This is the final article in a trilogy entitled ‘The Subscription Economy’ which explains the benefits and challenges of a subscription model, if it’s right for you and how to implement it into your business based on MailGuard’s expertise. The first article discussed why you should consider moving to a subscription model, the second article explained some of the challenges you will face. Today I will identify five steps you need to take to implement this into your business.
Now that you’ve ensured that your business will benefit from operating in a subscription model, it’s time to implement these changes. The following steps cover the areas that need to be considered during your implementation planning. Each area could (and most have) a book written about them in detail. The intention here is to get you started with the most vital questions.
Step 1: Set your pricing policy
Pricing is always a contentious issue in a subscription model. You need to decide whether you’ll offer a flat rate for all clients or charge per user or per service (where applicable). Will you offer a free trial, basic version and premium version of your product? Will you offer a loyalty program whereby clients receive discounted prices if they renew for a certain length of time? Are you planning to charge clients monthly, annually or for longer periods? And will they pay in advance or in arrears? The answers come from balancing what your business and your customers are prepared to support.
Step 2: Ensure you have recurring billing processes in place
One of the issues with a subscription-based business model is that it puts a lot of pressure on your accounts team. To alleviate some of this pressure you will need to configure your billing protocols so that invoices are automated. This is especially important due to ongoing invoices to process and send out – as opposed to a one-off payment cycle which only involves a single invoice per client. You also need to ensure you have a gateway or payment provider which supports recurring billing and can handle things like credit card expiry and bank account cancellations.
Step 3: Manage your cash flow with early planning
As mentioned in the previous article, accurate cash flow forecasting is vital for businesses who charge a recurring fee. Each month needs careful consideration to ensure fluctuations are avoided where possible and planned for where unavoidable. This is the same as any business, but now customers leaving to competitors, a.k.a churn, has a big impact. A churning customer directly reduces revenue at the next billing cycle. Metrics you will need to be familiar with are churn and average lifetime value. With a subscription model your business is forced to focus on customer satisfaction to reduce churn and increase loyalty, with an impact on lifetime value.
Customer support and satisfaction is a big focus at MailGuard, where we use customer surveys and Isayso. We know that happy customers makes for a happy business, and not just financially.
Step 4: Educate your customers about the changes
Businesses who are starting from scratch don’t need to worry about this. For established businesses with an existing customer-base, no matter how much preparation you do, nothing can prepare your customers for what is a change in the way they pay for your services. Adobe found this out when they received an initial backlash from their customers who were annoyed at their move to the cloud (and subsequent subscription model).
As I mentioned in the previous article, having loyal customers is extremely beneficial when moving to this type of payment model. If customers believe in your product, service and support then they are much more likely to invest in the idea of a recurring fee. Outside of that you can choose to offer existing clients a discounted price, or perhaps even offer this discount to everyone as an introductory sale. In a nutshell, convincing your customers this is the right choice involves a brilliant marketing strategy. Promotional campaigns are your best friends – you need to ensure your customers understand they will be receiving a better product as a result of the change.
Hopefully you now have a greater understanding of how a subscription model works, if it’s the right choice for your business and some steps to take to implement it. This series has been written based on MailGuard‘s expertise; we have successfully operated with a recurring billing service since the company was founded in 2001 and will continue to do so as a core part of our business model.