The challenges of a subscription-based business model
By Aniello Pepe, Director, Industry Strategy Group, Oracle
Subscription-based business models are undoubtedly spreading incredibly fast across many industries. Telecom companies paved the way, followed by music and video streaming companies. Today, a wide variety of businesses, from meal boxes to cars, printers and even washing machines (e.g. WashPass from Candy) have embraced the Anything-as-a-Service approach. Virtually any product or service can be sold in a subscription-based model and probably will be—if not now, then in the near future.
The reasons for the wide market acceptance of this new business model are multiple:
- A new perspective around ownership that prioritizes usage over acquisition of goods
- Financial preferences for reducing the upfront acquisition cost
- Desire to pay only for what you use or consume (service optimization)
- Avoiding obsolescence and repair costs, and ensuring easy replenishment or upgrading
For companies, the first generation of billing, revenue management and subscription management business applications has allowed early adopters to manage the complexity related to recurrent, usage-based billing under often complex offering rules and conditions. But many struggle with addressing the real core of the problem: that a subscription-based model requires a completely new operating business model to be sustainable and profitable.
Many first movers, in fact, have had difficulties in being profitable and even struggled to properly monetize new subscription services. Many of the first attempts at subscription-based models were aimed at testing the market or promoting the brand, but now that subscription-based models are becoming mainstream that approach is no longer enough. Companies that rely on the subscription model as their main one and companies that are considering moving a significant part of their business to this new model both realize they need a new approach to managing their operations. Let’s call it Subscription Management 2.0.
Subscription Management 2.0 is by definition multidisciplinary. Service configuration, selling, provisioning and billing are fundamental but just part of the overall challenge. And there are a number of questions that any company embracing Subscription Management 2.0 must successfully address:
- Will my business be sustainable and profitable, given the projected recurrent revenues from existing and new customers and the fixed and variable service costs that I will incur to provide the service level I am committed to?
- What price will customers be willing to pay for the current and future additive services I can provide?
- How can I better engage customers to consume more of my services, be more loyal and consistently renew?
- Which new bundled offerings of products and services do I need to design and develop to gain market share and beat the competition?
- How can I optimally support my products at scale, since maintenance and support are now part of my subscription model duties?
These business challenges of a subscription model point to the need for a comprehensive Subscription Management 2.0 platform. One that includes not only subscription management, but also customer management, financial planning and performance management, predictive analysis, simulation and optimization tools, new offering design and introduction, customer support and service management.