Tobin Lehman — February 25, 2019 — February 25, 2019
There’s a lot of excitement in the technology space about taking what would’ve been a traditional product or project-based engagement and turning it into a subscription.
Everyone falls in love with recurring revenue and the seeming ease of the sales process -and those two things are real benefits. But there are a few things you should think about in this process before you jump in headfirst.
First, Subscriptions End
Everyone falls in love with the idea of having new money coming into the business month after month. It sounds like a steady stream of water that will refresh the soul for a long time to come. Yes, having forecasted cash flow is an added benefit of the subscription model, but don’t forget – subscriptions end.
They will go almost as quickly as they came, and then you’ll be back in the market looking for additional sales. With a subscription model, sales can be a little bit easier (or at least there can be less friction in the process), but that fact doesn’t mean you don’t have to sell continuously. And unless you continually add value over the duration of the relationship, somebody else will end up doing what you do, but cheaper, as time and access to technology aid the competition.
And if your subscription model is simply a modified leasing schedule (meaning that you simply financed a piece of equipment for a client), that subscription will surely end abruptly as soon as the lease is done. I’d say you haven’t really achieved a subscription model in this case; you simply became a bank and didn’t know it.
Two, It’s Got to Be Better Than Financing
Again, if your subscription revenue service or product is simply financing out a larger cash outlay, you have not achieved a subscription model. The basis of a subscription model is something where value is delivered month after month for a price. If the value is only delivered upfront and you simply allow them to pay you later, you, my friend, have become a bank, not a subscription service. Even the credit card companies are wise enough not to do that without the benefit of compounding interest.
So, in setting up your subscription model, you need to think about how you can add value along the way – true value, not just perceived value, and value that the client will buy. There are two things to consider here.
First, where is the value in your service or product? And, second, how can you deliver that over time?
The “finance as subscription” approach is a big error in the hardware integration space. Companies simply do a giant, high-cost install, lower the upfront cost by financing it, and then try to tag a maintenance agreement onto the end to create the perception of recurring value. In many cases, a maintenance agreement could actually add value, but in many cases it doesn’t. The perception in many industries is that the hardware should work until it doesn’t anymore.
If you contrast that to the HVAC market, though, there are maintenance items such as filters, solenoids, etc. that do wear out and need to be replaced over time – so a maintenance agreement might make more sense. In this case, it’d be something of true value, not just perceived value.
The point is this: make sure your subscription service is not simply financing with a gratuitous maintenance plan tacked onto the end. If it is, your customer will see right through it, and the “subscription” will be over as soon as they’ve done the bulk of the financing
Lastly, Avoid Making it Complicated.
No one likes to have to decode a menu. Simplicity is key to a subscription service. It must be clear where the value is, what the relative cost savings are within the subscription model, and what the customer gets and doesn’t get.
We’ve seen many companies create a subscription service and then have a litany of add-ons and extras that the customer has to decode. This is an indication that the offering is not ready to be sold as a subscription service.
You should be able to have repeatable processes and products that fit a customer type with at least an 80% consistency. If you can’t fit the product to the customer that often, hold off on offering the subscription. You may be better off experimenting or narrowing the offer to a base level.
The reason why too many options are challenging is because an overwhelming amount of choice creates confusion for your customer. Any sales professional will tell you the last thing you want to do is confuse your customer with pricing. This is a common friction point in the sales process. If your customer does not understand how much something will cost and the value benefit they’ll get in return, you will lose. They will not switch from their current solution. They will make an assumption that it’s going to cost them more than others.
Making it simple and clear is part of the value.
Move Forward.
I hope that provides a little bit of a reality check if you’re venturing into offering a subscription service. I think the model can be fantastic. We’ve seen it work really well, but we’ve also seen it done poorly.
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