscription model:
- Give value to the customer relationship through the unified effort of the Sales and Marketing departments;
- Set up scalable plans, loyalty programmes and benefits, coupling increased plans and rates with tangible customer benefit;
- Offer no-commitment trials, free versions and demos to build customer loyalty and gather new prospects.
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