The subscription concept is clearly a great business model in the right situation. Many consumer product companies are exploring subscription and see it as the future. There is even talk about moving past subscriptions to purely usage based business models for software. These new ways to serve customers are very exciting and have a lot of potential. But, how do you implement subscription successfully? especially for an established product business?
- Is it the right model? (will it work?)
- How to dev and launch?
- How to run a subscription?
When I was tasked with creating and launching a subscription service I jumped into learning mode and tried to answer these questions. I bought all the best books I could find on the subject, reached out to experts, and subscribed to similar services from competitors. Here is what I found.
Is subscription the right model? (will it work?)
Most important finding: Product-Market fit is still key. Subscription is another way to bring your product to consumers, it doesn’t replace marketing fundamentals. This seems obvious, but many of the books and articles I read were cheerleading for the subscription business model. They make it sound like subscription will transform and grow any business. But the best books and articles (and sound business thinking) makes it clear that subscription is secondary to core marketing fundamentals. If your product wasn’t successful before subscription, subscription isn’t likely to change that.
If you do have product market fit, then answering this question is a business model exercise. Inputs are key and, just like forecasts, you’re always going to be wrong. How do you make sure you’re not too wrong? Talk with experts who have already done this (in your industry and others) do market research, and pilot the subscription if it still looks good. Build up a model that predicts the metrics below.
How do you develop and launch a subscription?
Pilot. Pilot. Pilot. You can do lots of market research and modeling, but you don’t really know how a subscription will go until you launch. Depending on your business cost structure this could be disastrous if certain variables are off. We had some variables and assumptions that were right on, and others that were off by 2x+ (good and bad).
It’s quite common to pilot subscriptions, I’ve seen a number of companies do it recently. Especially with physical products. The advice from the TaaS playbook (see book list below) also strongly supports this approach.
How do you run a subscription business successfully?
Everyone agrees that churn is the most important challenge and variable in consumer subscription business. But there are a couple challenges that are nearly as important:
- Churn – The most important metric in a subscription business model. Business model is highly sensitive to retention/churn rate.
- Cost – Especially getting economies of scale in your sales and marketing costs. This is difficult for most companies. Includes customer retention and billing operations costs.
- Commoditization – More of a challenge for software and XaaS than for consumer products, but now that your product is available “on tap” how do you stay differentiated?
Cost is an interesting, sneaky, issue. With subscription you now have an ongoing relationship with the customer. Gone are the days when people would only reach out when they had serious issues. You are now continually connected to all your customers and they expect you to take care of them in new ways. Expect many costs to go up. Customer service, retention, billing, etc. I can’t tell you details, but we definitely had surprises when we launched.
Running a subscription also requires entirely new metrics and roles in your organization
Key Metrics you’ll have to track and get your organization on top of:
- Churn / Retention – % of users lost / retained. Usually expressed as a monthly %. Should be <10%, >20% likely to be fatal
- CAC – Customer Acquisition Cost. Cost to get 1 new subscriber. Must be less than LTV
- LTV – Lifetime Value of a customer. Amount (in current $) you make on a customer over the lift of that customer
- ARR – Annual Recurring Revenue. Total annualized subscription revenue
- ACV – Annual Contract Value. The annual value of each of your contracts (subscribers)
- Renewal Bookings Rate – How much has your ARR of subscribers changed (up or down). Two components:
- Retained Revenue (-lost customers, -downsell)
- Expansion (+upsell, +crosssell)
- % S&M – Sales and marketing costs as % of revenue. Needs to have economies of scale. this is harder to scale
- GEI – Growth Efficiency Index. How many new ARR $’s do you get per $ of sales and marketing spend. Should be 1 to 2 to be successful
- User Engagement – Measure adoption, retention, and frequency of use of features. This is a leading indicator of churn.
Your organization may need to adopt new roles to successfully run a subscription. Traditional transactional businesses can be siloed and customers won’t notice as long as you have a good service department. With a subscription customer success requires seamless coordination across departments. This requires new processes and new roles. A lot of companies have adopted “Customer Success” roles, even having CCO’s – Chief Customer Officers. This is another great reason for piloting a subscription. You can ease your organization into successful subscription operations. Educating the org on metrics and implementing the new roles in a lower risk environment.
That’s all I can share here, if you want to learn more from my experience, get in touch. I’m bullish on the subscription business model and would love to discuss.
If you want to dig in more yourself, here are the books I read and the main points:
- Technology-as-a-Service Playbook – Provides a playbook for how to transition a traditional tech company to XaaS [still valuable insights for consumer products]. Transition to XaaS is inevitable. Moving from products to services to outcomes. Product-Market fit is the foundation, but churn is still key. Profitability is a challenge.
- Subscribed – Consumer focused. Subscription is inevitable. Market moving from products to services to outcomes. Churn/Retention is key. Customers want great experiences.
- The Membership Economy – Consumer products focused. “Membership” is a bigger trend and subscription is just a part of it. Customers want great experiences and to be a part of something.
- Retention Point – Consumer Membership programs focused. Churn/Retention is very important.
- Subscription Marketing – Consumer focused. Churn/Retention is very important.
TaaS Playbook is by far the best of the bunch. Most were soft selling something (consulting or a subscription platform). TaaS Playbook was a dense, intelligent analysis of the dimensions of the subscription business model challenge with data and evidence to back up their claims. It’s focused on technology products, not physical products, but there were many lessons that were still applicable.