For today’s businesses, the question isn’t whether or not you have to start offering subscriptions…it’s how. Just look to software as an example: as Gartner has noted, by 2020, more than 80% of software vendors will change their business model from traditional license and maintenance to subscription and flexible consumption.
But this isn’t just a software story. This shift is happening across industries. According to the Subscription Economy Index, subscription businesses are growing revenues about 5 times faster than S&P 500 company revenues and U.S. retail sales.
While transformation is inevitable, the path to transformation is not. There are many different strategies to get you to a subscription model — with no one-size-fits-all approach — but the pressure is on to do it right. According to research from the Forbes Global 2000, 84% fail at digital transformation; only about 1 in 8 successfully managed the process.
Any successful monetization framework has to take into consideration your particular portfolio as well as the concepts of business transformation and technology transformation. Furthermore, you have to put more emphasis than ever on the customer experience because today’s demanding consumers have expectations that need to be met (unless you want to lose your customers to your competition!).
In our work with hundreds of companies that have successfully launched subscription offerings, we’ve consistently seen patterns of behavior that result in success. This led us to the realization that there’s not really a playbook that shows businesses how to deploy multi-pronged strategies to monetize a subscription launch — or at least we’ve never seen one.
Here we detail the 5 core monetization strategies for launching new subscription offerings:
Businesses today are increasingly under pressure to monetize their offerings, through products, services, and subscriptions. A hybrid business model is a combination of both fixed models and usage-based ones. It involves continuing to employ traditional pricing strategies while at the same time tapping into a flexible consumption model.
The idea behind this hybrid model strategy is to start small and then evolve: companies launch new recurring revenue model offerings while maintaining core offerings as fixed models. These new offerings are then managed as separate business units from core legacy products (to avoid disruption to the existing business lines) but enable opportunities for upsell and cross sell between hybrid lines of business.
Zuora helped NCR, a 125-year-old company that made its start selling cash registers to saloons in the Wild West, launch a new tablet-based Point-of-Sale solution to help it compete with the likes of Square.
NCR Silver wasn’t the company’s first experience with a recurring revenue model. In fact, in recent years, recurring revenue had grown to represent nearly 55 percent of NCR’s business. What was different about NCR Silver is that recurring revenue was the business: it was all cloud-based, with no hardware installs or perpetual licenses involved
The NCR Silver launch team had only a couple of months to build the business and make the product available to consumers — and they did it, hitting their launch date with a flexible subscription management solution that helps them manage the complex billing involved with a subscription model and get accurate reporting on new subscription metrics like MRR.
This approach is a great way to launch a new subscription product without disrupting existing operations. Businesses can keep the one subscription product line separate and/or slowly evolve and transition their customer base to subscription models.This hybrid model is a win win in that it provides stability while building a subscription foundation on which a company can expand.
As Fast Company recently noted: “Some companies know that products only get you so far, that services are the future — in fact, services already account for 75% of the global economy.”
In short, this strategy is to shift from products to services, i.e shift existing classic “transactional” offerings towards repackaged recurring business models or flexible consumption models like usage-based, with a meaningful promise and a perception of affordability. With this approach, while you’re not launching a new offering, per se, you’re launching a new model for an offering.
In many industries, like software, conversion is typically the main play: moving from traditional pricing models focused on perpetual licensing and support/maintenance models to SaaS-centric subscription pricing and pay-per-use pricing models.
Companies can go all in on this strategy or opt for a partial conversion by shifting just a portion of their portfolio to subscription pricing models.
Company Example: PTC
PTC provides a good example of this shift in action. While PTC is one of the 50 biggest software companies, in recent years their earnings had taken a hit. In the second quarter of 2015, PTC recorded $303M in revenue. A little over a year later, that number dropped to $288M. In the same period, earnings swung from $17.4M profit to a loss of $28.5M.
To satisfy consumer demand, PTC decided to implement a broad, systemic shift to its business model from perpetual licenses to a cloud-based recurring revenue model. Since implementing Zuora to build out the necessary infrastructure to launch this new model, PTC now offers subscription pricing across its entire portfolio of solutions and technology platforms.
As a result of this shift, PTC has seen customer adoption of subscriptions accelerating every quarter. Based on their current course and speed, by fiscal 2021, they expect about 95% of their software revenue to be completely recurring.
Repackaging and introducing pricing flexibility is a great way to revive or boost an existing product/service with low sales, low coverage, etc. A subscription “launch” isn’t always a pure launch of a new offering; repackaging is a launch strategy unto itself.
“As-a-service” is the strategy of repackaging an existing product as a subscription offering.
For quite a few years now, we’ve seen companies moving away from one-off products and into subscription business models to increase agility, revenue, and shareholder value and ward off competition from nimbler startups.
And lately this trend towards “as-a-service” is picking up steam and crossing industries. Just look at a company like Philips which makes thousands of products, but now refers to themselves as “a technology solutions partner.”
By selling a service as opposed to a product, businesses shift not only their financial model, but the value of their offering. Product-as-a-service is a customer-centric model where customers subscribe for the time, usage, or outcome of the product — rather than simply purchasing a product outright as a one-time transaction. The shift for consumers is from an upfront price to usage-based pricing in which price is aligned with use, i.e. value-based pricing.
It’s all about access and outcomes, not product ownership. This shift creates opportunities for businesses to build ongoing, meaningful relationships with customers that they can continue to monetize over time.
Company Example: Hive
Hive launched their first product, a smart thermostat, back in 2013. But in 2017, they launched their first subscription service, the Hive Welcome Home, which bundles Hive products and services for just £5.99 a month per month in the UK. And, since then, they’ve gone on to create and launch a full suite of subscription services—including heating, security cameras, sensors, lights, and smart plugs.
To make the shift from a product-led solution to a suite of subscription services, they needed a platform that enabled them to launch, monetize, and expand their service offerings. And a platform that gave customers the ability to self-manage their accounts for a better subscriber experience and, ultimately, greater opportunities for increased ARPU (Average Monthly Revenue per User/Customer).
Since making the shift from a product-led solution to a suite of services, Hive has seen a 70% surge in their customer numbers.
Hive is now the British leader in smart home technology, having installed more than 660,000 smart home hubs. As Jo Cox, Commercial Director of Hive, notes: “It’s less about products, and much more about the services that they can enable.”
Shifting to an as-a-service model is a highly disruptive strategy that enables new monetization streams. With more flexibility in a service offering, as-a-service provides the foundation for a much stickier customer experience while also empowering companies to acquire more and more customers.
Once you pivot to as-a-service, businesses begin to measure profits in new ways, with new metrics. This is a paradigm shift that can be challenging to undertake, but ultimately this insight into more predictable business metrics consistently leads to greater monetization opportunities and higher valuation caps and shareholder value.
In short, connected services and connected devices capture value-add data that can be monetized by companies. We’re seeing more and more companies with devices beginning to launch these connected services in order to drive more value for their customers. These connected services create opportunities for even age-old, traditional businesses to introduce new ways to build long-term relationships with their customers based on ongoing value-add data.
Because these new services drive specific data points, they can be used in many different applications — thus opening up new revenue streams.
For example, we work with a company called Analog Devices (ADI), a multinational semiconductor company specializing in data conversion and signal processing technology. They have their own hardware and software connected app offering. The device plugs into a hotel room and provides data on whether or not a hotel guest is in the room. They can then sell this data to a cleaning service, for example, so that the service knows when to enter the room to clean without disturbing the guest.
This is just one example of the interesting ways that traditional companies can use connected devices to penetrate new markets to create revenue opportunities that extend beyond their device.
This play creates opportunities for businesses to build relationships with customers. That’s why it’s a particularly desirable (and much more common) strategy for an industry like manufacturing in which, historically, the business doesn’t have much direct engagement with their customers. But you can see that having ongoing relationships with customers that are monetized over time is a valuable strategy for a wide variety of businesses.
Company Example: Caterpillar
Caterpillar is a leading manufacturer of machines and engines to the construction, mining, and energy transportation industries. Although Caterpillar will remain a heavy equipment manufacturer, they’ve begun digitally enabling machines to provide more service-based offers.
They’ve coined the term “Smart Iron” to describe this shift to connected services. They put sensors on their equipment and then take all of the information coming off the machines and use telematics to help customers understand how they are leveraging their equipment and to provide predictive analytics. The rich data helps customers better manage their bottom line, and helps Caterpillar to develop better products.
This new digitally driven service arm is becoming a bigger and bigger part of their business, under the CAT Connect portfolio. According to Tom Bucklar, director of IoT & channel solutions at Caterpillar, “Today, we have the largest installed base in our industry with over 500,000 connected assets and those connectivity-based services are subscription-based services.”
For software/hardware businesses, launching new connected services is relatively easy to start with and puts a limited risk on the company’s financials. It’s a strategic play to create brand new revenue streams, increase market opportunities, and become more customer-centric.
With the M&A monetization strategy, companies work their way into a flexible consumption model through the acquisition of subscription pure plays (and, occasionally, through a merger). The play isn’t launching your own new subscription offering, but integrating an acquired subscription business into your existing business, i.e. “launching” the subscription offering as an upsell or cross-sell to your existing customer base.
In particular, we are seeing an evolution of traditional businesses acquiring more subscription savvy companies featuring recurring revenue models. Recent examples include IBM acquiring Red Hat for $34 billion to “unlock true value of the cloud” for their business; Walmart’s acquisition of online men’s store Bonobos for $310 million; and Alphabet / Google consistently acquiring pre-revenue companies in the subscription world to “enhanc[e] the technical capability of its cloud applications” — to name just a few.
But M&A is a complex process, and every time a company goes through an acquisition, they are faced with a whole new set of people, processes, and technology — and the challenge of merging two separate entities.
The goal is to optimize opportunities to cross sell and upsell both the new product lines as well as the legacy line of business, without stunting the growth of the acquired company (or killing its agility!). To do so, you need to create an infrastructure that will enable sales to easily sell new products along with the old.
From a technology standpoint, acquiring companies require a standardized platform that allows for the sale of both legacy products and recurring revenue offerings — and a streamlined order-to-revenue process across business lines — all on one system.
With a successful acquisition, the customer experience is consistent, with quotes, invoices, and billing all coming out of one system — regardless of what product line they subscribe to. And the customer view is also consistent, with all customer-related metrics coming from one system offering a unified view, rather than a skewed perspective derived from mixing and matching info from disparate systems.
With visibility into key subscription metrics like customer lifetime values, customer acquisition costs, churn rates, and net dollar retention all available within one system, companies can make better decisions based on live data thus optimizing the value from acquisitions.
Building a monetization M&A-friendly platform plays an important role in facilitating a repeatable process to successfully integrate new companies and accelerate a pivot to subscriptions.
Edgewell Personal Care (the company that owns the Schick and Wilkinson razor brands) announced their plans in Spring 2019 to purchase Harry’s (an online shaving startup) for about $1.37 billion in stock and cash.
This acquisition is yet another example of a traditional established business acquiring a nimble startup that was built on a customer-centric model.
For Edgewell, the acquisition gives them a chance to market directly to consumers. As Rod Little, Edgewell’s Chief Executive notes, “We’ve had an interesting product portfolio, but we’ve lacked a way to communicate with the consumer.”
With this acquisition still in the works, it remains to be seen how the integration will go, but if Edgewell is able to capitalize on this acquisition to create direct lines of communication with customers, it will prove to be a great move into the world of subscriptions for them.
An increasing number of businesses are acquiring companies to drive subscription revenue. For established traditional organizations, acquisition can be easier than full-on transformation. And the organizational knowledge brought by native subscription companies is invaluable. At the heart of all of this M&A activity isn’t just a desire to build out or complement product offerings, or to subsume competitors, but a strategic play to jumpstart necessary digital transformation.
Whether you choose to launch a new subscription offer, repackage an existing product to a recurring revenue model, launch a new connected service, shift your business to “as-a-service,” adopt a subscription model via acquisition — or all of the above! — your goals will be the same: