It probably comes as no surprise that the subscription economy is booming. With a history that goes back centuries, the subscription-based business model was first introduced in the 1600’s by newspaper and book publishers. Since that time, the model has continued to grow and continually extend its reach. From a B2C perspective, a recent survey of more than 2,000 U.S. consumers revealed that 99% of them became subscribers since the start of the pandemic. Whether it’s food and drink, entertainment, pet supplies, fashion or software, you can purchase virtually anything through a subscription. So it’s no surprise that formalizing your enterprise subscription management model is critical for today’s businesses to thrive.
Subscription Business Models Continue to Accelerate and Broaden Their Reach
Recently, the enterprise subscription management business model is expanding into (what some may think of as) unlikely territory like healthcare, airlines and automobiles. For example, as a way to attract younger customers and/or provide car subscription concierge services, high-end auto makers already incorporate subscription-based models into their business structure.
Not to be overlooked is the acceleration of B2B subscription business models. Aside from software-as-a-service (SaaS) which encompasses B2C and B2B, the B2B landscape is prime to offer innovative subscription-based products and services. In fact, anything as a service (XaaS) products are expected to reach $344.3 billion by 2024. Check out one of our recent blogs to see how businesses – possibly like yours – are using innovation to take the subscription business model to the next level.
What to Expect With The Enterprise Subscription Management Business Model
The question remains, what’s the attraction of this business model? Why are companies across all industries developing subscription-based business plans for their products and services? To get to the bottom of this phenomenon we took a deep dive into enterprise subscription management’s business model, its advantages and even its potential drawbacks.
While businesses receive benefits from subscriptions, customers do as well. Let’s explore each of the key benefits and why many of the advantages are a win-win for both the company and the customer.
1) Develop a loyal customer base
Unlike traditional one-off sales, the subscription business model enables you to build long-term customer relationships. The data collected can be used to create products, services and bundles that meet the needs and preferences of your customers. By piquing your customers interest with offerings they desire, you can grow a loyal subscriber base that provides greater customer lifetime value (CLV).
2) Rely on a predictable revenue stream
One of the key benefits of having a loyal customer base is in receiving regular and predictable revenue. Knowing this enables you to predict your weekly, monthly, and annual revenue with better precision. This enables you to start each month and year with a clear idea of your expected profitability.
3) Improve profitability through up- and cross-selling
Given the long-term relationships the subscription business model promotes, you have an existing subscriber base for marketing efforts to offer complementary products, services, and features. Various pricing models such as tiered, per-user/per-unit, usage-based, volume, or even hybrid pricing allow customers to easily upgrade, add more users, and more – quickly and effortlessly.
4) Appeal to a wider market
The subscription-based business model gives you the opportunity to offer better entry-level pricing, such as freemium to attract more customers to your business. In addition to gaining the ability to grow your customer base through attractive pricing, lengthy and expensive sales cycles and negotiations become a thing of the past.
5) Lower retention spend
Subscribers automatically buy from you on a regular basis, so you’ll reduce marketing spend on retention initiatives. Of course customers can and will churn. This is why successful enterprise subscription management focuses on delivering personalized experiences, engaging with subscribers across a variety of channels, and delivering the products and services their customers desire.
6) Increase return on customer acquisition costs
Increase return on customer acquisition costs: Regardless of the business model, tracking your customer acquisition cost (CAC) and CLV are pivotal financial metrics. CAC depends on the costs you take into consideration like sales and marketing salaries, overheads of department personnel, marketing expenses, and tools such as software used to acquire a customer. As you can see, depending on which costs you use the figure can be misleading. This is where CLV provides a more accurate view of your finances. To calculate CLV, simply take the annual revenue per customer times the number of years the client has been a customer. Then subtract the customer acquisition cost. Basically, the longer a customer remains loyal to your brand, the higher your retention rates and the greater your CLV.
7) Manage inventory more precisely
Enterprise subscription management helps you avoid the unpredictability of not knowing how much product is needed in the coming months. Since the number of customers is a known quantity, as they increase this directly affects the amount of product required. Then the predictability of a subscription-business model allows you to better anticipate future demand.
As you can see, adopting a model of enterprise subscription management provides many advantages, but as also poses some challenges, including:
- Risk of churn: Since repetitive purchasing is the hallmark of subscription-based business models, churn is one of the biggest risks. While you need to anticipate a level of churn, it’s equally important for you to understand what is driving churn – both voluntary and involuntary. Then take the necessary steps to rectify the situation(s). For B2C you should target a churn rate somewhere between 2-8% and for B2B you want to stay below 2%.
- Increased competition: With a business model that is forecasted for continued growth, the reality is that you’ll encounter an increasing number of competitors. Although a growing number of competitors may make it difficult for you to attract and retain subscribers, there are ways for you to gain a competitive advantage. Rise above the competition by providing exceptional customer service, and delivering the highest quality products and services. And be sure to keep the lines of communication open between you and your subscribers.
The above disadvantages affect both B2B and B2C subscription-based companies alike. The following are more applicable for B2C subscription businesses.
- Contract avoidance: This issue lies in the commitment required for consumers to become subscribers. First, make it easy for customers to become subscribers by offering no-commitment trials. Second, if a product isn’t what was expected or didn’t live up to quality expectations, make it easy for the subscriber to return the product. Finally, be sure it’s easy for subscribers to cancel their contract.
- Loss of interest: Consumers today are easily bored and are constantly on the hunt for the newest product or service. This potential challenge can easily be overcome by continually creating new and innovative products. This includes providing samples of soon-to-be-released products or offering newly released software like games or apps on a 5-day free trial basis. What’s important is to continually provide value to your subscribers by keeping them engaged.
As a business model that delivers countless benefits, 70% of business leaders expect subscriptions to be key to their future growth. However, shifting to enterprise subscription management takes more than developing a business plan. This was echoed in a recent survey of Senior Financial Executives which revealed that nearly half (48%) of businesses with a recurring revenue model struggle to meet accounting and reporting challenges.
Streamline Enterprise Subscription Management Processes with the Right Billing System
Overcoming accounting and reporting challenges resulting from dynamic customer relationships inherent to subscription management requires an agile, cloud-based billing system. To avoid billing issues that could negatively affect subscribers, you need a billing solution that, at a minimum, provides a product catalog, account management, billing automation, automated invoicing, mediation, business intelligence, and customer communication. BillingPlatform delivers this and much more. Our cloud-based platform enables companies to support any business model with any combination of charges, even the most complex recurring revenue relationships. Request a free 14-day trial to see for yourself!
