Subscriptions 101: Three steps to recurring revenue

Print

Posted 01 May 2012 14:38pm by David Chiu with 0 comments

• Tweet

• Tweet

It's been called the best business model in the world. And subscriptions aren't just for media businesses.

Gartner forecasts that by 2015, 35% of Global 2000 companies with non-media digital products will generate up to 10% of their revenue from recurring models. Are you ready?

Ongoing monetization is a key part of disruptive digital selling. Consumers flock to these businesses because they offer a superior product experience, enable costs to be amortized, and provide a guarantee that vendors will always work hard to ensure their satisfaction.

In return, enterprises maximize customer loyalty, secure predictable revenue, and often gain a significant competitive advantage.

Those of us in verticals that haven't transitioned to the subscription economy yet can learn a few things from media and telecommunications companies, where the rise of new technologies and digital distribution have driven profound shifts in their business models:

<p >

Other industries are catching on quickly. As James McQuivey of Forrester Research puts it, "every business–no matter how analog–is susceptible to the same digital overhaul." Companies in fields as diverse as life sciences, computer hardware, and traditional manufacturing are all seeking new ways to create revenue through subscriptions to diagnostics, data analysis, consumables, and professional services.

I recently spoke with an executive from a heavy equipment company whose top strategic priority is switching to digitally-enabled subscription pricing for tractors and excavators. The times are indeed changing.

Step 1: Identifying the right model

Both vendors and consumers are deeply in love with recurring business models. For enterprises, the advantages come in the form of predictable revenue, lower cost of acquisition, and the ability to scale revenues with expenses.

Combined successfully, these traits almost always translate into higher company valuation. For consumers, spreading out costs over time evens out cash flow and provides an assurance that the vendor will continuously strive to improve their offering on an ongoing basis.

All recurring business models can be boiled down into three basic flavors: 

• Subscription – A fixed payment for access to products and services, for a specific period of time. Flat rate pricing, unlimited consumption, and membership fees all fall into this category.
• Usage – Per-use or per-unit charges that are usually recorded automatically on a preexisting account. This includes offerings such as pay-per-play, pay-per-view, metered usage, or bandwidth billing. Freemium products often fall into this category as well.
• Subscription plus usage – A combination of a fixed subscription with overage charges or incremental units that are billed individually, usually to a preexisting account.

Correctly triangulating the above flavors with your product offering and the needs of your customers is vital to success in the subscription economy. It's important to remember that even within a brand, different products demand different types of monetization.

For example, Apple markets an ongoing service like iTunes Match as a subscription while charging unit costs for individual media titles to your account.

Step 2: Rolling out subscriptions

Once a model has been determined, the next step is to deploy technology that can quickly capture, monetize, and manage individual subscriptions. This is the domain of subscription and billing management systems, whose capabilities fall into several key areas:

• Subscription management – Creating and managing the basic plans and units of service that make up a subscription product, while capturing the sales of these products from existing touchpoints.
• Usage management – Tracking the consumption of subscription and usage products so that appropriate customer access and billing can occur.
• Billing management – Recurring charges create new customer scenarios such as periodic invoicing, authorizations, and dunning (dealing with failed payments) that must be handled by the subscription management system. 

With these capabilities in place, businesses can quickly monetize their offerings and start earning recurring revenue. But it would be a big mistake to just stop here. As I mentioned earlier, the benefits of a subscription business come with the responsibility to continuously improve, or else customers will pick up and leave. Doing so effectively requires a little more technology.

Step 3: Building for the future

To fully realize a recurring revenue business, enterprises need to develop a few more competencies.

Because everything in the subscription economy revolves around the customer relationship–identification, authentication, entitlements, preferred touchpoints, usage data, and key metrics like lifetime value and churn–it's vital that companies deploy the right technology to capture, analyze, leverage, and distribute this information effectively.

• Entitlements – Managing precisely what products, services, or units a customer may access, when, and through what touchpoints, including via third parties or affiliates.  
• Offers – Being able to create and manage compelling bundles of products and services that are responsive to the history, behavior, and context of the customer as they engage with your product experience across multiple channels.
• Content Management – Disruptive subscription businesses place novel  demands on content management systems, so strong capabilities in this domain are important. As every interaction becomes a potential commerce touchpoint, seamless integrations between content and transactions become critical.
• Delivery and fulfillment – Magic happens when your subscription offerings seamlessly integrate into your customer touchpoints, whether it happens to be a smartphone app, someone else's piece of software, or the dashboard of a tractor. As digital commerce systems weave their way into every customer experience, the ability of your systems to scale through high-quality APIs will give you an important competitive edge.
• Intelligence – Being able to analyze the vast amount of information generated by the above activities, and then make actionable decisions based on it, will become a critical competency.

Developing these capabilities will allow you to participate fully in the disruptive subscription economy.

Researchers and analysts agree that recurring business models based on digital commerce will soon be adopted in every industry, and that they will drive significant revenue growth in the coming years. Will you earn your share?

David Chiu is the digital commerce strategist at Elastic Path and a guest blogger for Econsultancy.