Understanding Subscription Commerce

Understanding Subscription Commerce

In today's digital economy, subscriptions are everywhere.

At home, we subscribe to everything from grocery deliveries to streaming media; at work, we subscribe to an increasing number of cloud-based solutions, including CRM, ERP, security services, and more.

As subscriptions become more complex, with multiple providers and products participating in digital ecosystems, many companies are discovering that their existing technology and operations strain under the weight of a recurring revenue model.

To be successful, organizations need systems and processes that are purpose-built for subscription commerce.

Here, we explore what subscription commerce is, how it impacts various areas of a business, and how to start developing a strategy for recurring revenue at your organization, or scale the one you already have.

1. What is Subscription Commerce?

An introduction to the basics

Any product or service that you subscribe to and pay for can be considered part of subscription commerce, but there are a few key differences between various offerings.

Today, subscription commerce is most often associated with two business-to-consumer (B2C) product categories:

  1. Subscriptions to consumer products, such as subscription boxes, where consumers sign up for regular delivery of a wide range of items, from beauty products, to pet supplies, to clothing, and more.
  2. Subscriptions to media streaming services, including Netflix, Hulu, Spotify, Audible, and others.

A third major offering that falls under subscription commerce are the "as a service" products that dominate the public cloud. These are infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS). While some "as a service" offerings can be considered consumer products, the majority are B2B solutions geared toward business users.

The main feature that separates B2B subscription commerce from other subscription types is complexity. Selling, implementing, and managing recurring B2B digital products is entirely different than selling simple subscriptions to consumers.

How is subscription commerce different from e-commerce?

Selling simple subscriptions to consumers for streaming media is quite different than selling software, services, data, hardware, and more to businesses and their employees. In fact, selling to businesses has always been more complex than retail consumer sales, and B2B subscription commerce differs in many ways.

B2B subscription commerce:

1. Involves multiple people across multiple channels and multiple devices

2. Needs assisted sales more often

3. Includes complex products and services

4. Requires seamless integration between internal systems like ERP and CRM

5. Must accommodate a range of payment options, such as credit cards, ACH payments, invoices, etc.

6. Often involves multiple decision-makers and other stakeholders, rather than a single employee with a credit card

The benefits of subscription commerce

Subscription commerce is complex, but that doesn’t mean that it’s not worth it. On the contrary, the subscription commerce model delivers multiple benefits for all involved.

Sellers get a consistent, recurring revenue stream, which provides an easy way to:

  • Forecast future cash flows and budget
  • Lower administrative costs associated with time tracking and billing
  • Drive higher valuations, since capital markets value subscription revenue more than other types of revenue

Buyers get a consistent, recurring cost, which gives them an easy way to:

  • Better plan and budget for the solutions they need
  • Lower the cost (measured in time, employee resources, and CapEx) of solutions
  • Lower the risk of implementing new tools 

At the same time, both parties benefit from better alignment around value because payment is based on consumption.

B2B subscription commerce and ecosystems

Today, a growing number of companies are opening their technology to third-party vendors, creating ecosystems of applications that complement their core solutions.

B2B SaaS ecosystems also epitomize all of the challenges that B2B subscription commerce presents. In any ecosystem, there are multiple vendors, products, channels, payment types and terms, decision-makers, and a long list of other potential stakeholders.

AppDirect's platform showcasing the importance of ecosystems when it comes to subscription commerce

Shifting your business to subscription commerce

Beyond deploying a subscription commerce platform and developing an ecosystem, any company not born in the cloud within the past few years faces additional challenges in shifting to this new business model.

Understanding and anticipating the operational and cultural changes necessary to move to a subscription commerce model will help you avoid typical pitfalls and setbacks as you pivot your business. Some of the areas where you’ll likely need to change your current structure, operations, and approach, include:

  • Monetization and pricing: Before you launch your subscription offers, consider the economics of how you will price them. Should you charge yearly or monthly? Will it be metered or a flat rate? If you are shifting to a subscription model for key products, how will it impact your current revenue?

  • Sales compensation: If you’re moving from one-time transactions to subscription sales, be aware that this will dramatically affect your sales strategy. One area that becomes particularly complex is how to compensate and motivate your sales force.

  • Customer service and support: Subscription commerce is all about establishing and nurturing an ongoing relationship with your customers. That’s why customer service and support are critical and why you need to scale support to meet demand and enable customer success.

  • Channels and resellers: Just as your sales compensation structure will need to change drastically, the way you work with and compensate channel partners will be different. You’ll need to consider aspects like which company will own the customer relationship—you or the reseller?

To learn more, download our primer, "Subscription Commerce 101: A Quick Guide for B2B Executives."

Download Guide
AppDirect's e-book about subscription commerce providing a guide for B2B executives

2. Evaluating Your Subscription Commerce Readiness

As B2B subscription commerce gains greater traction, your market could get disrupted if you don’t take action to monetize some or all of your offerings using a subscription model. While the biggest risk is not moving fast enough to embrace the subscription commerce opportunity, you still need to make sure your company is prepared for the fundamental changes the new business model requires.

Here are six questions you should ask before you begin to transition your business.

Are your products and services subscription-ready?

Just because some existing products or services might lend themselves easily to a subscription model doesn’t mean they are the right choices for your strategy. Ideally, you should start with an honest assessment of your company’s market opportunities and then decide which existing and future products and/or services would be most successful in a subscription model.

To determine if your products are subscription-ready, ask:

  • What value will customers get from our subscription offering?

  • How does this value translate into revenue opportunities for our business?

  • Do we have an application programming interface (API) for integrating with our customers’ and third-party applications?

How will you price your subscription products?

There are many different models and permutations for how to price subscription offerings, from tiered or usage-based, to annual or monthly, and more. To determine which pricing models deliver the best long-term outcome, ask:

  • How are our competitors pricing their offerings?
  • What type of pricing would best align with the value our customers receive?
  • What would our customers be willing to pay?
  • What will our company need to put into place to enable value- or usage-based pricing?

How will you manage the customer experience and relationships?

The right product and price are only part of the equation for being successful in subscription commerce. The rest of it is delivering the kind of customer experience that today’s business buyers expect.

To deliver a frictionless find, buy, and manage experience for your customers, you’ll need a comprehensive subscription commerce platform that brings all the capabilities together—onboarding, marketplace commerce, identity and access management, billing, relationship management, spend management, data and analytics, and more—so that your business doesn’t have to cobble together different solutions.

How will you provide customer service and support?

Making sure your customers have what they need to be successful is critical to your bottom line—recurring revenue won’t recur over the long term if you lose customers because they didn’t get the support they needed. That’s why customer service and support can’t be an afterthought. Instead, this part of the business needs to be a core component of your subscription model strategy and an essential part of your customer relationship efforts.

How will you adapt your sales strategy and compensation?

If you’re moving from one-time transactions to subscription sales, be prepared to dramatically shift your sales strategy and the way you incent your sales team. You can’t rely on tried-and-true compensation schemes that worked for higher-dollar, one-time transactions. Instead, you’ll need to understand whether it makes more sense to base your compensation model on metrics such as onboarding and activation rates and average revenue per account. As you evaluate how to create the right compensation package for your subscription offering, ask:

  • Which metrics make the most sense for measuring and rewarding your sales team’s performance?

  • What is the ideal frequency for incentives?

  • How should you reward renewals in your incentive plan?

How will you build and support an ecosystem?

Subscription-based ecosystems make your offering much more appealing to customers because you’re solving more of their business problems with one-stop shopping. The benefits for your business can be tremendous because you can deliver new capabilities quickly without having to create them all yourself. This not only keeps your research and development costs down but gives you the agility to bring new products and services to market far more quickly. To make your ecosystem a success, ask:

  • Which capabilities are core to our product and which make sense for partners to fulfill?
  • What’s the value of partnering with our company?
  • Will my subscription commerce platform support my ecosystem as it grows?
  • What will partners need from us to be able to participate in our ecosystem?

To learn more, download our guide, "Is Your Business Ready for a Subscription Commerce Model?"

Download guide
AppDirect's guide on how to tell if your business is ready for a subscription commerce model

3. Subscription Commerce vs. Subscription Billing

There are dozens, if not hundreds of solutions currently available that can bill for products and services on a recurring basis. However, this capability—subscription billing—is just one part of the larger picture.

Subscription commerce, on the other hand, encompasses all of the technology and processes that power the sale of digital products on a recurring basis. A company can have a great subscription billing solution, but without a larger strategy and platform, its subscription commerce efforts will still fall short.

To successfully power full-scale subscription commerce, a billing solution must be:

  • Customer-centric, not product-centric.

    Traditional back-office tools and systems, such as ERP, were built with products, inventory, and one-time transactions in mind. In contrast, subscription commerce is built around long-term customer relationships, which change over time. Customers may increase or decrease licenses, add additional products, etc.

  • Powerful and highly flexible.

    Traditional billing, even for subscriptions, can be rigid, with complicated, manual processes to change pricing, add SKUs, etc. Billing for subscription commerce must allow customers to upgrade, downgrade, suspend subscriptions, and other common actions, while at the same time enable providers to easily change pricing, handle reconciliation and taxation, and other complex back-office functions.

  • Ecosystem- and channel-ready.

    Ecosystems and channels are core components of subscription commerce, and they can make billing significantly more complex. A billing engine must be able to automatically understand the relationships between various stakeholders in an ecosystem and seamlessly support them. For example, the billing engine should understand when to apply any mark-up or mark-down to third-party products or sales made via resellers for their customers.

Take a look at our guide, "An Introduction to Billing for Subscription Commerce."

Download Guide
AppDirect's guide focusing on an introduction to billing for subscription commerce

4. How to Build A Business Case for Subscription Commerce

To make your company a subscription commerce success story, first you have to convince everyone else in your organization that it’s the strategy to pursue right now. What you need is a compelling business case for why your company not only needs to adopt a subscription commerce model, but why you need to do so now.

Here are the steps you should take:

Communicate the Why, What, When, and How of Your Strategy

The reasons to adopt subscription commerce may be clear to you, but executives, board members, stakeholders, and other decision makers in your company may have different views. A well-prepared business case can help you describe the opportunities and benefits in a way that gets executive and board-level approval, buy-in from other parts of the company, and a higher priority for investing in your initiative.

Your business case should tell the story of what will happen if your company does or does not make the decision to move forward now on subscription commerce. It presents the justification for the investment and a convincing rationale for decision makers to approve. To structure your business case, address these concerns: why, what, when, how, and how much? Use these questions as a guide:

  • Why is subscription commerce the best way for the company to achieve all or part of its vision?
  • What is subscription commerce and the specific opportunity for your company?
  • When should the company move to subscription commerce and how long will it take?
  • How can the company execute a subscription commerce strategy?
  • How much will subscription commerce impact the business outcomes most important to company leadership?
  • How much investment will be required?

Start with the Corporate Vision

The best place to start when developing the rationale for your business case is with the top-line direction and vision for the company. To make your business case relevant, you need to ground the rationale in how a subscription commerce offering can help the company achieve its vision for where it wants to be in the next three to five years.

Educate Your Audience on the Opportunity

Your stakeholders may not know the difference between ecommerce and subscription commerce, let alone why and how your company should be thinking outside of the traditional, one-time transaction model. Or, they may understand the value of moving to subscription commerce, but don’t believe that now is the right time to do so. This is why your business case must first educate the audience and help everyone get on the same page.

To complete the picture, you should also provide an overview of the competitive landscape. Identify and analyze any new competition you’ll face as you launch a subscription offering. This information will be an important component of conveying the importance and urgency of moving to subscription commerce for executives and stakeholders.

Describe Your Strategy and Calculate the Outcomes

This is where you convince stakeholders that you have identified the best way to capture the subscription commerce opportunity. Present your strategy using concise language that demonstrates you have a clear vision of how to achieve the company goals you’re focusing on.

Also, be sure to focus on the estimated impact of your strategy on your organization's most important KPIs. For your business case to be convincing, you’ll need to show clear, measurable benefits and when those benefits can be expected to be achieved.

Check Your Work Against Best Practices

As you develop your business case, consider and incorporate the following best practices into your effort:

  • Do you have an executive sponsor or sponsors on board? An executive sponsor can give you important insight and guidance.

  • Did you distill the business case down to what’s most important to stakeholders? Narrow down the main focus of your business case to one to three core metrics.

  • Did you get input from different areas of the company? Make sure to build consensus across functions and gain cross-functional alignment.

  • Are you thinking long term? Subscription commerce is strategic and visionary, so don’t expect overnight results—anything shorter than 18 months is too short.

5. Build vs. Buy for Subscription Commerce

The decision to build or buy the platform and capabilities you need to support subscription commerce can have a major impact on your go-to-market strategy. Should you build the capabilities you need for your subscription commerce model in-house or should you choose an off-the-shelf platform? Or is it better to buy multiple point solutions and write custom code to fill in the gaps in functionality?

To determine the fastest, lowest-risk, and most cost-effective way to adopt subscription commerce, start by considering all the pros and cons of building the supporting technology yourself or buying/subscribing the technology from a third-party provider. Identify how the pros and cons apply to your organization and your company strategy.

Here are the factors you should keep in mind as you consider your options.

Build It Yourself

With this approach, you can build the entire platform from scratch or mix and match capabilities from different providers. The pros include: Control of the entire project, from design and user experience to technology stack used; building from the ground up for the exact features and requirements you want. The cons include: Higher costs; slower time to market; unplanned/unexpected issues with integrating point solutions to meet requirements in a mix-and-match scenario.

Buying / Subscribing to a Platform Provider

Working with a third-party provider can often deliver a range of benefits, including: faster time to market; lower risk; continuous updates; predictable total cost of ownership. On the downside, companies may need to modify standardized features, and they can influence a provider's roadmap, but not control it.

How to Make the Final Decision

To prevent the build-versus-buy decision from delaying or derailing your go-to-market plans for subscription commerce, involve key stakeholders early as you begin building your business case and defining your strategy for subscription commerce. Those stakeholders usually include IT, finance, product management, and others as appropriate to your industry and business.

Moreover, you should ask your stakeholders these questions:

  • Is building a subscription commerce platform part of my core business?
  • Do we plan to sell this platform to other companies (i.e., will a custom-developed platform generate revenue for the business?)
  • If building it ourselves delays our launch, how far behind our competitors will we be?
  • How will a delay to market impact our ability to grow market share and revenue?
  • What is the value over time of getting to market faster (revenue and company valuation over a five-year plan)?

Creating a Platform Checklist

For companies that decide to work with a provider, the next step is to develop a requirements list. Here are some important criteria to include on your checklist:

  • Ease of integration with your existing technology
  • Open and agnostic to help you future proof your strategy
  • Frequent releases and continuous platform evolution
  • Flexibility to accommodate your business needs
  • Strong security and governance measures
  • Global expertise and experience to help you reduce risk
  • Professional services to complement and extend your in-house expertise and resources

6. Why Deciding to Do Nothing Is Not an Option

Your company can choose to build a subscription commerce platform or work with a partner. However, the one thing your organization can't do is decide to take a wait-and-see approach. For companies that delay, there is a danger of lagging too far behind. Every day of non-action puts your company at greater risk of being disrupted, and the price your business pays can be incredibly high.

By 2024, the size of the global "anything as a service" subscription market is forecast to be $344.3 billion. Today is the ideal time to develop a subscription commerce strategy and set your organization on a path for success.

To learn more, download our infographic, "The High Cost of Doing Nothing: Getting Left Behind in the B2B Subscription Economy."

Download Infographic
AppDirect's infographic focusing on the high cost of doing nothing and getting left behind in B2B subscription

7. Integrating Subscription Commerce Into Your Business

Subscription commerce touches every functional area of an organization, from sales and marketing, to accounting and finance, and beyond. Given this, it can be exceptionally difficult to integrate subscription tools and processes into existing technology and operations.

For companies that are formulating strategies and developing new products for a subscription model, one of the main goals is to bring those new offerings to market as quickly as possible. Yet in their drive to reduce time to market and accelerate their time to revenue, they may be making strategic implementation mistakes that inhibit revenue and market share growth.

Avoiding the Pitfalls of a Siloed Approach

To avoid these issues, companies are often tempted to isolate recurring revenue models from their existing business. They set up a siloed set of systems, processes, and even staff for their new subscription offerings. However, a siloed approach can create a range of problems, including:

  • Operational inefficiency. With separate strategies, processes, systems, and staffing, there’s little opportunity or incentive for different teams across the company to work together.

  • Frustrated customers. Forcing customers and prospects to use a different access point to purchase your subscription offering than the rest of your products and services creates friction throughout the customer journey.

  • Brand confusion. With no holistic view across all of your offerings, customers have to make potentially ill-informed decisions about which products make the most sense for their needs.

  • Missed sales opportunities. Each time your customer service or sales teams interact with a customer, it can create an opportunity to educate them about other offerings from your company. But with a siloed approach, your staff may be missing out or not incentivized to upsell or cross-sell your subscription offering.

A Better Option: A Phased Implementation

Instead of creating silos for your subscription business, a better strategy to achieve the right balance of speed to market, time to value, and efficiency is to take a phased approach. Start with your operational processes. Begin by evaluating how they’ll need to be adjusted to support your new subscription model, then prioritize the ones that are most important to generating revenue, maintaining customer satisfaction, and reducing costs and effort. These will most likely include your:

  • Pricing model
  • Sales strategy and compensation
  • Customer support strategy
  • Marketing strategy
  • Product delivery and management processes

Align Your Supporting Tools and Technology

To create a unified experience for customers across the buying journey and optimize the efficiency of your operations, you’ll need to adapt or integrate your existing operational systems to support your subscription model. Depending on your industry and types of offerings, typical systems already in place in your technology stack probably include some or all of the following:

  • Customer and partner relationship management
  • Configure, price, and quote capabilities (CPQ)
  • Provisioning
  • Billing
  • Enterprise resource planning (ERP)
  • Reconciliation
  • Product integration management (PIM) and digital asset management (DAM)
  • Content management system (CMS)

Keep in mind that many companies quickly discover that they need additional capabilities for subscription commerce such as a digital marketplace, onboarding support, relationship management, engagement tools, and more.

Align Your Success Metrics

The metrics that matter for subscription commerce are often different than those used to measure traditional sales, or even traditional ecommerce. While some, like quarterly revenue, can still be a valuable metric, other typical metrics may need to be adjusted or new ones added to better reflect how success is measured for recurring revenue.

Measurable key performance indicators (KPIs) to consider using for subscription commerce include:

  • The number of active users
  • Usage (frequency or length of time) of your product
  • Revenue per customer or average revenue per user
  • Internal operational costs
  • Return customers
  • Customer churn

Ultimately, these metrics should be used to make data-driven decisions about your subscription business, helping you inform pricing, offers, and other decisions to create an even stronger recurring revenue business.

Download our white paper, "Unifying Subscription Commerce with Your Existing Systems and Operations."

Download White Paper
AppDirect's white paper on how to unify subscription commerce with existing systems and operations

8. Additional Resources

  • B2B Subscription Commerce Is on the Rise. Here's the One Thing You Need to Know.

    Today, we are seeing the emergence of a new model for recurring transactions—B2B subscription commerce—that presents a range of new challenges. Learn about where the B2B market is headed, and why B2B subscription commerce is so important in today's digital economy.

    Read More

  • 5 Ways to Crack the Code for B2B Subscription Commerce Success

    As subscription commerce sweeps across the business world, it is becoming more complex—and presenting more complex challenges for providers looking to launch or scale a B2B subscription commerce strategy. Learn best practices to help you succeed.

    Read More

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