Change is the only constant. A cliché, but for a reason.
Reimagining the way we conduct business seems to be the tagline of the year 2020. But the truth is, the events just accelerated shifts that were already underway. Terms like customer-centric, customer success, customer-focused aren’t new, these concepts have been around for decades. The only difference being, now businesses have been forced to put them in practice, and fast. The litmus-test for if a company is truly customer-oriented has arrived, and the results are almost instantaneous, for everyone to see.
So, now more than ever you need to consider converting your business online into a subscription model.
The subscription model is especially relevant today, as customers are looking to cut down costs and ease the expenses that they aren’t able to cover on account of the plunging economy. And given the growing subscription economy buoyed by anything/everything-as-a-service being sold, the case for a SaaS (software-as-a-service) based subscription model ought to make itself.
Furthermore, the increasingly connected digital world that we live in, allows you to plug your business into your customers’ journeys with more ease, efficiency, and relevancy. The data available allows for contextualization and customization that was unimaginable before.
It benefits you to look at every customer as a relationship for a lifetime (with multiple revenue opportunities) than just a one-time purchase. A subscription model allows you to deeply understand your customers, and even preempt their needs. That’s the kind of value creation that leads to customer delight, reduces customer churn, and inspires long-term customer loyalty. And aren’t those the goals of every business?
Why should your SaaS business follow a subscription model?
Here’s a look at some points to demonstrate the benefits of a subscription business model:
Research by Price Intelligently states that “customer acquisition costs (CAC) are up more than 50% and willingness to pay for software has declined steadily for the past five years.” Add to this the findings of a survey by McKinsey & Company in which 60% of the respondents cited “flexibility to adjust capacity as the reason for preferring subscriptions over perpetual offerings”. The writing is on the wall.
Customers want to be prudent about costs and are wary of large-scale capital expenditures that take too long to show returns, while running the risk of the technology becoming obsolete by the time they do.
Additionally, the cost-efficiency and flexibility of subscription pricing incentivize even those customers that have limited budgets, thus attracting segments that would otherwise not be profitable to service. And flexibility extends to your business’s pricing strategy as well – based on features, usage, time, location, and more. A win-win situation for all.
2. Costs and Revenues
A subscription model offers a recurring stream of revenue. With subscription models, you also avoid the pressure to offer heavy discounts as opposed to up-front purchases.
Consistent, steady, and predictable in nature, the subscription model helps you scale while reducing customer churn. Your operating costs are almost simultaneously offset against the differently priced plans – from entry-level to more mature ones. You invest more in each customer as their usage of your product/service grows (based on their satisfaction and the current as well as future value your product/service brings to their business).
Furthermore, cross-selling and up-selling to existing customers takes less effort and expense than acquiring new ones. An infographic published by Invesp states that “customer acquisition costs are 5 times more than customer retention costs; while the success rate of selling to an existing customer is 60-70%, as opposed to 5-20% to a new one”. Thus, your marketing expenses can be optimized by investing in expanding the relationship with your existing customers.
The longer your customers stay with you, the less likely they are to go elsewhere, given the perceived cost of change. But this shouldn’t lead to complacency, if anything the opposite. Your value to customers is still in the delightful experience you provide to them – from the optimum functioning of the product/service, solving their issues in-time, to addressing their future needs.
3. Customer Lifetime Value (CLTV)
While the concept of CLTV is not limited to a subscription business model, it is at its core. With the customer being the focus, their journey of growth becomes your journey as well. As your customer’s business changes, so does the CLTV, and with a subscription model, you have the finger on this dynamic pulse.
When you focus on a customer’s lifetime value, keeping in mind the potential for multiple revenue streams, you can better define both short-term and long-term goals. Even the pressure to recover your CAC will ease because it can be treated as an investment rather than a cost, for the long-term returns will outweigh the initial expense.
4. Deeper Understanding
There are several metrics that a subscription business model tracks and data points that it captures. This information can help you understand your customers better with every passing day. And the longer the time, the more insightful the data. A trend that looks to be a blessing in the short-term, might turn out to be a challenge in the long-term, and vice-versa.
Furthermore, the on-going relationship with customers makes them more likely to participate in surveys and give feedback, because they will be around to experience the improvements. The outcome – an agile business that truly knows what its customers want.
In the spirit of being customer-centric
With respect to SaaS-based vendors, Gartner predicted that “By 2020, all new entrants and 80% of historical vendors will offer subscription-based business models.”
We are halfway through 2020, which means if you aren’t ready to ride this wave, you’re more likely to be washed away.
This prediction is in line with the growing importance of customer success. Businesses can no longer afford to react to market changes. You have to predict and preempt; you have to look at your customer’s life-cycle and map out where your business can offer value and start working towards that, today. 21
A subscription business model is just one aspect of adapting to change, to become more customer-centric. The ultimate goal being – a business that recognizes the value in building long-term meaningful customer relationships through consistent positive experiences.
Anshi has over 12 years of experience in demand generation, digital marketing, and managing global teams. In her prior role as head of marketing operations for a high growth US healthcare tech organization she transformed marketing from cost to revenue center.
Published June 29, 2020, Updated September 16, 2020