Subscription businesses grew 9X faster than S&P 500
As buyer interests are shifting from goods to services and to experiences, their preferences are also shifting from buying ownership to buying access. Make no mistake, the subscription economy is responding to these trends with full force.
A Forbes article reports that “Since the start of 2012, the sales of subscription economy businesses are growing nine times faster than sales of companies in the S&P 500 and more than four times the rate of U.S. retail sales.” The findings are the results of an analysis conducted by Zuora, a company that serves subscription businesses. Zuora used its customer data from 353 businesses that it serves to come up with what it calls The Subscription Economy Index. Zuora concluded that “From January 1, 2012, through September 30, 2016, the subscription businesses have increased sales 15.1% versus 1.7% for revenues of companies in the S&P 500 and 3.6% for retail sales, including e-commerce.”
We looked at the benefits of the subscription model from strictly a pricing and monetization angle. Here are some of the benefits of the subscription model that may help enhance any and/or all of your buyer acquisition, monetization, and retention metrics.
Recurring revenue is guaranteed revenue
Subscription businesses are in a better position to offer price discrimination to capture the differing needs and use cases of different customers, through multi-tiered pricing structures. A multi-tiered pricing structure allows businesses to configure their offering and align each tier with how different customers need, acquire and benefit from the offering differently. Therefore, not only the buyers can easily self-identify themselves and their needs but also the providers can easily calculate the lifetime value of a certain type of customer, manage their roadmap, and invest their resources in accordance with segmented growth goals.
Subscription pricing is easy to communicate and budget
Subscription pricing, if built on the correct value metric, has an advantage over non-subscription businesses in that it provides a modular and easy-to-calculate-cost to a buyer. As most subscription models utilize a key dimension (user, usage, adoption levels of a key benefit etc.,) it’s easy for users and buyers to size their cost for the offering as their needs and businesses grow. This is a win-win for the provider, as well, since they too can plan their resource allocation, the cost of acquisition, and the cost to serve based on the foreseen recurring revenue levels.
Subscription model aligns pricing with the value delivered to each type of buyer
Subscribed customers continue to pay as they continue to receive the benefits. The model enhances providers commitment to deliver on and improve the customer experience so as to retain their customers which not only represent current revenues but also the future revenues. In that sense, it aligns the motivations and behaviors of both parties. While this alignment is rewarding, one important note on that is underpricing in the subscription economy means lost revenues for the lifetime of a customer - you'd better get your pricing right.
Underpricing in the subscription economy means lost revenues for the lifetime of a customer.
Multi-tiered price plans drive segmented growth
Multi-tiered pricing plans can be structured in such a way to fuel the growth in one particular segment. By reverse-engineering the amount of value delivered in the adjacent tiers, providers can influence buyers’ perceived value and adoption behaviors. Further, new levels of profitability can be attained by aligning segmented growth initiatives with the product, offer, and cost structures. For example, let’s say you have four different types of buyers who need and benefit from your product in distinctly different ways. If you want to grow in tier 3, your product team shouldn’t focus on the features and attributes that would benefit all the tiers or a specific tier other than tier 3 – so on and so forth. Focusing on segmented growth can also enhance your customer relationships which in turn reduces churn.
By reverse-engineering the amount of value delivered in the adjacent tiers, providers can influence buyers’ perceived value and adoption behaviors.
Bundles go far in recurring revenue model
As the subscription economy matured over the past decade, buyers and users alike are now sufficiently normed towards the idea of bundles and, in some cases, they even come to expect them. Particularly for B2B businesses, this creates immense opportunities to enhance profitability. Businesses that can identify new products and services that add higher value with lower cost structures benefit from bundles the most. While most bundles include add-on services, modules, and products; sometimes different service level agreements, product delivery frameworks, and onboarding perks can be great ways to differentiate your bundled pricing and profits.
Sometimes different service level agreements, product delivery frameworks, and onboarding perks can be great ways to differentiate your bundled pricing and profits.
While technology and software companies took the lead in the transformation to subscription economy, the model is fast spreading across other industries and most interestingly across professional services industry which is a traditionally project and deliverables based relationship. We, at Pricing Innovations, are among the leaders in professional services business with our Pricing-as-a-Service model. This model allows us to become an extension of your team fuel your growth by working on any-and-all of monetization, product, and go-to-market strategies, rather than us serving narrowly scoped deliverables. We’d love to tell you more about it.
What opportunities does your business have to ride the subscription wave?