What if B2B businesses focused on upselling or cross-selling to an existing customer rather than acquiring new customers? The results would be incredible. Leveraging the existing customer base is what the subscription-based business model is all about. It entails nurturing customers and benefitting from the growth that follows.
The crux of such a business model largely depends on your customers’ opinion – if it is positive, your business takes off; else, it collapses. So, you need to be customer-centric when you start your subscription-based business journey.
And the key thing to remember is customer retention is the sweet spot where you benefit from. In this blog, we’ll walk you through what a subscription-based revenue model is, its benefits, various subscription-based business models and how you can implement one effectively.
What is a Subscription- based Business Revenue Model?
Subscription-based models are those where customers pay for a recurring usage of a product or service to a business. Amazon Prime, Netflix, Wynk Music, HelloFresh, Birchbox and so on are some of the well-known services that are offered on a subscription-based model.
Wondering why subscription models work better than the other pricing technique? Let’s find out.
What are the Benefits of Subscription and Usage Revenue Models?
Unlike other revenue models, the subscription-based model has a strong wall of defense against economic uncertainty and helps create a stable customer base that will continue to subscribe to services or products; this allows businesses adopting this model to predict revenues with high efficacy. Here’re some of the undeniable benefits a subscription business model can offer you.
I) Accelerated Revenue Generation
Retaining customers is 5 times cheaper than acquiring new ones. The businesses that adopt a subscription-based business model are adept at customer retention and derive better customer lifetime value (CLTV) compared to the rest. So, these businesses tend to grow easily and more efficiently. The subscription-based business model also enables you to acquire customers faster through referrals and word of mouth. You can thus attract more customers, thereby expanding your business considerably and increasing its recurring revenue.
II) Better Revenue Predictability
Businesses following a subscription-based business model don’t have to reset their revenue forecasting button every quarter. They can start with a ballpark revenue estimate based on the data of the previous quarter and leverage churn rate numbers and gradually build from that point.
III) Enhanced Business Agility
When you establish long-term relationships with your customers, you can better understand their needs, requirements, pain points and expectations, and this enables you to cater to them better. With customer behavior mining platforms such as Salesforce Customer 360, you can not only manage your entire customer database in a single place but also respond to the dynamic requirements of your clients with your new product or service offerings.
What Are the Different Kinds of Subscription-based Revenue Models?
All subscription-based businesses have a common feature — customers are charged for the access to the product rather than the product itself. Let’s now look at three popular subscription business models.
1) Pure Subscription Model
In a pure subscription-based business model, revenue for each subscription period is fixed. The amount that needs to be paid by the customer is predetermined along with the payment window. One of the best examples of this kind is Spotify’s flat-rate monthly subscription fee.
2) Consumption Model
Also known as the pure usage model, the consumption model’s revenue is not fixed. In this model, the amount that needs to be paid by the user and payment window is determined by the product’s usage. In other words, it’s a pay-as-you-use revenue model. Uber, Zomato and DoorDash are some examples of companies following this business model.
3) Hybrid Model
The hybrid subscription-based business model is a mix of both pure and consumption revenue models. This is why their revenue has both fixed and variable aspects. One such example of this business model is overage fees charged on your current flat-rate monthly bill for your additional phone minutes.
How Can I Implement a Salesforce-enabled Subscription Model in My Business?
Implementing a Salesforce-enabled subscription model requires the right tools and processes including building a consistent buyer’s journey that charts various channels customers may come across and how they might change their subscription package over time. You also need to track the latest metrics incorporated in the buyer’s journey. We’ll now look at the 3-step subscription model implementation process in detail.
Empower Customers to Buy and Pay over Any Channel
Recent findings from McKinsey bring to light that more than 75% of customers prefer a remote human engagement or digital self-service platform rather than having a face-to-face meeting. Given this, you need to empower customers to upgrade, renew and pay instantly through various channels.
Well-established B2B companies like McKinsey are using more than 10 different channels to interact with clients. This reveals the importance of cross-channel communication from the customer’s point of view. No matter which channel your customers use to approach you, you need to ensure to provide a seamless experience and resolve their queries effectively.
For example, a subscription management system can pick up a customer who initiated an online purchase but hesitates at the checkout. The system comes with Customer Relationship Management (CRM) tools that route them to the right rep to help the customer complete the purchase. Using the subscription management system, you can utilize customer data to deliver great experiences by ensuring a fully-connected buying journey.
Focus on Delivering Customer Value
A key thing about the subscription-based business model is it helps deliver value consistently to your customers. On the downside, when the customer stops receiving value, nudging them to renew their subscription to your product or service doesn’t make sense. The results – They’ll fail to renew, your retention rate will decline, and they’ll eventually leave stalling your growth.
As a business, you need to transition from thinking about delivering products/services to delivering value to your customers consistently. Along those lines, when we look at Netflix, it doesn’t sell DVDs, on the contrary, it provides entertainment as a service. Likewise, Amazon’s value lies in delivering exceptional buying experience as a service.
Customers experience the value of your product or service when they use it, and this brings the service and customer teams to the limelight. These two teams need to work in tandem to ensure customers can adopt the product with ease and customer satisfaction is high.
Achieving these goals is only possible with a robust CRM tool that provides both automation and data visibility capabilities. Why data visibility and automation? Automation fast tracks your customers’ buying journey to use your product or service effectively, while data visibility lets you monitor and take appropriate actions based on user behavior and fix potential problems before they frustrate your customers.
Track Recurring Revenue with KPIs Consistently
For a subscription-based business model, customer retention and customer value are even more important metrics than customer acquisition as they tell you how much value you can derive from a customer and estimate the potential recurring revenue.
The challenge is what metrics to use to monitor and track recurring revenue. Here are some metrics that you need to look at to project the recurring revenue.
- Customer Value
- Average Revenue Per User (ARPU)
- Monthly Recurring Revenue (MRR)
- Annual Recurring Revenue (ARR)
While customer value can be determined by how much your customer base is adopting your subscription offerings, ARPU is calculated by dividing your business revenue by the total number of users. Targeting your customers with the right product or service offerings will help you increase your ARPU value.
MRR is calculated using the following formula:
MRR = [New customer subscription revenue] + [Existing Customer subscription revenue] + [Add-on and license upgrade fees from existing customers] – [Loss of revenue from churned customer accounts] – [Loss of revenue from license downgrades or removed add-ons]
ARR is calculated using the formula given below.
ARR = MRR*12
These metrics are extremely important for a subscription-based business as they help it become more predictable, and as these values increase, it implies the business is growing.
Bonus Point: Implementing Salesforce Revenue Cloud is another smart move you can make to track all your revenue management activities end-to-end and accelerate your business growth.
As you can see, focusing on the aspects listed above enables you to develop a robust subscription-based business model that facilitates rapid growth. At Solunus, we help you make the best use of Salesforce to facilitate seamless implementation of the model to achieve your revenue goals. Our rich experience gained serving companies of all sizes across industries and strong focus on understanding your unique requirements enables us to develop the perfect solution that provides you the highest ROI.
Hope you liked this post. How do you use a subscription-based business model? We’d love to know.
About Solunus
Solunus is a dedicated Salesforce partner organization, headquartered in Dallas, Texas. Our unrelenting focus on comprehending the unique needs of our clients coupled with our unrivaled expertise of the Salesforce platform enables us to deliver the perfect solutions that create the best value for IT and business analytics firms.
