The Subscription Economy

  |  June 28, 2013   |  Comments   |  

Ever heard of the subscription economy? Apart from being a company that provides subscription billing to its clients, this topic is high on my agenda as I've been in touch recently with companies who specializes in subscription billing solutions.

Let's start with defining what a subscription economy is, and comparing it to "one-off sales", and finish by looking at how to do it properly through a few case studies.

Having a good pricing model is a critical part of your marketing strategy.  This column is about how to strategically look at your offering and how to market and bundle your offers, rather than how to digitally market them. Strategic marketers, e-commerce gurus, startup entrepreneurs, and CRM managers, behold!

Why subscription economy?

Think about the services you're consuming online and how these companies make money. LinkedIn sells premium users' packages, Spotify, Dropbox, and Google Apps for Business, insurance, mobile phone services, satellite/paid TV, hosting, analytics providers, marketing platform, and I am sure you can think of many other examples.

A big chunk of our monthly bills as individuals and as businesses are paid on a monthly recurring basis.

The advantages for the consumers are clear: we pay for what we use; we 'rent' the service for as long as we want to, and we can increase or decrease spend as we see fit.

To monetize, merchants offer different plans and move clients from one plan to another. They're using different tools like freemium plans, upgrades, pre-paid, post-paid unlimited usage and trials with the target of increasing CLTV (customer lifetime value).

There must be something worthwhile for the merchants as well. It is consistent revenue streams, a stable client base and the opportunity to increase brand loyalty from existing clients.

Gartner did a study in 2011 which convinces companies not offering subscription options to their clients to make assessing it a priority.

Let's have a quick base comparison between subscription billing and one time sale pricing:

Marketing in the subscription services

The key in foraying into the subscription economy is to identify the customer life cycle around your product or services (instead of the product life cycle), package it and offer it on a basis of usage from very minimal level to large consumption. When promoting it in the digital space, ensure the benefits are presented clearly, the price, the period of commitment, and how the user can upgrade or terminate their services. If you have the possibility to provide clients with a portal where they can "shift" between plans, try them out, and buy additional products then you're automating your sales process and allowing customers better control and flexibility on their spend and hence satisfaction from your company.

Let's look at a rather simple subscription model such as Dropbox, a cloud-based file storage and sharing service. They have a free subscription offering limited storage space, pro versions with different storage capacity at different prices, and a business plan that caters to multiple users. Such subscription models cater to the fact that not all customers are equal and they have different needs, these price plans make targeting and segmenting Dropbox's customers much easier than just a one-off subscription.  Once a customer nears the limit of what their subscription offers them, Dropbox can then send marketing messages to convince them to adopt an upgrade to their current plan or provide word-of-mouth offers to get them to introduce the service to more people with the incentive of increasing slightly their storage capacity if they successfully do so.

To conclude this example, timing and the right level of features help propel customers to upgrade accordingly to their needs and to retain customers happily at the level they can afford.  Some marketers and certainly the finance department heads are wary of providing 'free' services, while I do agree that not all service or product offerings is well-suited for the freemium model, it is a good strategy to understand the customer better and let them learn the true value of upgrading to a price plan.  Dropbox, Evernote, LinkedIn are very successful examples of this.

However, to be successful in marketing for the subscription economy, the strategy must be extensively tested and that means ensuring you have benchmarks to measure against and KPIs to fulfill, which goes on to my next part.

Customer centric view – KPIs to look at

If you're starting to see the advantages or offering some of your products/services as a subscription business, in order to truly understand your clients, you'd need to look at different pricing plans you already have in place and the customer behavior of each.

I recommend you should be looking at some of the following ones:

MRR: Monthly recurring revenues as total, on a product level, per customer and average. You would want to identify changes when comparing to the previous period.

Total subscribers: The number of new subscribers you have = your client base.

New subscribers: Number of new subscribers registered to your services in the base comparison period (day/week/month/quarter/year).

Delta MRR: The increase or decrease of your MRR when comparing to the base period.

Churn: How many clients were lost. Measured by number of clients and revenues lost.

CAC: Cost of acquiring new client

ARPA: Average revenue per account

LTV or CLTV: The average time period of a client until his churn and his average spend.

TCV: Total contract value

ACV: Annual contract value

Renewals rates: How many clients and associated revenues renewed the services and under which products.

Retention rate: The number of clients not defecting presented as a percentage.

Till next time, stay tuned.

Ohad

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ABOUT THE AUTHOR

Ohad  Hecht

Based in Hong Kong with a diverse marketing and management experience in Asia, Ohad has managed a number of accomplishments in his fledging career. Highlights include creating the patent registered luxury brand Swana. He speaks four languages and is well versed in the interwining his Western management philosophies into the Asian business model. His experience is complemented with establishing core digital strategies with expertise in e-commerce and email marketing. A regular speaker in the industry events. Armed with a B.A. and M.B.A., he now heads the Asian-Pacific operations of emarsys LTD .

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