For most businesses, a recurring revenue model is the Holy Grail. It’s easy to see why. If you have predictable revenue, it is easier to plan for the future and invest in your business. Everyone understands, at least intellectually, that the value of acquisition is additive while customer retention is exponential.
If you have a transactional model, you are always on a hamster wheel, “forever” trying to attract your customer’s attention to engage in a new transaction. With a subscription, the customer makes a decision once, and continues to pay you “forever.” It’s a “forever” transaction.
Subscription Models Reduce Uncertainty
Subscription pricing makes sense for both the customer and the organization – especially in times of economic uncertainty. The customer likes knowing there’s a cap on how much they will spend. For example, the original value proposition that Netflix featured when they launched was “no late fees.” While there were many benefits they could have touted—everything from the convenience of having movies delivered by mail to the breadth of titles—they focused on the uncertainty of cost because it irked movie rental customers the most.
Subscription models are great for companies as well. Simply, recurring revenue models enable companies to plan for predictable growth. With this knowledge, their efforts and spend are more efficient. And it’s paying off.
According to an analysis of public software companies by the Software Equity Group, the median SaaS Price/Revenue ratio for a SaaS company is more than twice that of a Licensed Software company.
Subscription Pricing Taps Into the Membership Economy
The Membership Economy leverages more than just subscription pricing. A subscription is a pricing decision. Membership is about the organizational mindset and affects every decision you make across the business. When you have a membership mindset, you are focused on the customer’s mission and constantly introducing and evolving offerings to help the customer achieve their mission.
Many news publishers, such as the Wall Street Journal in the U.S. and The Guardian in the U.K., have introduced additional benefits for their readers that help the member achieve the goal of feeling connected to “what’s happening” in his or her city and the world, as well as introducing him/her to like-minded people through live events and online communities. This type of membership goes beyond print editions and subscription models to really engage members, and support their goals. People don’t subscribe to a paper because they want a paper—they have a bigger mission that the paper helps them achieve. By focusing on the mission rather than the products, a company can identify all kinds of ways to deliver value to the member, justifying additional spend.
Organizations that think of their customers as members focus on the long- term formal relationship. For them, the transaction is not the finish line, it’s the starting line. Key metrics include: measuring the success of onboarding new members, customer engagement and retention rates, monthly recurring revenue (MRR), and data on web visits and time spent.
The Membership Economy is a transformational trend in how organizations engage with their customers. It’s about moving from ownership to access, from a transactional, anonymous focus to more of a long-term known relationship. And at its best, it opens up the conversation −not just between the customer and the organization but also among the customers themselves− enabling peers to help one another, while opening up previously inaccessible sources of value.
Editor’s Note: To learn more, join Robbie Kellman-Baxter and Aria’s Sean Rollings on Wednesday April 27th at 1pm EDT/10am PDT for a one-hour webinar as they explore pricing models and strategies that maximize returns from the Membership Economy.