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Subscription-based models offer flexibility – and challenges

Cloud-delivered subscription-based models offer flexibility for customers. But recurring revenue models can pose pitfalls if companies aren’t careful.

Streaming videos and music, car leasing and subscription-based razor clubs have taken their respective industries by storm.

Today, customers expect to pay for only what they want, when they want it. Subscription-based models are part of this shift in expectations. Their on-demand delivery helps with on-demand consumer needs and companies’ aspirations to provide new services.

But it took some time to shift from traditional ownership-based models to recurring-revenue approaches. Once upon a time, customers often had to own many of their products to be able to consume them. They paid an up-front fee. And products like cars, music and software were also their responsibility to manage and maintain. In some cases, the ownership model created higher up-front costs, potential customer upkeep challenges and product lock-in.

With digitization and the cloud, however, customers could pay a monthly fee and try different products and services more easily. They also didn’t have to wait for IT departments to fix software issues but could instead rely on the automatic patching and updates form providers. With less up-front sticker shock of owning and paying for products outright, subscriptions are lighter weight, more flexible and more consumer-friendly, pairing nicely with cloud-based service offerings themselves.

“We have transitioned the way we use goods and services,” noted Brent Leary, a partner at CRM Essentials, a consultancy, and an expert on subscription-based models. “Nowadays, we don’t have to own outright . . . to do the things we want to do. We have the opportunity to focus on access without the overhead of ownership.”

Access without ownership

For companies and customers of Netflix, Salesforce, Adobe, and Dollar Shave Club, the subscription-based model has been a boon, offering steady income through monthly fees and new ways to engage with customers.

Netflix disrupted traditional movie-rental company Blockbuster and helped pave the way for streaming movies. Salesforce, a cloud-only based software provider, caught traditional on-premises CRM providers like Oracle and Microsoft unaware and forced them to rethink on-premises only models; the company says it’s on track to have $10 billion in revenue by 2018. Adobe, a provider of desktop publishing services, moved from shipping boxed software to delivering cloud-based subscriptions, and it went from deriving 19% of its revenue from subscriptions to more than 70% in those five years. Unilever bought Dollar Shave Club, which charges customers a low monthly fee for razors, for $1 billion in 2016.

“That access-over-ownership model has … made it easier to consume this stuff,” Leary said.

The challenges of the subscription-based model

While the subscription-based model has smoothed the way for customers to consume services, recurring revenue can pose pitfalls.

Subscription-based models, for example, require a more always-on, analytics-driven business model so that companies can deliver on these services. Companies need to be able to gather data from multiple channels, understand the implications of that data, and address customer needs, seamlessly in real time.

“It does become a bit tougher. It does come with a cost,” Leary said.

“Customer expectations are ramping up increasingly. You have to know what those expectations are and deliver on them. You have to be of a mind-set and a culture where you are customer-focused. Customers expect you to continue adding value.”

Additionally, companies have to be able to gather insight about customer behavior—then act before the insight becomes stale. "You not only have to be able to gather the data band . . .  and act on data insights on an ongoing, continual basis,” Leary emphasized. “You have to move quickly.”

Leary also noted that companies have to be good stewards of consumer data. Selling consumers’ personal data to other companies or using it for tone-deaf marketing that isn’t tailored to true customer need won’t fly.

“If you go over the lines and use the data for a pure company perspective and look for ways to exploit customers rather than add value … customers are going to go to somebody else.”

Additional resources

Cisco and the subscription-based model

Cisco’s own shift to subscription-based models

What customers want: Subscription-based models

Lauren Horwitz

Managing Editor, Cisco.com