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Three hurdles to navigate when introducing a subscription business model

Written by Mark Waas, Strategic Sales Director, UK and North EMEA at CloudBlue

Subscriptions can enhance customer experiences and provide more predictable revenue streams for enterprises and are becoming a prominent business model in the software-as-a-service (SaaS) industry. With the impact of lockdown and now hybrid working, a growing number of companies in sectors such as automotive, airlines, gaming, health and wellness, education, and home maintenance have introduced subscription services in recent years. Disney+, Apple, Audi, at-home fitness app Peloton, Fitbit, and virtual platform Codecademy are just some examples of product or service providers that are finding success in the subscription world.

However, many Fortune 500 companies are not taking the crucial steps needed to successfully implement subscription services and make that transition to fulfill customer need. Corporations should be aware that the subscription model is much more than simply putting a monthly or annual price tag on their offering. Executives cannot simply layer a subscription model on top of an existing business without making changes to the entire operation process, onboarding all stakeholders, recalibrating strategies, and creating a subscription culture.

While 70% of business leaders believe subscriptions will be key to their future, only 55% of companies believe they’re ready for the transition. With this in mind, companies should first address the following core issues so they can better plan their switch to a recurring revenue model:

1) Involving all company stakeholders in the transition

Legacy companies accustomed to pay-as-you-go models may assume shifting to a subscription model is just a sales issue. However, such a migration will affect nearly all departments across an organisation, from product development and manufacturing to finance, sales, marketing, and customer service.

Leaders must instead prepare for a smoother transaction by motivating all stakeholders for the change and empowering them to actively prepare for the transformation.

This is easier said than done. It will be a formidable task to secure the cooperation of all internal stakeholders.

Executives are recommended to paint a vivid picture of the immediate and longer-term future of the enterprise to reassure uncertainty about change, especially its impact on job security, to reduce any resistance. In doing so, they should gain the support of individuals who can act as change agents within the organisation, and inspire internal alignment to the new vision.

2) Earning trust from external stakeholders

For large and public corporations, it is not only internal team members who need to be aware of the switch to subscriptions. It’s also the external stakeholders such as investors, shareholders, and Wall Street regulators.

Moving to a subscription business model is an extreme reallocation of revenue. For example, companies may see a flattening of peaks of one-off sales ahead of earnings calls, but that same revenue may be spread out over the lifetime of the customer.

Companies should transparently notify and educate all outside stakeholders, so they have a thorough understanding of, and are on board with, the subscription plan to avoid panic when earnings calls start to look different. To make the transition smoother and earn the trust of external stakeholders, the finance team should build accurate forecast models of what finances will look like after adopting subscriptions, and share this transparently with stakeholders.

3) Switching to an efficient sales compensation structure

Sales teams are a key component of a successful shift to subscription models, but making them undergo this change is complex, risky, and costly.

For larger enterprises, one-time payment deals usually bring about sizable commission figures to the salesperson, but the subscription model spreads out a lump sum over a year or more, creating a cash vacuum and leading them to fail to achieve the previously on-target earnings monthly.

To earn the full support of salespeople, enterprises must introduce a plan that is tied to the customer success structure and aligned with primary business goals, namely customer acquisition and customer base protection and growth.

The key component for an efficient compensation scheme is a focus on consistently increasing monthly recurring revenue (MRR) and annual recurring revenue (ARR), based on suitable KPIs, and in a way that would meet recurring revenue targets. The Rule of 78 in sales, which is commonly used to calculate how much each sales representative should bring in every month to maintain steady growth, can offer leaders better insight into their revenue targets and help them choose the right KPIs for an effective compensation plan. The formula assumes that a rep who brings one new customer on board every month generates 78 months of revenue for the business over the course of a year.

Companies must also take stock of all the potential risks within their customer contracts. For example, if the customer has a break clause in a three-year contract after one year, the revenue in year one will be safe, but year two and three possess risk if the customer terminates the contract and the bonus from this revenue has been paid up front to the salesperson.

It is also crucial to have well-defined rules and parameters to avoid conflict and start communicating the company’s new compensation mechanism, while it is being put together to prepare team members for the upcoming changes.

In the communication process, organisations should highlight the benefits of transitioning to a comp plan based on MRR and ARR, including that it lowers monthly quotas compared to one-time sales compensation plans.

Technology is only part of the solution

Cloud services lie at the heart of an era where most companies have already adopted a digital-first business strategy, or intend to do so.  Indeed, worldwide end-user spending on public cloud services, for example, is forecast to grow 18.4% in 2021 to total $304.9 billion, up from $257.5 billion last year.

Technology tools aid companies in areas including billing accuracy and finance, customer relationship management (CRM), and professional services automation (PSA), which enable companies to make the transition to a subscription-based model. However, organisations that prioritise an efficient, human-centered approach, and view technology as only part of a bigger picture will be the ultimate winners in future-proofing business and customer success.