9 KEYS TO BUILDING SUCCESSFUL SUBSCRIPTION BUSINESS MODELS
Written by:
Zuora Content Team
“Does it have to be nine keys?” our PR firm once asked us, “Can’t you make it ten?” We can’t. It’s nine. We’ve been market leaders in this field for many years, and we’ve based these nine principles on thousands of conversations with companies like HP, DocuSign, Box, Nest, News Corporation, and dozens more.
It turns out, when we did the synthesis, that a very clear and consistent picture began to emerge. The same nine principles kept surfacing: Price, Acquire, Bill, Collect, Nurture, Account, Measure, Iterate and Scale.
Some of these may seem more immediately relevant to your business, but eventually all of them have to be addressed. These nine keys serve as a foundational blueprint for building and scaling a subscription-based business:
We don’t just talk about the nine keys. We use them every day. All of our new internal business summaries are presented in a nine-key format, and we’ve also run hundreds of external tests with our existing clients. We test the framework when we initially engage with companies to talk about their business. We test it during our implementations and by looking at support cases from live customers. We test it by looking at what features are requested for us to build or enhance.
Today, we map pretty much everything we do against the nine keys: marketing collateral, employee onboarding, sales decks, support analyses, etc. It’s a framework that runs through our entire customer engagement cycle. Everyone knows it, from receptionists to product managers. Our CEO, Tien Tzuo, even had it tattooed on the back of his neck (it was a temporary tattoo).
When we conducted a survey of 200 companies about the nine keys, and the results were evenly distributed (almost scarily so). In other words, they are all important to the success of any subscription business. While individual keys may be prioritized at different times, a business must focus on the collective set as a whole.
The survey also showed that businesses consistently recognize opportunity for improvement in their ability to perform each of the keys. Furthermore, these companies also indicated that they are currently investing or planning to invest in these key capabilities within the next 12 months.
This introductory guide is intended to outline these nine concepts in very broad terms. All of the nine keys, from pricing to scaling, will eventually become the subject of much more in-depth analysis. But let’s start with the basics.
1. PRICE IN SUPPORT OF YOUR BUSINESS GOALS
Pricing is your most valuable strategic weapon as a subscription business, because it is directly tied to three fundamental growth strategies: acquiring new customers, increasing the value of existing customers, and reducing your customer churn. Subscription pricing is a necessarily complex endeavor. A static monthly subscription price can often be counterproductive. The one-price-fits-all days are over, as this approach turns off downsell opportunities and leaves money on the table from active users.
“Having the ability to manage complex pricing structures in a very transparent, organized manner, is really important for us to get a competitive advantage in the market.” Chris Purpura, VP & GM Cloud Platform, MuleSoft
Subscription pricing strategies can be tiered according to functionality, discounted to incentivize bulk purchases, metered according to usage levels, or optimized to reward loyalty. They can be based on the time of day the service is used (this is popular with Telcos), adjusted to incentivize activity from particular geographic regions, term-based to lock in long-term commitments, or adjusted in cooperation with partner promotions. There are overage charges, free trials, virtual coupons, early bird offers, freemium to paid plays…the list goes on. We suggest starting simply with two or three basic surprising pricing tiers, and adjusting them over time as you learn from your customers. If you have an ideal price point, be sure to set another price above it to make it look more attractive.
2. ACQUIRE CUSTOMERS ACROSS ANY CHANNEL
Here’s an area where B2C companies frequently trump B2B competitors. At its core, this is a basic user flow issue. Signing up for a subscription should be a seamless user experience that can be done across multiple channels: online, mobile, or via an assisted sale.
B2B companies with assisted sales models need to create a quote for potential clients – a process that can be difficult compared to one-time product sales. Many systems aren’t designed to support all the elements of a subscription-based customer acquisition strategy, such as term lengths and multi-channel support. These complexities can often slow down your customer acquisition strategy and result in cumbersome single-channel commerce solutions. Subscription businesses need to establish fast, simple, and automated customer acquisition workflows across multiple channels. Make sure you have multi-channel support (the amount of commercial activity on mobile phones continues to explode), and fine-tune your user flow to Amazon-like levels of ease and simplicity.
3. BILL WITH ACCURATE, INTUITIVE INVOICES
In a traditional business, products and services are simply purchased and invoiced: make widget, sell widget, recognize widget revenue. However, in the subscription model, billing is far more complex. Businesses have to bill new customers at sale, deal with prorated accounts, different billing dates, usage bills, etc. Without the right billing system, it can take weeks to generate bills, and errors can lead to customers fleeing in droves.
Scaling is a huge challenge. Your bills should be accurate, simple to understand and branded appropriately. As a result, your billing system must effectively manage the many data points needed to calculate bills clearly and accurately. Think of your bill as your company’s first real step in establishing a transparent, long-lasting customer relationship. Have your designers examine it closely! Bills should be treated as vital branding collateral.
4. COLLECT FAST CASH AND EASY SETTLEMENTS
In the product world, payments are relatively simple: consumers pay up-front with cash or credit, or have a credit line opened on net-30 terms. Neither of these approaches work very well for recurring payments Automation is the key to optimizing cash collections. Subscription businesses need to collect cash quickly, while maximizing collections and minimizing write-offs. Remember that very few subscription plans these days rely on simple domestic monthly credit card charges.
Particularly with overseas sales, there are a host of payment gateways to assess and implement. Some of them can take up to a month to set up! Once you define your market, you need to identify your most appropriate collection paths. There are probably some you don’t even know exist.
5. NURTURE AND DEVELOP DEEPER CUSTOMER RELATIONSHIPS
If you’re in the subscription business, you’re in the customer service business. Strong customer relationships are at the core of the subscription business model. Without them, there can be no sustainable recurring revenue growth. As a company’s customer base gets bigger, this becomes one of the most important keys in the entire framework. Acquiring new subscribers is critical, but in the Subscription Economy the vast majority of customer transactions consist of changes to existing subscriptions: renewals, suspensions, add-ons, upgrades, terminations, etc.
And it’s much less resource-intensive to build on existing customer relationships than to acquire new ones. Most large companies generate just 15 to 25% percent of their revenues from brand new customers. As a result, you need to provide customers with intuitive and comprehensive tools to manage their accounts over the entire subscription life cycle. Ideally, you should have a 24/7 support service, as well as a customer success outreach program. Closely monitor customer usage and adoption to mitigate churn risk. A stable, happy customer base is essential to compound growth.
6. ACCOUNT FOR REVENUE AND CLOSE BOOKS FASTER
Subscriptions are more similar to “a thousand points of light” than a “shining beacon on the hill.” A typical subscription has a vast number of order transactions, and can change drastically over its life cycle. This causes a complex ripple effect on bookings, billings, cash, and revenue. Most General Ledgers have difficulty handling these processes, but businesses still need them to generate financial statements.
This isn’t a front-facing challenge for most start-ups, and as a result they frequently wind up cobbling together manual spreadsheets the night before their financials are due. Don’t get caught out on this issue! You’ll need a way to streamline your accounting-close process and maintain compliance.
7. MEASURE TO GET VISIBILITY INTO THE RIGHT CONSUMER METRICS
Subscription businesses are constantly evolving and adapting. The days of big clunky version updates are over. SaaS companies, for example, update their core products dozens (if not hundreds) of times a day.
Analysing key metrics from bookings through revenue recognition can provide unparalleled insight into customer value and the financial health of your subscription finance business. Traditional GAAP reporting won’t go away soon, but subscription businesses must also focus on metrics like ARR, retention rate, recurring profit margin, and growth efficiency index to be successful. Unfortunately, many businesses are flying blind, since traditional financial systems don’t provide these metrics. Make sure you set up a dashboard to track these important subscription finance KPIs from the outset, and check them frequently.
8. ITERATE AND RAPIDLY DEPLOY NEW PRICING
The Subscription Economy has an infinite number of pricing options. Many companies typically start with a simple recurring pricing model, because you have to start with something. But markets can evolve quickly, and customers’ needs will likely change over time.
Competitors may enter with a differentiated offering. It’s critical that your pricing and packaging — a strategic weapon for driving growth — is flexible and dynamic. Subscription businesses need to rapidly iterate on pricing models to maximize subscriber acquisition and market share. Be prepared to turn on a dime, but the challenge is not alienating your existing customer base. Netflix learned this the hard way. Gift your existing customers at every opportunity, and only raise prices on future customers.
9. SCALE WITH MISSION-CRITICAL INFRASTRUCTURE
Who doesn’t want to grow big? Large subscription businesses need a reliable, enterprise-grade system with services that are built on a secure, mission-critical, and scalable infrastructure. Your system should have 7x24x365 operations and assured business continuity. B2C companies especially need this kind of infrastructure support to scale rapidly. All companies need seamless integrations with commerce systems, payment gateways, and other technology systems.
Practice what you preach: look for scalable, affordable, and easily implementable back-end solutions. Avoid cumbersome expensive ERP installations. Build out your perfect cloud stack. If something doesn’t work out, you’ll be able to drop it and move on.
9 KEYS, TO BUILDING SUCCESSFUL, SUBSCRIPTION BUSINESS MODELS,
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