The ‘old’ product economy was all about transactions – shipping goods, getting new customers and charging for one-time exchanges. Today, a new era is taking stage where the spotlight is on building better long-term customer relationships.
It’s the rise of a new global phenomenon called the subscription-based marketplace.
Subscription business models are rooted in the idea of keeping customers consistently engaged by selling them a product/service on a recurring basis. By offering a personalized, convenient, low-cost way to purchase what individuals want, subscription-based companies completely rethink what value businesses deliver to their audience and how they do it.
The predictable and stable revenue, the ability to control expenses, expand the customer base and build loyalty make this business model a very intriguing opportunity for entrepreneurs. But they have to remember that it is consumers who are driving the change and succeeding in such an economy is not a simple task.
In this article we will go over tips and techniques on how to thrive in a subscription-based marketplace. We will provide you with practical suggestions and insights that can give your business a sharper competitive edge.
1. Define Your Product or Service-Market Fit
Customers don’t really like to commit to a product or a service too quickly. Instead they prefer to test out different items and discover what they like most.
The subscription-based business model gives companies the opportunity to have a clear understanding of what exactly clients are willing to pay for. Such knowledge enables them to predict revenue growth and track the changes in how customers perceive value over time.
Scaling a subscription company requires a lot of retention efforts and improved product positioning. You would need to consistently provide a positive customer experience that will keep clients coming back.
Before putting all your efforts into scaling your business, it’s important to focus on defining an appropriate product/service-market fit. That means selecting a market (that you can enter) with a product/service that can satisfy the needs of its shoppers.
When choosing your market, make sure it’s large enough and that it can actually allow you to scale and grow your company. It should have a sizable number of potential users that are easy to acquire and that can quickly grow in number.
It’s really important that the experience you are providing is worth subscribing to. According to Business Insider the product can be simple like a box of chocolate, but it’s the consistency of the service that provides value to subscribers thanks to making their lives easier and more enjoyable.
In order to ensure that your product/service satisfies your audience, it’s good that you talk with them. Their feedback will give you valuable insights about which of their problems your business solves as well as all the ways in which it gives them joy. To generate meaningful findings you can use customer development. This process lets you understand buyer preferences and needs so you can develop a sales model that can meet them.
2. Accentuate the Value You Deliver to Your Customers
Some of the biggest challenges subscription businesses have are related to managing customer experiences and expectations.
Customer centered operations are where the heart and soul of your subscription business should be. So, to make this model work effectively you need to pay a lot of attention to the relationship you’re building with your subscribers and show them the value they can derive from it.
Whether your business has a B2B or B2C product/service model, your customers’ needs can change rapidly, so it’s necessary to accentuate and evaluate your value proposition regularly. This will let you stay ahead of your audience’s needs and ensure that your subscription service continues to delight your subscribers.
Speaking of delight, it’s good to personalize your product/service. You can analyze which subscription features are more desirable, group customers in clusters and improve the experience altogether.
Be aware of your clients’ lifetime cycle. It’s important to ensure that with every subscription made and renewed you are able to nurture deeper relationships and reward loyalty. You can, for this matter, invest in a customer success team. This would help you spot inconsistencies over time and provide appropriate guidance to help your subscribers achieve their goals.
3. Build a Strong Pricing Model
The subscription business model is based on monetizing an ongoing customer relationship and requires recurring billing to foster business growth.
Your pricing strategy has an impact on both your revenue stream and your dealings with clients. Any changes made to your pricing structure can affect the experience of your audience. So, to ensure that your company scales up over time, it’s essential that the price you charge for your subscriptions is what your clients are willing to pay.
To put this into perspective, let’s look at 6 pricing models and examine the core value they offer.
Flat Pricing Model
Flat rate pricing means offering customers a full set of features for a weekly, monthly, quarterly or yearly paid subscription fee. It works well for companies with a single buyer persona and a narrow business product, and it’s mostly used by companies that sell physical products in consumer-facing contexts.
For example, subscribers of the Economist pay a flat price and can access all resources it offers.
Tiered Pricing Model
Tiered pricing is used to provide a variety of products/services at different (tiered) price points.
This model is perfect for upselling because your clients will likely need more features as they scale. Additionally, it works great for businesses that sell licenses, seats, widgets, and so on.
The idea behind it is that prices and features are tailored to the different needs and use cases of your subscribers. You can offer a basic, standard and premium tier and you should be careful about the value each tier provides.
Usage-based Pricing Model
You may have heard about this pricing model being referred to as pay-as-you-go. This means that users are charged at the end of a billing cycle (monthly or yearly) based on how much they’ve used your product/service.
This model is often considered as a win-win subscription strategy for both companies and customers as it allows users flexibility while still being held accountable for how much they’ve used your service/product.
Per User Based Pricing
Per user pricing means that you charge clients based on the number of individuals using your subscription product/service. The more people that are subscribed the more revenue you will generate.
Per Feature Based Pricing
Per features pricing is pricing based on the product’s features. It allows users to pay only for what they need. The higher a package is priced, the more features it offers.
The challenge here is to decide which set of features will work for most of your potential subscribers.
Freemium Pricing Model
Freemium pricing is a strategy that allows customers to test limited features of a product/service for a fixed period of time. The main idea of this model is to nudge prospects to upgrade to the paid version and it’s used quite often with SaaS products.
Choosing the most appropriate pricing model is closely linked to understanding your core value metric. It could be providing custom web development or centralized systems that help manage business processes. The point is that the subscription product/service plan that you offer should allow your customers to derive as much value as possible from that product.
Ensure Your Technology Can Handle Your Growth
Another key requirement to thriving in a subscription-based marketplace is adopting the correct technology to support your business operations.
You have to implement efficient and secure payment and order management systems. These should have the flexibility to evolve and handle multiple pricing models, not only to reflect your individual subscribers’ needs, but also to help your business subscribers scale. Additionally they should ensure that recurring billings, failed and multi currency transactions are accurately managed and that invoices are provided.
It’s also important that as part of your technology stack you incorporate proper marketing automation, analytics and content management systems. These are essential for subscription and membership content. They can help you personalize your product/services to the needs of individual members and send them targeted offers.
A few additional tips to keep in mind:
- Examine what your competitors are doing and what is working for them. This can help you utilize your resources appropriately. It also can give you ideas on how you can better fill a hole in the market.
- Seek validation from your customers. Create a streamlined process for acquiring feedback and reviews
- Invest wisely in your tech. It’s important that you invest in technology that allows you to provide a recurring service that is beneficial to you and your clients, and able to move your company forward.Know the Right Metrics
You’ve selected your product/service market, presented your core value, decided how to price it and adopted the appropriate technology. Now, you have to know the right metrics with which to track how well everything is performing.
Here are some of the most important key performance indicators to keep an eye on.
Net Promoter Score
It’s difficult to imagine a successful company that does not take its customers into consideration. The Net Promoter Score (NPS) measures customer experience and helps predict business growth. It’s the key measure of the overall perception that your customers have of your brand. When combined with other metrics from the various points along the client journey it can give your business an actionable view of how your customer experience is performing.
To know what a good NPS is for your company, make sure you are aware of the NPS of the industry you’re in. Generally a good score is anything around 50 or above.
Customer Acquisition Cost
The Customer Acquisition Cost (CAC) corresponds to the average amount of money you spend convincing prospects to subscribe to your product/service.
It sheds light onto the overall effectiveness of your acquisition strategy. It involves all your marketing and sales costs and will help you budget your future marketing campaigns more accurately.
Monthly Recurring Revenue
Your subscription business lives and thrives on consistent subscription revenue and can be measured using the Monthly Recurring Revenue (MRR) metric.
MRR represents the financial health of your business. It’s a fair representation of the money you’ll earn from your subscriptions on a regular basis. If in the initial stages of growth your MMR growth rate is 15% and over, it indicates that your business is in good shape.
Average Revenue Per User
The Average Revenue Per User (ARPU) metric corresponds to the average amount of monthly or yearly revenue received per user. It’s one of the most important revenue metrics for subscription-based companies.
When you calculate your ARPU, make sure it does not include free/freemium users since they don’t add to your revenue. If this metric is low you should reevaluate your strategy to find out why it’s not as high as it should be.
Churn rate is the rate at which your subscribers are cancelling their subscriptions. Your subscription based business needs retention to thrive so a high churn rate is worrisome. If this happens, it’s important that you find out the reason for the cancellations.
Customer Lifetime Value
The Customer Lifetime Value (CLTV) is the average revenue generated from a client over the life of their account. It helps you know how long a customer stays with you on average, how quickly they churn and how much you should spend to acquire new subscribers.
The subscription based business model is here to stay. If you want to leverage its power it’s important that you are aware of the key aspects that can help your company thrive.
We hope our tips have given you ideas on how to make subscriptions work for both you and your customers.
If you need more guidance, don’t hesitate to reach out to us by completing the contact form below.