Subscriptions

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For companies using digital capabilities to shift from selling products to offering subscription services there is a dramatic impact on how business is booked and revenue is recognized. It is not the spike that happens toward the tail-end of the quarter as products are shipped.

SUBSCRIPTIONS-BASED BUSINESS MODEL Revenue PRODUCT-BASED BUSINESS MODEL Past Future

The revenue stream is normally lower (at least initially) but more constant and predictable (i.e., there is more predictability from a three-year subscription than from the spikes linked to product sales). This changes how the business is managed, and how financial investors value the company. More traditional companies are used to seeing revenue spikes — and now they have to see "peanut butter" spread across the year. This shift in the business model has a huge impact on sales incentives, partner engagements, and how the broader company is managed over the longer term.

Revenue MANAGING THE "CASH FLOW" TROUGH AS PART OF THE SHIFT TO SUBSCRIPTIONS. Past Today Future CashflowTrough

Just as the company stops the traditional business, they have to invest in the new business, and it takes time to add customers and get going. In addition, moving to a new revenue model frequently impacts how the core product and related services are built. For example, when usage-based pricing is a desired outcome, the future product must incorporate the capability to instrument and meter the services it delivers. And following on from this, the metering capability needs to be integrated into the company's revenue management systems. And this creates the classic "cash flow trough" which puts all organizations going through this type of business model shift under massive pressure.

Digital Best Practices

Feedback From a Germany-Based Global Technology Company


In the technology industry, this is about shifting from delivering a traditional product (hardware or software) to a cloud service. This has major implications on the revenue model as it represents the shift away from an upfront capex model to an ongoing opex model.

  • Digital Best Practice 1

    Ensure that the subscription model is effectively built into the product (depending on whether it is user based or transaction based).

  • Digital Best Practice 2

    Use dynamic pricing models as a competitive differentiator to enhance the customer experience.

  • Digital Best Practice 3

    Educate internally and externally on the benefits of a subscription model (i.e., it is simpler to forecast and manage the business due to its predictability), as well as improved financial valuations.

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