Senior Technology Executive with expertise in Global Transformation, Enterprise Architecture, Analytics, AI/ML and Cloud Services. Profile
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Subscription (i.e., XaaS, pay-as-you-go) business models are quickly becoming the standard for most organizations to deliver content or services. A majority of senior finance executives believe about 40% of their organizations' revenues are recurring, and 70% of business leaders expect subscription business will be key to their future. According to Gartner, all new entrants and 80% of historical vendors will soon offer subscription-based business models.
While the benefits are significant and strategically create a competitive advantage, it is not easy to drive a business transformation from a product-centric business to a customer-centric subscription model. Every element of the value chain, from product SKU, sales cycles, CPQ, billing, revenue recognition and even supply chain, gets significantly impacted. We have all seen businesses that have both struggled and succeeded on this journey. The following are some core principles based on things I've learned that can make the transformation a bit easier and eventually successful.
Plan for rapidly scalable infrastructure.
A subscription business by definition is an on-demand business that is expected to manage peak loads in a scalable, robust and secure infrastructure. Reliability is also dependent on strong integration points within the enterprise, such as invoicing systems and external services, such as billing, payment gateways, partner portals and so on. While not necessary, hybrid cloud architecture is increasingly becoming a great choice for subscription business platforms.
Simplify product SKU.
Most businesses that have been around for 15-plus years have an organically evolved, custom SKU structure. Most subscription products are very simple in nature, which offers an easy choice to customers and accommodates constant changes required. Traditional SKU definitions established in ERP and CPQ systems are inadequate to the ever-changing service definitions, configurations and pricing. A simplified SKU makes it easier to bill, recognize revenue and renew subscriptions.
Develop reliable usage telemetry and analytics.
Real-time processing of usage data from source systems, such as device telemetry or system logs, user dashboards, real-time data cleansing and rating, are all capabilities that are now critical infrastructure for accurate billing and invoicing. Without a robust, real-time data reporting and analytics platform, one that can show variable consumption usage and trends, building a successful subscription business is almost impossible.
Build a robust billing and invoicing capability.
Subscription billing capability is an absolute prerequisite for a shot at success with a subscription or pay-as-you-go business. Manual workarounds with existing billing capabilities, which most organizations try to get away with, can only work for a limited time before the need for a proper engine becomes obvious for anybody serious about transformation. Similarly, invoicing now shifts to a more regular cadence, typically monthly, from a yearly structure. Real-time metering and usage further add to the complexity.
Build and release early.
The core idea of a subscription business is to be fast and nimble so that you can get ahead of the competition and offer newer products to the consumer. Part of the same philosophy is to increase the velocity and time to market of products. Customers are usually OK with a great product with limited features, as long as new ones are rolled out fast and often. Hence, instead of long-drawn product cycles with large sets of features, it is more valuable to build and release products early and often.
Consider flexible and granular pricing models.
A pay-as-you-go subscription model includes variable pricing ranging from flat to tiered to volume discounts. The ability to change prices is often necessary to offset the increased cost of service due to customers' demands and to match competitor prices in the same market. Constant price changes for new customers (if not, for old customers) is the new normal to increase market share and retain an existing customer base. A flexible pricing engine, possibly supplemented by pricing guidance using predictive analytics models, can make a big difference in revenue and growth.
Double down on cash-based payment and auto-renewal capabilities.
Unlike the traditional product business, automated processing of payment and renewals is a must. Faster processing of payments provides a great advantage for businesses to quickly offset customer acquisition and service development costs incurred when quickly getting a product to market.
Build an engaged sales cycle, easy onboarding and continuous customer relationship.
In a subscription-based business, customer acquisition is only the beginning. Customer relationship management is a continuous journey with constant client interactions. Customers may choose to do several activities after signing up, including making changes in subscription, onboarding, renewals, inquiries, trials and so on. Hence, being ever-present for the customer is mandatory to retain and potentially grow the business by capitalizing on any upselling or cross-selling opportunity during each customer moment of engagement. While it might get expensive managing an "always-on" customer service platform, a lot of this can be automated with tools, self-service portals and AI bot capabilities.
Validate processes and architect a complete solution.
A subscription business platform architecture, for many of the reasons mentioned, needs to accommodate flexibility, business capabilities and technologies that were not required in a traditional model. An organic evolution of platform architecture with business growth doesn't work as well. A complete order-to-cash process and architecture road map needs to be in place early on, even if it is not built on day one.
Also, the architecture will likely be an ecosystem of other XaaS capabilities, such as billing, subscription management, CRM, analytics, etc. Overlaying the need for 24/7 customer support and service, it's vital that your platform is not only built for purpose but is also highly available and scalable with business growth.
While all of the above are worthwhile considerations, the most important ingredient in transforming into a subscription business is the patience and buy-in to get through the change, while maintaining a balance between the two simultaneous business models to ensure revenue and continued investment in change.
Bringing investors, board members, customers, employees and other stakeholders to a shared vision of future that invariably includes a temporary pain, is a must. However, effective planning and considering the above core principles can lead to eventual success in the journey.
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