Consumer and corporate markets are in the midst of a revolution, as companies transition from selling products to becoming service providers. From the street corner entrepreneur to the largest conglomerates, more and more organisations are vying for recurring business from existing customers in a bid to access a more predictable revenue stream based on subscriptions and create a more valuable supplier-customer relationship.
This 'subscription revolution' is transforming traditional businesses and creating whole new business models for startups able to take advantage of customers that are now more receptive to subscription-based service offerings. Here, we look in more detail at the 'revolution' itself and consider how cloud billing is helping to drive it.
Today, more and more organisations across all sectors of the economy are moving away from the traditional and increasingly old-fashioned, one-off product sales model, characterised by unpredictable revenue streams, high cost of sales and limited customer loyalty.
Instead, a growing number of organisations are migrating to a new services-based approach, supported by a subscription pricing model. The focus is on selling a relationship rather than a product; building guaranteed revenue streams and regular customer contact which supports upsell and cross-sell opportunities, as well as smoothing service renewals and upgrades. The definition of subscription services is broad and encompasses everything from digital services like Dropbox or Salesforce, to goods-as-a-service offerings, where customers pay a regular set fee to cover their consumption of a particular physical product.
The list of companies moving to the subscription model grows longer by the week. Last year, analyst firm Gartner forecasted that more than 40 per cent of media and digital products companies would use subscription services for their fulfilment, billing and renewals by 2015 – and the volume of recent announcements and stories we are seeing on this theme confirms this is likely to be the case.
A flawed model
However, the process to move from one model to the other is not something that is usually advertised, or made public. And the truth is, if this change is not carefully planned and executed there can be many potential pitfalls which may put the whole business at risk.
In fact it is not uncommon to see businesses that move to the subscription model struggling for several months of operation, with little or no profit achieved, before eventually reaching the much sought after benefits of a recurring revenue stream.
The simplicity of subscriptions makes them very appealing to organisations and their customers. But in that strength, we can also see the model's inherent weakness. The best services are often the simplest ones but the simplest ones are also the easiest to mimic, particularly in the digital services market where the cost of entry is relatively low and the threat of new entrants and substitute products being introduced is high. At the same time, the bargaining power of customers is growing with social media, enabling customer complaints to spread like wildfire across the Internet, and online comparison sites encouraging customers to shop around at every opportunity.
So service provider offerings will need to mature. And as they do so, the requirement for innovative pricing and product packaging will also become ever greater in order for businesses to differentiate themselves in an increasingly crowded and challenging market environment, and create real value in their customer relationships.
Today there are a whole range of new pricing strategies in place that aim to drive agility for businesses and their customers.
One of the best publicised of these approaches is bundling - a common strategy for extracting additional value from the supplier/customer relationship. In the telecoms sector, for example, the likes of Vodafone are now bundling services like Spotify or Sky Sports as part of their data packages in a bid to avoid an out-and-out price war for their 4G mobile subscriptions. But not every customer is a music lover or sports fanatic, and having a product catalogue that provides the flexibility to 'pick and mix' service options becomes crucial in order to meet the needs of a diverse customer base.
Freemium offerings are another widely used tactic to get consumers to try out a service in the hope that they will convert to a regular paying subscription. However, with an industry standard conversion rate of around one per cent, the freemium model can be a very expensive marketing ploy.
The problem with any 'free' service is that unless a customer is paying something, however small, then they generally don't attach any real value to the service. At the same time, though, locking customers in to either expensive monthly subscriptions or long-term contracts can also be a recipe for disaster. If a customer is unsure of the value of the service then they are unlikely to sign up unless they can try it first. Similarly, paying a monthly fee for something that is not regularly used is not typically worth the money – gym memberships being the classic example - where people sign up with great intentions but their interest rapidly wanes. To counter this, a pay-as-you-go approach to pricing is often employed, allowing customers to pay for what they use before making any commitment to longer term use.
These are just some of the ways service providers across a range of vertical sectors are looking to add value to the customer relationship and build loyalty. But it is a difficult trick to pull off. Segmenting the B2B market is not easy and assuming that a few standard offerings will meet the needs of this demanding sector is rather naive. Every enterprise will want to negotiate its own personalised pricing plans and contracts, as well as frequently needing to manage separate cost centres in multi-level billing hierarchies.
Moving to the next level
Starting with a subscription-only offering is a great way to gain a foothold in the market and begin developing services. But growing competition in a rapidly changing market means that subscriptions alone are no longer enough. The economy of tomorrow requires the flexibility to mix-and-match subscriptions and sophisticated usage-based pricing models. It also requires the ability to manage complex enterprise hierarchies and package offerings that address the phenomenal breadth and depth of consumer and corporate needs.
In the past, subscription services were billed using traditional on-premise billing and accounting systems. However, the arrival of cloud-based technology, including infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS) means that service providers now have an alternative solution for the new digital service-led world, that is not tied to high CAPEX and lengthy integration projects.
We are witnessing the emergence of cloud billing which, at Cerillion, we define as a specific type of software as-a-service (SaaS), sometimes referred to as billing-as-a-service. The SaaS approach, as delivered in true cloud billing solutions, takes the form of a multi-tenanted application hosted securely in a public, private or hybrid cloud. Businesses choose the approach that suits them best. All three cloud models are viable but the latter two, in particular, offer organisations the flexibility to change their business model and do more bespoke integration, enabling them to take more effective advantage of the new service-based economy.
Billing-as-a-service solutions bring the ability to quickly set up and start billing for a new service, without the need for any infrastructure or upfront licence fees. Equally, organisations receive new features and enhancements automatically as part of regular software updates. So, whether you're a startup with a new business to launch, or an existing business looking to experiment with a new service or business model, billing becomes the enabler, rather than an inhibitor, of innovation.
The ideal mix
Today, demand for cloud billing solutions is accelerating rapidly, as providers of digital and non-digital services look to leverage the latest technologies. But with low barriers to entry, particularly in the digital economy, and rapidly increasing competition, many service providers are already struggling to differentiate their offerings, being limited to simple subscription-only capabilities.
Today's subscription-based economy requires the flexibility to combine subscription and usage-based pricing models, plus the ability to tailor offerings to the full range of B2B and B2C segments. Without this, even the best service in the world will be at the mercy of lower-priced imitators.
Fortunately, solutions are now coming on stream that deliver the kind of business agility that the emerging breed of service providers need to be successful in the new economy. With cloud billing solutions, in contrast to an on-premise approach, businesses can choose the software edition and features that are right for them, as opposed to being forced to take on functionality that changes the way they run their business. And they can decide to turn capabilities off and on as required.
In summary, as the subscription revolution continues to gather pace, service providers can move forward with added confidence in the knowledge that cloud billing solutions are now available and capable of enabling them to differentiate and drive business advantage.
Image credit: Flickr (Victor1558)
Louis Hall is the CEO of Cerillion Technologies.