3 issues to resolve before switching to a subscription business model


This article was originally published in Tech Crunch. 

In my role at  CloudBlue, Fortune 500 companies often approach me about solving technology challenges they face when shifting to a subscription business model, only to realize that they have not taken crucial organizational steps necessary to ensure a successful transition.

Subscriptions scale better, enhance customer experience, and hold the promise of recurring and more predictable revenue streams—a pretty enticing prospect for any business.  

This business model is predominant in software-as-a-service (SaaS), but it is hard to find an industry with no successful subscription story as a growing number of companies in surprising sectors such as automotive, airlines, gaming, health and wellness, education, professional development, and home maintenance have been introducing subscription services in recent years. 

Disney+, Apple, Audi, home maintenance startup Handy, at-home fitness app Peloton, wearable tech company Fitbit, and virtual platform Codecademy are examples of product or service providers who are finding success in the subscription world.  

However, 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 just 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. 

Before talking technology, which is an enabler, companies should first address the following core issues as it can help them holistically plan for switching to a recurring revenue model:  

1) Getting all company stakeholders involved in the transition  

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

Leaders must get all stakeholders motivated for the change and empower them to actively prepare for the transformation. The more preparation put in on the front-end, the smoother the transition will go when it is executed.   

But, as we know, people naturally do not like change, even if it is for their own good. So it will be a formidable task to secure the cooperation of all internal stakeholders, which, depending on company size, could number in the thousands.  

Executives are recommended to paint a vivid picture of the immediate and longer-term future of the enterprise since fear of the unknown and uncertainty about the effect of change, especially its impact on job security, is one of the major reasons for resistance to change in such a context.  

Through this transformative journey, they should avail the help of and support individuals who can act as change agents within the organizations and inspire internal alignment to the new vision.   

The best change agents are usually respected, charismatic individuals with extensive experience in the organization’s processes and technologies and early adopters who have the ability to sway the majority.  

They are good teachers, communicators, networkers, and connectors who are resilient in the face of change. They’re the few who raise their hands in favor of new initiatives, and leaders should start with them. Some companies find it effective to include outsiders in the change process, but this should be done with care. 

2) Getting all external stakeholders on board with the transition  

For large and public corporations, it is not only internal team members that need to be made aware and, better yet, well educated, about the switch to subscriptions. It is also the external stakeholders such as investors, shareholders, and Wall Street regulators.  

Moving to a subscription business model will be an extreme reallocation of revenue. For example, companies heading in a new direction 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 – a much longer period.  

Companies should transparently notify and educate all of their outside stakeholders so they have a thorough understanding of and are on board with the subscription plan and do not panic when earnings calls start to look different.  

To make the transition smoother and earn the trust of external stakeholders, the finance team should be building accurate forecast models of what the business will be like after adopting subscription, and share this transparently with stakeholders.  

3) Changing the sales compensation structure 

Sales teams will be one of the key stakeholders for 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 to the salesperson, but the subscription model spreads out that 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 and backing of salespeople, organizations need to restructure their sales incentives programs to fit a subscription model.  

For best results, enterprises must move away from creating bonus schemes based on the one-time total contract value and introduce a plan that is directly tied to the customer success structure and aligned with primary business goals, namely customer acquisition and customer base protection and growth. 

The king 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 hidden 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 will have risk if the customer terminates the contract and the bonus from this revenue has been paid up front to the sales person. 

So businesses should be cognizant that they are never going to retain 100% of the customers they convert during the year and need to learn to adjust their sales strategy accordingly. 

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

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

Hold a physical or virtual group discussion and then speak with each rep individually. Listen to their views and make sure to incorporate their feedback into the approach. Once the new compensation plan is drafted, send each team member a copy and give them sufficient time to review it.  

Be careful not to get complacent when everything is said and done. Leaders should ask for feedback on a constant basis, track the compensation plan and their reps’ performance, and be open to making adjustments when and where needed. 

Technology is a means, not an end  

We are in an era where most companies have already adopted a digital-first business strategy or intend to do so, with cloud services lying at the heart of their digital transformation efforts.  

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 that aid companies in areas such as billing accuracy and finance, customer relationship management (CRM), and professional services automation (PSA) are great enablers for making the transition to a subscription-based model, but they’re not the silver bullet.  

As today’s technologies are becoming more widespread, opening up a world of possibilities and leveling the playing field, the ultimate winners will be organizations that appreciate everything stems from an efficient human-centered approach and that technology is only part of a bigger picture.