Subscription Model Issues: 3 Things to Fix First

The Organizational Shift to Subscription Models

Frequently, at CloudBlue, I am contacted by large enterprises – those within the Fortune 500 – seeking technological solutions to facilitate their move towards subscription-based business operations. Often, these organizations discover they haven't implemented the fundamental organizational changes vital for a successful transformation.

The advantages of subscription models are considerable. They offer improved scalability, a better customer experience, and the potential for consistent, predictable revenue. This makes the model highly attractive to businesses across all sectors.

The Pervasive Nature of Subscriptions

While initially dominant in Software as a Service (SaaS), subscription services are now widespread. Industries as diverse as automotive, airlines, gaming, healthcare, wellness, education, professional development, and even home maintenance are increasingly adopting this approach.

Companies are introducing subscription offerings at an accelerating rate, recognizing the benefits of recurring revenue.

Beyond Pricing: A Holistic Transformation

It’s crucial to understand that adopting a subscription model isn't merely about assigning a monthly or yearly fee to an existing product. Simply adding a subscription option to a current business isn’t sufficient.

A complete operational overhaul is required. This includes engaging all stakeholders, revising the overall business strategy, and fostering a company-wide subscription culture.

Readiness for the Transition

Despite the widespread belief in the future of subscriptions – with 70% of business leaders identifying them as key – only 55% of companies feel adequately prepared for the shift.

Before focusing on technology, which serves as an enabler, organizations must address core issues to effectively plan and execute a transition to a recurring revenue model.

Key Considerations for Success

Prioritize organizational alignment before implementing new technologies.
Ensure all stakeholders are onboard with the strategic shift.
Develop a comprehensive strategy that encompasses all aspects of the business.
Cultivate a company culture that embraces the principles of subscription services.

Engaging Internal Teams in the Transition

Organizations historically reliant on usage-based billing often mistakenly believe a move to a subscription model is solely a sales-related challenge. This assumption is incorrect. A shift of this nature will impact nearly every department within the company, including product engineering, production, financial operations, sales, marketing, and customer support.

Consequently, leadership must actively engage all stakeholders, fostering enthusiasm and equipping them to proactively prepare for this evolution. Thorough preparation is key to a seamless transition.

However, resistance to change is a common human trait, even when the alterations are ultimately beneficial. Securing the full cooperation of all internal teams – potentially numbering in the thousands depending on company size – can therefore be a significant undertaking.

To address this, executives should articulate a compelling vision of the company’s future, both in the short and long term. A primary source of resistance stems from uncertainty regarding the changes’ impact, particularly concerning job security.

Throughout this transformation, leaders should leverage and support individuals capable of championing the change within the organization, inspiring alignment with the new strategic direction.

Effective change agents are typically highly regarded, influential individuals possessing deep knowledge of the organization’s existing workflows and technologies. They often include early adopters who can positively influence broader acceptance.

These individuals excel as educators, communicators, networkers, and connectors, demonstrating resilience when faced with disruption. They are the first to support new initiatives.

While some companies benefit from incorporating external consultants into the change process, this approach requires careful consideration.

Engaging with Investors, Shareholders, and Regulatory Bodies

In addition to informing and training internal teams regarding forthcoming modifications, substantial and publicly traded organizations must also account for external parties, including investors, shareholders, and financial regulators.

A shift towards a subscription-based revenue model necessitates a significant redistribution of income streams. Companies pivoting in this manner might observe a leveling off of singular, large sales prior to quarterly reports. However, this revenue will then be distributed across the entire duration of the customer relationship – a considerably extended timeframe.

Proactive communication and education of all external stakeholders are crucial. This ensures a comprehensive understanding of the subscription strategy and prevents undue concern when financial reports begin to reflect the change.

To facilitate a seamless transition and cultivate confidence among external stakeholders, the finance department should develop precise predictive models illustrating the business’s post-subscription performance. These models should be shared with complete transparency.

Accurate forecasting is paramount to maintaining investor confidence during this period of transformation.

Key Considerations for External Stakeholders

Revenue Recognition: Explain how subscription revenue differs from traditional sales revenue.
Long-Term Value: Emphasize the potential for increased customer lifetime value.
Financial Modeling: Share detailed projections demonstrating the anticipated impact on key financial metrics.

By proactively addressing these concerns, companies can successfully navigate the transition to a subscription model and maintain strong relationships with their external stakeholders.

Adapting Sales Compensation for Subscription Models

Successfully transitioning to subscription-based revenue requires the full engagement of sales teams. However, implementing this shift can be a complex undertaking, presenting potential risks and incurring significant costs.

Within larger organizations, sales personnel often rely on substantial commissions derived from single-payment transactions. The subscription model, by distributing revenue over an extended period—a year or more—can create a temporary shortfall in earnings, potentially hindering salespeople from reaching their established income goals.

To secure the complete commitment of the sales force, companies must revise their sales incentive programs to align with the subscription framework. This necessitates a departure from bonus structures based solely on initial contract values. Instead, a plan should be implemented that directly correlates with customer success metrics and supports core business objectives, such as customer acquisition, retention, and expansion.

A central element of an effective compensation strategy is a consistent emphasis on increasing monthly recurring revenue (MRR) and annual recurring revenue (ARR). This should be achieved through the use of appropriate key performance indicators (KPIs), designed to meet established recurring revenue targets.

The Rule of 78, a common principle in sales, provides valuable insight into revenue projections. It suggests that acquiring one new customer each month translates to 78 months of potential revenue for the business. Leaders can leverage this formula to refine revenue targets and select relevant KPIs.

Organizations must also carefully evaluate potential risks embedded within customer contracts. For instance, a contract with a termination clause after one year of a three-year agreement introduces uncertainty. While revenue from the first year is secure, subsequent years are vulnerable to cancellation, potentially impacting previously awarded bonuses.

It’s vital to acknowledge that customer retention will rarely reach 100%. Businesses should proactively adjust their sales strategies to account for inevitable churn. Clear guidelines and parameters are essential to prevent disputes.

Communicate openly about the evolving compensation structure throughout its development to prepare the sales team for the changes. Emphasize the advantages of a MRR/ARR-based compensation plan, including potentially lower monthly quotas compared to traditional one-time sales compensation.

Facilitate both group discussions and individual meetings to gather feedback from each sales representative. Incorporate this input into the final compensation approach. Distribute a copy of the drafted plan to each team member, allowing ample time for review.

Continuous monitoring and adaptation are crucial. Leaders should consistently solicit feedback, track the compensation plan's performance, and remain flexible, making adjustments as needed to optimize results.

Technology as an Instrument, Not a Goal

Currently, the majority of businesses have either implemented a digital-first strategy or are planning to do so, with cloud services serving as the core of their digital evolution. Global expenditure by end-users on public cloud services is projected to increase by 18.4% in 2021, reaching $304.9 billion, a rise from the $257.5 billion spent in the previous year.

Tools leveraging technology to improve areas like billing precision and financial operations, customer relationship management, and professional services automation are valuable assets in shifting towards a subscription-based business model. However, they are not a guaranteed solution.

The Importance of a Human-Centered Approach

As technological advancements create new opportunities and promote competition, the organizations that will ultimately succeed are those that recognize the fundamental importance of a people-first strategy. It’s crucial to understand that technology represents only one component of a larger, more comprehensive framework.

Efficient processes and a focus on the human element are paramount. Technology should be viewed as a facilitator, supporting these core principles rather than dictating them.