Recently during a roundtable in a pricing conference in Stockholm, one of the B2B OEM participants was explaining how servitization of their product and service offering helped them to go through the hard time of the previous economic downturn by having reoccurring revenue stream in place. This experience created a vibe in their organization globally and resulted in higher attention to subscription business model or outcome-based service offerings.
While such success stories make subscription business models very tempting, it is important to remember that not every business model is created or is able to transform to a subscription offering. Those who fail usually have too much emphasis on reoccurring revenue without the critical attention needed to more substantial changes in customer relation, value creation and KPIs.
Robbie Kellman Baxter in his article in #hbr suggests 4 characteristics of leading companies in subscription business model:
1 – They check if their customers like to pay subscription fees for their services
Paying monthly fee forever for a #yogaoutfit might not look very rational to many customers as they might not need a new outfit every month. Comprehensive market research and well-defined value offering based on the market research is needed before marking for new business model with obscure added value.
2 – They define and use right KPIs
In transactional business, volume plays a crucial role. It is to the point that companies and sale entities are willing to give great discounts to capture higher market share. In subscription model, however, what is more important is how long your customers are willing to stay with you. This by itself means that sales are not the end of the customer journey, it is the start of it. Moreover, cash flow points of transactional business models, like breakdowns and sales of spare parts, will become cost points as there are covered in the subscription fee and too many of them may result in churn.
3 – They invest in membership culture
Membership is a mindset. Customers need to see enough value to change their mindset from transactional buying models to subscription schedules. It is fair to say B2B or B2C clients need great outcome of their membership program than product ownership, to be willing to pay a reoccurring fee. This has implications on how different functions need to change their mindsets too within the organization. For example; for sales, moment of transactions is the start, not the finish line; finance should invest on long-term well treatment of clients, and product development needs to evolve the product constantly to maintain the value offering.
4 – Love members more than anything else
Subscription providers always provide ranges of value providing offerings, not a single product. Such value offering products are also evolve during the time to evolve the product based on the client or segment usage behavior, making sure long-term relationship. For example, looking at what #Dropbox offers, it might look like a data storage space; while this is correct, this offering is followed by data security guarantees, data versioning, collaboration workspaces, omni-channel data access, etc. While combination of these offerings might vary for private, professional, and business users, it is a dynamic set of value offerings changing by time.
What do you think that would be essential "DO"s for moving to subscription business model?
This article is a summary and comprehension of the following reference:
https://hbr.org/2016/07/subscription-business-models-are-great-for-some-businesses-and-terrible-for-others