Win, Keep, Grow

How to Price and Package to Accelerate Your Subscription Business

Mark Stiving

• Publisher: Morgan James Publishing
• Year: 2021
• ISBN:
  9781631954795
• Topic: Business
• Subtopic: Business General
• Index: Business

Win Keep Grow shares the surprising fundamentals entrepreneurs need to build and grow a subscription business. The first section of Win Keep Grow delivers a simple framework to help businesspeople understand the differences of the subscription business. The framework consists of the three revenue buckets subscription companies must manage and the 3 value levers subscription companies must master to put their offering in a position to skyrocket. The second section uses the framework to walk the reader through how managing a subscription product evolves as the product matures in the market. The third and final section prepares companies who don't currently have a subscription product on what to expect while transitioning to one. Pricing expert Mark Stiving, Ph.D. dug deeply into the subscription business model and he was surprised at how many aha moments he had. Win Keep Grow shares his many insights with businesses who have or want to have subscription products. Readers will walk away with a deeper understanding of this business model, a process to prioritize the investment of resources, and a way to simply communicate the product's objectives throughout their own organization.

Section 1.

Fundamentals of Managing Subscriptions

You might not think subscriptions are your grandfather’s business model — but just wait — maybe they are. Subscriptions have been around for a long time. The earliest subscription I am aware of was in the 1500s when European map makers sold subscriptions to map updates (The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow). However, the rapid adoption of the subscription pricing and business model indicates something powerful may be happening right now. And it is.

These first four chapters build a framework for understanding subscriptions. They describe why subscriptions are so powerful and the essential tools you need to manage them. Even if you have experience with subscriptions, please don’t skip these chapters. You will learn an easy way to think about subscriptions, and you’ll be more able to discuss subscriptions with others using this framework.

1

The Motivation

A subscription is a periodic payment in exchange for recurring benefits of a product. Periodic could mean weekly, monthly, quarterly, or annually. Regardless of which period you choose, one of the keys to successful subscription businesses is automating the customer’s payment so they don’t even think about whether or not they should continue paying. It’s similar to having a direct deposit of your paycheck.

The phrase “recurring benefits” explains why the most outstanding subscription businesses thrive. When they sell their product, the customer doesn’t receive ownership; instead, they receive temporary access to the product. The company needs to make sure the customer continues to receive significant benefits so they will continue as a subscriber.

Subscriptions may seem like a new phenomenon, but they aren’t new. We’ve had subscriptions around us our entire lives. Before the Internet, we subscribed to gyms, newspapers, cable TV, and phone service (landlines, of course). Even Business to Business (B2B) subscriptions pre-dated the Internet: with companies like Dun and Bradstreet, who provided information to salespeople about potential customers; and Xerox Corporation, who sold subscriptions to service their copy machines.

Salesforce may not be the first software as a Service (SaaS) company utilizing the Internet to replace traditional (“shrink-wrapped,” “on-premises”) offerings, but they are indeed the poster child. Their runaway success caught the attention of other companies, which prompted a movement. Today, almost all software companies — and even many hardware companies — are trying to figure out how to shift to a subscription business model.

As it turns out, you can turn almost any business into a subscription and make it a service business. At the Dollar Shave Club, you can pay a monthly fee and have your razors and accessories shipped directly to your house. Of course, this is because of the consumable nature of the products. But what about cars? Believe it or not, you can subscribe to Porsche. In Atlanta, for $3,000 per month, you could drive any Porsche any day. You can drive a Cayenne on the weekend to go skiing and a 911 on weekdays to drive to work. Did you know you can even subscribe to a doctor? This is not insurance; it’s premium access to your doctor for routine or specialized health services.

Even if your company is not strictly a subscription business, there may be much to learn from this book. Products like Uber, Lyft, AWS, and Azure do not fit the subscription model because users pay per use. Yet, every one of these products’ success requires onboarding customers, frequent repeat business, and growing usage — three critical characteristics of subscriptions. While studying subscriptions, I have learned many lessons applicable to both subscription-based and traditional companies. For example, a SaaS business must choose a pricing metric (what to charge for). Also, traditional companies may be able to create disruptive new business models by rethinking their pricing metrics. Of course, there are many more lessons to learn and uncover, both in this book and beyond.

Why Subscriptions?

You may be wondering what causes the incredible growth seen in subscription businesses. The simple answer is subscriptions are valuable to both the buyer and the seller (company). Let’s dig into both.

Why Buyers Love Subscriptions

We all subscribe to something today. We subscribe to cell phones, TV or video services, music services, news outlets, gym memberships… and that’s before we get to software services like Microsoft Office, a sales CRM, and any of the (literally) thousands of marketing tools to which you could subscribe. At last count, Impact Pricing subscribes to over 20 services to help run our website, marketing, and product delivery.

We may be getting subscription overload, but we still love subscriptions. Here’s why.

Buyers buy the benefit, not the product. In the old days, we would buy a product and receive something tangible. Do you remember when software was a set of physical disks and a manual shrink wrapped in a box? We were purchasing an object; we hoped the item solved a problem for us, but we bought the object. Beyond the purchase price, the object sometimes came with many additional costs, including shipping, storage, installation, insurance, maintenance, and disposal.

In the world of subscriptions, we don’t buy objects. We buy the benefits we gain by using a product. We are much clearer on what we need: the hole, not the drill.

I recently signed up for LastPass, a password management service. While shopping, I wasn’t thinking, “I need to buy a program to manage passwords.” No. I was thinking, “I need to find a way to make it easy for dad and me to share and manage passwords.” I was shopping for the benefit.

Think about the Porsche subscription. Do people really want to own a Porsche, with all of the maintenance, upkeep, and rapid depreciation? Or, do they want to drive a Porsche whenever they want? Most people probably care more about driving it, or being seen in it, than actually owning it.

Subscriptions are logical and straightforward. From a user’s perspective, we can get up and running on a new product and start receiving the desired benefit relatively quickly. It is rare to subscribe to something with a long learning curve.

It turns out this is by design. When a company wins a new customer, they want the customer to stay — but customers only continue subscribing if they get value out of your product, and fast. Hence, companies make their products easy for beginners to get value quickly so they don’t want to leave. Customers who don’t use the product will stop subscribing. In the jargon of subscriptions: companies have onboarding programs to minimize the customer’s time to value, which helps reduce churn (cancellation of subscriptions).

Buyers get faster time to value, meaning the product is doing something useful quickly (such as solving the customer’s problem). This is way better than slogging through a manual to figure out how to use a complex software package.

Subscriptions provide flexibility to grow. Users often start with a small amount of a subscribed service, but they know they can get more as they use it and love it. Buyers want to learn more about the benefits available to them as they need it. This is especially true for business buyers. As a company grows, they want the product to continue to support them.

Subscription-based companies build this into their products in many ways. Buyers can pay based on some usage metric (so as they use more, they pay more). Buyers can upgrade to a more feature-rich version of the product. Or, buyers can buy different yet compatible products to expand the capabilities of their current subscription. These become more relevant to subscription companies as they scale.

Subscriptions reduce risk. We can subscribe to something for a nominal entry price to see if it provides the benefits we expected — and as buyers, we LOVE this. In the old days, we had to commit the total amount of money upfront before using the product. We just hoped the product purchase performed as we expected. Now, we buy for a month or two, and if it doesn’t meet or exceed our needs, we stop paying and are only out a much smaller amount.

Subscription products are better. To ensure customers renew their subscriptions, sellers need to deliver value quickly and continually. They can’t get away with poor performance; their customers are not ‘stuck’ with the product. If the customer decides they don’t like it, they can cut off the recurring payment at any time. Thus, providers of subscription products MUST maintain high levels of customer satisfaction. This imperative tends to drive higher product usability, performance, and reliability than the norms seen with traditional products.

Because of this, when we subscribe to a new offer, the product is probably better than if we had bought a solution outright. Yet, over the life of the product, it will get even better. Vendors add more features and capabilities to ensure we’re receiving more value over time, so we maintain our subscription. We often get vastly more than what we originally bought.

B2B customers can more easily calculate ROI. We subscribe to solve a problem that has some cost to us. If we can measure the cost of the problem, we can measure the value of the benefit and compare it to the price of the solution. This is much easier to do when paying periodically than when buying a product outright and attempting to amortize the price over a long-yet-mystical timeframe.

B2B accounting is more accessible and more beneficial. Subscription payments come out of operating expenses, the other benefit applicable to business buyers. Expensive purchases (i.e., not subscriptions) are considered capital expenses. Capital expenses are harder to account for; they require depreciation tables and the application of complex accounting rules. Conversely, operating expenses are generally tax-deductible immediately, whereas capital expenses are not.

From a customer’s perspective, the only real disadvantage to a subscription is we often pay more over time. This is especially painful with older products that no longer need significant improvements. Say we subscribe to Microsoft Word. Ten or even twenty years ago, Word probably had every feature we use today. We don’t need it to be any better — still we pay the subscription. We would probably be just as productive on Office 97 (if it would run). Paying $10 per month for ten years is $1,200, which seems pretty expensive. However, in this rapidly changing world — for most products — a subscription is a much better decision for customers. For example, if you subscribe to Netflix, much of the value comes from the new content you expect them to create or acquire in the future.

Why Sellers Love Subscriptions

More and more companies are offering subscriptions. Major companies like Microsoft and Adobe have already transitioned to subscriptions, and others, including Hewlett-Packard Enterprise and Dell Computer, have committed to transitioning to subscriptions as well. Subscriptions are becoming an increasingly popular business model for three significant reasons: faster growth, higher lifetime value of a customer, and higher valuations of their market capitalization. Let’s look at each of these reasons in more detail.

Faster Growth

Research shows subscription-based companies are growing much more rapidly than the Fortune 500. Perhaps you could argue it’s because the Fortune 500 companies are larger and less agile, but there are some significant reasons why subscription companies grow faster.

First, buyers have lower entry costs, so it’s easier to win new customers. Buyers don’t have to commit to a considerable upfront expense. Companies can often win new customers without salespeople or the buyer’s purchasing people getting involved; this is a business model commonly referred to as product-led growth.

Second, as long as companies keep new customers happy, they continue to pay. Subscription companies essentially start the year out with whatever sales they ended with last ye...