Using A Subscription Business Model To Grow Revenue And Increase Customer Lifetime Value
January 21, 2020at5:00 AM
E-commerce and retail experts at times will grapple with how subscription programs might be different from their personal experience with online businesses. The question “Why can’t I just think of subscriptions as a series of repeat purchases?” inevitably comes up. In B2B situations, one might try to fit subscriptions into the same thinking as a term contract with a payment plan.
Disastrous results can happen when the lens of other channels is applied to the subscription business. This article will outline some of the reasons why running a subscription business is unique.
Subscription Programs Facilitate An Ongoing Customer Relationship
First, the ‘sale’ establishes an ongoing relationship right from the outset rather than executing a transaction. You as a provider are configuring an offer to your customers, not pricing a product.
Frequency of payment, frequency of shipment, delivery charges, ease of change, service and support are all included in your offer. The offer creates a stream of purchases that occur over time. Each transaction along the path must create a good experience. Unhappy customers drive churn. This recurring process drives everything.
What is ‘everything’? Your company’s financial statements, your costs, your income stream, your margins, your business processes, your systems, and the underlying basis for how your company makes a profit.
A Focus On Successful Customer Outcomes
This is a big shift to move from thinking about products as the center of attention to selling an ‘outcome’ where the customer is the focus.
Successful subscription companies focus on the relationship first and their product or service second. Customers are subscribing to an outcome with you, while the underlying services provided may adjust over time.
When you start to think in terms of customer outcomes, a whole new world comes into focus. Am I selling a washing machine or am I selling clean clothes? Am I selling toothpaste or am I selling family dental health? Am I selling cars or selling a transportation plan?
The businesses that think in terms of outcomes are the ones causing disruption. Those same businesses are using subscription models to create an ongoing relationship. Think selling songs over the internet for 99 cents compared to selling a music streaming service. The first is transactional, the second is relational. Which model, would you say, provides the greater long-term value?
The reach with a subscription business model brings you closer to your customer. You know who they are, you know what they buy. You connect with them on a regular basis and know when things change. You no longer have a disconnected, one-time transaction where you may not even know your customer’s name.
For capital items like cars, it also means that the vendor owns the asset over the length of the relationship as there is no asset transfer to the end customer. The vendor can work out financing on a large scale, work to maximize utilization of the resource across all the customer base and optimize the maintenance and support. The end customer becomes a user, while the provider stays as the owner. This allows the provider to come up with creative solutions they could have never done before.
This can shift all the underlying economics in the providers' favor, increasing overall profitability if they are creative enough to leverage the subscription value.
Driving Sustainable Change In The Customer Relationship
This Subscription Economy is also driving faster change. Amazon Web Services is improving their data center platforms constantly. Microsoft is free to improve Office 365 as often as needed. Every product vendor offering up a subscription service is free to improve their products frequently, as they do not need to wait for lengthy and repetitive customer deployment cycles.
This same thinking is now coming to any service or product that the vendor gets to control throughout its lifecycle.
All these aspects mean looking at the customer in terms of their Lifetime Value, rather than their transactional or repeat purchase value. Profit is something that happens during the relationship, not at the initial sale. Your business grows by adding layer upon layer of customers that stay with you and provide a profit over time, while all the others that come and go are just a cost of doing business.
Over time, your subscription-based customer proposition looks more like an insurance company’s book of business - i.e. the tail of your current customer base revenue stream already on the books extends far into the future. Anything you do to shorten the tail hurts your business, anything that extends it strengthens your business.
The Importance of Robust Delivery Systems & Technology
To manage subscriptions effectively and efficiently, your underlying process and technology-based systems become critically important.
Technology in the Subscription Economy becomes the relationship glue. Systems are not only responsible to ensure that products and services are delivered successfully over time, technology is also responsible for managing many aspects of the ongoing interactions that create happy and long-term customers.
Consider automation as managing the tail of your revenue stream:
What happens when a customer’s bank sends them a new credit card, because of fraud or expiration, and now the card you hold cannot be charged for the next billing?
What happens if there is a hurricane in a customer’s state and they want you to hold their next shipment for a while?
How easy is it to suspend the next delivery because they are going away for the summer?
How quickly can you come to repair “your” equipment? How easy is your returns process?
While people may make the initial sale, technology is the quality driver in the Subscription Economy that helps to keep your customer.
Of course, there are many other aspects to becoming a subscription company. But if you master these critical areas you will be far ahead of most in the market today.
About The Author
InquireOf advisor Kim Terry is a C-Level expert in Information Systems Technology, with a particular focus on Recurring Revenue Based Businesses. This includes advisory, strategy and technology expertise regarding order capture, order management, and fulfillment systems that optimize their revenue and profitability.
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