Companies and customers have found their footing with subscription-based services. But there are some pitfalls for both parties in the subscription-based model.
As companies strive to be more agile, the old way of delivering products and services may need adjustment. Subscription-based services have become an alternative to long-standing ownership models.
In the traditional payment model, customers buy products outright and own and manage them them. They pay for maintenance and have to budget for the initial capital outlay. With subscription-based services, companies rent rather than own products and pay for use of these products on an incremental basis. Subscription-based services may reduce the initial cost of products and may also assist companies in the ongoing maintenance of services.
Gartner predicts that by 2020, all new entrants and 80% of established vendors will offer subscription-based business models for various products and services.
“What began as a trickle a few years ago has become a stampede of vendors wanting to make a move to a subscription business model,” said Laurie Wurster, research director at Gartner, in “Moving to a subscription model.” This applies even to enterprise technology companies, now selling infrastructure services on a subscription basis.
Plus, that's in line with what buyers want. Between 2013 and 2017, customer preference for subscription-based services has grown from 63% to 82%, according to McKinsey & Co.
“Our customers were asking us to transition our business and change the way we deliver our technology,” said Cisco CEO Chuck Robbins in January 2018 in the video interview “Squawking at Davos.” “Our customers wanted to consume more of our technology as a service.”
When compared with ownership, subscription-based services offer convenience and potentially reduced initial costs for customers, greater flexibility in consumption of services, on-demand pricing and fewer management headaches. Sellers themselves can also benefit from the subscription-based model by forging more regular communication with customers concerning pricing and feature upgrades; this can translate into higher customer retention and satisfaction. It may also offer the opportunity to up- or cross-sell services.
“The subscription model owes its success to the optimal balance of value it provides to both the company and the customer,” wrote Chuck Longanecker in “Why you should use a subscription business model.”
Mutual benefit for involved parties is a calling card of the subscription model, where companies can learn more about customers to better suit their preferences.
“We can dive into what our customer wants a little bit more,” Gregory Lowe II, former CEO of Fitbox, a fitness subscription service, told Business Insider.
At the same time, customers and companies should beware certain pitfalls on each side. For customers, subscription-based services may seem initially attractive by reducing the cost of initial capital outlay, but they may cost more money over time. For companies selling subscription-based services, they can benefit greatly if they can vary features and options and offer new pricing schemes.
Further, companies may lose out if they cannot maintain quality and service over time. Customers are likely to drop subscription-based services they deem too costly without enough value. Companies also need to deal with subscription-lifecycle management (ensuring that credit cards don’t lapse and they can collect payments) and deal with global compliance issues in collecting recurring payments. Sales reps also need to be trained and attuned to customer needs regarding pricing and features.
Managing subscription-based services in a global environment can be a challenge. Regions handle recurring payments differently, and companies will need to find a good payments managing system.
Subscription-based services also require companies to become more agile.
“You not only have to be able to gather the data . . . and act on data insights on an ongoing, continual basis,” said Brent Leary, a partner at CRM Essentials. “You have to move quickly.”
Subscription-based models represent a shift in how products and services are priced, managed and delivered. That means that relationships between companies and customers will necessarily shift, and companies can make the most of that shift by acknowledging the change.
Here are some recommendations for making the shift to a subscription-based services model.
As companies shift from selling products to selling services, they need to reorient their practices and stay vigilant about diversity of services and analysis of customer needs. In this way, subscription-based services can become an opportunity to add value rather than simply a different pricing model. Use the subscription model as a way to differentiate services, entrench relationships with customers and better understand customer preferences through data.
“Personalized communications is one of the biggest factors in reducing churn and re-engaging customers,” said Jerry Jao, CEO, Retention Science in a piece on building a profitable subscription model. “Collect as much data as you can about your customers and email them personalized offers . . . to coax them to renew before they churn.”
Lauren Horwitz is the managing editor of Cisco.com, where she covers the IT infrastructure market and develops content strategy. Previously, Horwitz was a senior executive editor in the Business Applications and Architecture group at TechTarget;, a senior editor at Cutter Consortium, an IT research firm; and an editor at the American Prospect, a political journal. She has received awards from American Society of Business Publication Editors (ASBPE), a min Best of the Web award and the Kimmerling Prize for best graduate paper for her editing work on the journal article "The Fluid Jurisprudence of Israel's Emergency Powers.”