Technology & Innovation
How to build a subscription business model to grow revenue
For SaaS companies, a subscription business model often works best. We’ll help you grow revenue with a subscription-based business model.
For CFOs in the SaaS industry, growing revenue in a scalable way requires being a grandmaster in managing complexity. This is because, unlike other revenue models, a subscription-based business model needs to optimize its processes through a full customer lifecycle: onboarding, ongoing customer support, and renewal and churn management.
This article will walk you through building and scaling a subscription business model. We’ll also cover SaaS growth best practices and even get into pricing dynamics and how to build your tech stack.
What is a subscription-based business model
A subscription-based business model is a pricing model that charges customers on a recurring basis for access to a product or service. Instead of making a one-time purchase, customers pay a fee (typically monthly or annually) to continue using the product or service.
In a subscription business model, each subscriber has three critical elements of their customer lifecycle that you need to consider:
1. Onboarding: This is the stage in a subscription-based business model where leads become customers. SaaS CFOs try to make the customer onboarding process as simple and frictionless as possible–this shortens your sales cycle, speeds up cash flow, and keeps your customers happy.
2. Customer care: Typically, SaaS companies will develop a separate customer care team–also called a customer success team–once they scale to a certain level. Even without a dedicated team, cloud-based accounting software can help you create the best possible user experience and field any issues that might arise.
3. Renewal & churn management: When a customer’s current billing period ends, they’ll either churn or renew for another billing cycle. As with customer care, accounting software is essential in streamlining these aspects of your customer lifecycle.
Let’s look at some subscription business model pros and cons.
Subscription business model pros and cons
Skillfully building your subscription business model requires you to be aware of the pros and cons of this particular approach. This allows you to capitalize on the advantages of a subscription business model and minimize its disadvantages.
Advantages of subscription business model
Some of the most common and beneficial advantages of a subscription business model include the following:
- Decreased customer acquisition cost: A subscription-based business model usually decreases your customer acquisition cost.
Many people are more open to a subscription than an outright purchase because a subscription often involves smaller segmented costs, often with the ability to cancel at any time, which can shorten your average sales cycle.
- Enhanced customer loyalty: By its very nature, a subscription business model involves customers repeatedly coming back to your product over time. This inherently builds customer loyalty.
- More actionable and reliable forecasting: Since a subscription-based business model involves charging customers regularly, revenue forecasting is much easier, and forecast variance tends to be lower. This is especially true for companies that invest in automated forecasting.
There are also a few potential drawbacks to a subscription business model.
Disadvantages of subscription business model
Some of the disadvantages of subscription business models include:
- Contract-shy customers: Even though a subscription-based business model tends to lower your average CAC, you can still expect to run into contract-averse customers.
- Rapid changes in market conditions: Because customers can usually churn at any time, companies using a subscription business model are especially susceptible to fast pendulum swings in customers’ tastes or broader industry conditions.
- Difficulty maintaining customer interest and value: Even customers who love your product will still expect occasional reboots, additional features, and so on. This adds ongoing development costs beyond the challenge of maintaining your customers’ original interest in your product.
Having said all that, let’s dive further into why the subscription business model has become so widespread.
Why subscriptions work so well
Beyond what we’ve already covered, a subscription business model has several distinct benefits.
A subscription business model increases CLTV
Customer lifetime value (CLTV) is one of the most valuable subscription business model metrics. It measures how much money each customer spends on your product before unsubscribing. CLTV tends to increase for subscription companies because each new billing cycle builds further customer loyalty.
A subscription business model increases customer engagement
A subscription business creates a user environment where many people congregate around the same product, usually for the same reasons. You can capitalize on this by building a digital community around your brand that will create an upward spiral of customer engagement.
A subscription business model tends to scale more smoothly
The increased predictability around subscription revenue allows SaaS companies to avoid typical growing pains associated with other business models.
Speaking of growth, here are a few actionable tips to unlock faster and easier growth in your subscription-based business model.
Tips to help your business grow
Even for the most successful SaaS companies, maintaining the momentum of a subscription business can be tricky.
These are some of the most important best practices you can follow to help your business scale sustainably. They revolve around pricing, metrics, and your tech stack.
How to price your subscription options
There’s a plethora of strategies out there when it comes to pricing your subscription business model, and it pays to know your options. Three of the most popular pricing methods are:
- Competitor-based pricing: As the name implies, this involves a detailed market analysis of your competitors’ rates. What are they charging, on what grounds, and are people paying it?
- Cost-based pricing: Cost-based pricing takes two components into account. The first is your upfront development costs, and the second is any product or customer maintenance costs you’ll incur.
- Value-based pricing: Companies using value-based pricing set their rates based on how rare or meaningful the value of their product is to their customers. A product that provides an extremely rare or important service will tend to be more expensive than its run-of-the-mill counterparts.
What about your subscription business model metrics?
Metrics to predict your revenue more accurately
Metrics are essential for any SaaS business, but a few that are particularly important for companies operating on a subscription business model include:
- Churn: Churn is expressed as a percentage and tells you how many subscribers choose not to renew after their current billing period.
- Expansion MRR: Your expansion monthly recurring revenue (MRR) measures how much revenue you gain from subscription expansions in a given month.
- Contraction MRR: Your contraction MRR measures how much revenue you lost to subscription downgrades for a given month. Contraction MRR differs from churn because these users still choose to remain customers.
Subscription business model metrics aren’t much use unless you can establish a real-time, actionable relationship with them. That’s accomplished through your SaaS tech stack.
Software companies rely on three main tech stack components to help them manage their subscription-based business model.
1. Renewal management software
Companies with a subscription-based business model frequently utilize software to help them stay on top of renewals as the company continues to scale. The more customers you have, the more opportunities there are for revenue to fall through the cracks because of poor renewal management.
2. Revenue recognition software
A subscription business model requires companies to follow particular accounting guidelines and revenue recognition standards. This gets very complex very quickly.
Getting careless about revenue recognition can lead to more than lost cash. Unresolved revenue reporting discrepancies can result in legal consequences for your organization.
3. Financial forecasting and reporting software
No SaaS CFO can expect their subscription business model to flourish without pinpoint reporting and far-ranging financial forecasting. Reporting on your subscription business model metrics keeps you rooted in reality, and forecasting helps you succeed by knowing your likely financial outcomes in advance.
Sage Intacct rolls all three of these crucial elements of subscription business model success into one cloud-based, truly modern accounting suite.
Wrapping it up
A subscription business model opens an entire world of possibilities. But for SaaS CFOs, this can make knowing how to move forward difficult.
If you’d like even more clarity around building your subscription-based business model, this infographic is meant for you: 5 Steps to Prove Out and Scale Your Subscription Model.
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