Magazine publishers have known for years that their best source of reader-generated income comes from renewing current subscribers rather than acquiring new ones. Renewal series are cheaper to mount than new subscriber promotions and provide a steady stream of instant cash. More and more businesses in different sectors are discovering that this same subscription-based model makes sense for them and for their bottom line, too. Netflix, Amazon, and even unorthodox companies like Zipcar, have used this model to dominate their niche.
“The relationship between people and businesses, and the products and services they use, is no longer a one-time event,” notes Tien Tzuo, CEO of Zuora, a Silicon Valley-based subscription billing company. (For a list of other subscription billing and service companies, like PayPal and Chargify, check out this blog post.) Tzuo was formerly chief marketing office at Salesforce.com, a company that shook up its industry several years ago when it chose to offer lower-priced, monthly software subscriptions to its clients instead of charging them high, one-time licensing fees upfront. Going forward, Tzuo says modern companies should find similar ways to build long-term relationships with their customers. “And with these long-term relationships come a recurring, predictable revenue stream,” he says. “That is the subscription economy.”
But you don’t have to be a Goliath to take advantage; almost any type of business can put together a subscription plan. For example, online business guide Investopia explains that subscription plans—which are also known as passive income streams—“could incorporate a low monthly fee for on-demand customer service or maintenance, subscription access to exclusive coaching, or a newsletter with interviews, book reviews, and market analysis on your industry.” Combine any of these options with a customer’s fondness for the certainty that a subscription plan provides and you wind up with a near perfect way to keep the money flowing, even in an uncertain economy.
More predictability for business and customer
Red Hat, the leading provider of Linux and open source solutions, adopted a subscription model almost 10 years ago because of its convenience and high customer value. “A subscription model is incredibly simple and predictable for customers,” says Lars Herrmann, director of strategic marketing for the North Carolina-based company. “They know exactly what they have to plan for, exactly what they have to budget for, and what they get at any point.”
Red Hat’s offerings are enormously flexible. In the case of Red Hat’s Enterprise Linux program, for example, subscribers get access to the software channels and the customer portal where they can download the products, along with available updates and fixes. In addition, they can choose from a variety of support tools, depending on the subscription plan they buy.
Building brand loyalty is another key feature of the subscription model. To that end, Red Hat constantly seeks ways to expand its portfolio of products in order to provide more choices for customers and more revenue streams for the company. “The subscription model forces the vendor to deliver a great experience every day because the money is not made upfront at the sale,” says Herrmann. Instead, he emphasizes, “the money is earned every day.”
Generating a predictable revenue stream helped Red Hat maintain a robust bottom line during the current financial crisis. For the completed 2011 fiscal year, the company took in $773.4 million in subscription revenue—an increase of 21 percent over the prior year.
Red Hat focuses on giving great value to the customer, Herrmann says. “We are not depending on new license fields every day in order to report fantastic numbers to our shareholders. We depend on delivering great service and driving customer satisfaction.” At renewal time, customers receive an automated notification that their subscription is about to expire with instructions on how to renew. They can choose to renew their subscription as is, or upgrade or downgrade it. The feedback from customers, Herrmann says, has been extraordinarily positive.
“They love the subscription model. It’s easy to handle from an accounting point of view. The customers know very well which services they get. They have the flexibility to move their subscription from one system to another and they like the simplicity of managing it. If they don’t want to have a renewal event every year, they can avoid it by buying into a three-year subscription.”
Building long-term relationships means higher customer retention
Boutique firm Kroll Bond Rating Agency may be only one-year-old, with just 24 employees, but it rates nearly 18,000 entities, from savings and loans and insurance companies to credit unions and the top 1,000 corporations. In its first year, the company has already seen good results from its subscription offerings, says Kroll managing director and head of the subscription business, Tawanda Seifert.
“Most of our clients like the subscription model because they know what they’re going to get, they know the product, they know the timing,” says Seifert. And she emphasizes the important role a subscription model plays in maintaining good customer relationships. “Client satisfaction is an implied or unstated component of the subscription-based model. They know that they can call and ask questions and we’re going to answer the phone”
By using a subscription agreement that lasts for the lifetime of the relationship, Kroll has been able to retain about 90 percent of their clients so far. That certainty takes a lot of the anxiety out of planning for future budgets—for both Kroll and its clients.
“You’re not asking are we going to do 15 deals this year and how much revenue will that bring us? I think you have a more constant stream” of revenue, Seifert says. “There are months when our invoiced amounts are less and then there are months when our invoiced amounts are very high. Since you know these cycles, it helps you plan and budget your income statement or your P&L.”
Replacing uncertainty with predictable revenue and brand loyalty is just one reason that subscription-based business models may be the best arrangement for you and your customers in an unpredictable economy.