Jess Warrington
In my role at CloudBlue, Fortune 500 companies often approach me for help with solving technology challenges while shifting to a subscription business model, only to realize that they have not taken crucial organizational steps necessary to ensure a successful transition.
Subscriptions scale better, enhance customer experience and hold the promise of recurring and more predictable revenue streams — a pretty enticing prospect for any business. This business model is predominant in software as a service (SaaS), but it is hard to find an industry that doesn’t have a successful subscription story. A growing number of companies in sectors ranging from automotive, airlines, gaming and health to wellness, education, professional development and home maintenance have been introducing subscription services in recent years.
However, businesses should be aware that the subscription model is much more than simply putting a monthly or annual price tag on their offering. Executives cannot just layer a subscription model on top of an existing business. They need to change the entire operation process, onboard all stakeholders, recalibrate their strategy and create a subscription culture.
While 70% of business leaders believe subscriptions will be key to their future, only 55% of companies believe they’re ready for the transition. Before talking technology, which is an enabler, companies should first address the following core issues to holistically plan and switch to a recurring revenue model.
Get internal stakeholders involved
Legacy companies accustomed to pay-as-you-go models may assume shifting to a subscription model is just a sales issue. They are wrong. Such a migration will affect nearly all departments across an organization, from product development and manufacturing to finance, sales, marketing and customer service. Leaders must therefore get all stakeholders motivated for the change and empower them to actively prepare for the transformation. The better you prepare, the smoother the transition.
But as we know, people naturally do not like change, even if it is for their own good. So it can be a formidable task to secure the cooperation of all internal stakeholders, which, depending on the size of your company, could number in the thousands.
Executives should paint a vivid picture of the immediate and longer-term future of the company, since uncertainty about the effect of the changes, especially its impact on job security, is one of the major reasons for resistance in such a context. Through this transformative journey, leaders should avail the help of and support individuals who can drive the change within the organization and inspire all stakeholders to align to the new vision.
The best change agents are usually respected, charismatic individuals with extensive experience in the organization’s processes and technologies, and early adopters who have the ability to sway the majority. They are good teachers, communicators, networkers and connectors who are resilient in the face of change. They’re the few who raise their hands in favor of new initiatives. Some companies find it effective to include outsiders in the change process, but this should be done with care.
Consider investors, shareholders and regulators
Besides educating and teaching internal stakeholders about upcoming changes, large and public corporations also need to consider external stakeholders such as investors, shareholders and Wall Street regulators.
Moving to a subscription business model means an extreme reallocation of revenue. For example, companies heading in a new direction may see one-off sales peaks flatten ahead of their quarterly earnings calls, but that same revenue may be spread out over the lifetime of the customer — a much longer period. Companies should notify and educate all of their external stakeholders so they have a thorough understanding of and are on board with the subscription plan and do not panic when earnings start to look different.
To make the transition smoother and earn the trust of external stakeholders, the finance team should be building accurate forecast models of what the business will be like after adopting subscription and share this transparently with stakeholders.
Change your sales compensation structure
Sales teams are one of the key stakeholders for a successful shift to subscription models, but making them undergo this change is complex, risky and costly.
At larger companies, salespeople get sizable commissions for one-time payment deals, but the subscription model spreads out the money over a year or more, creating a cash vacuum and causing the salespeople to fail to achieve their previously on-target earnings.
To earn the full support and backing of salespeople, organizations must restructure their sales incentives programs to fit a subscription model. Enterprises must move away from creating bonus schemes based on one-time total contract values and introduce a plan that is directly tied to the customer success structure and aligned with primary business goals, namely customer acquisition and customer base protection and growth.
The prime component for an efficient compensation scheme is a focus on consistently increasing monthly recurring revenue (MRR) and annual recurring revenue (ARR) based on suitable KPIs, and in a way that would meet recurring revenue targets.
The Rule of 78 in sales, which is commonly used to calculate how much each sales representative should bring in every month to maintain steady growth, can offer leaders better insight into their revenue targets and help them choose the right KPIs. The formula assumes that a rep who brings one new customer on board every month generates 78 months of revenue for the business over the course of a year.
Companies must also take stock of the potential risks hidden in their customer contracts. For example, if a customer has a break clause in a three-year contract after one year, the revenue in year one will be safe, but year two and three will have risk if the customer terminates the contract and the bonus from this revenue has been paid up front to the salesperson. Businesses should be cognizant that they are never going to retain 100% of the customers they convert during the year and need to learn to adjust their sales strategy accordingly.
It is also crucial to have well-defined rules and parameters to avoid conflict, and to start communicating about the company’s new compensation mechanism while it is being put together to prepare team members for the upcoming changes. In the communication process, organizations should highlight the benefits of transitioning to a compensation plan based on MRR and ARR, including that it lowers monthly quotas as compared to one-time sales compensation plans, taking some of the pressure off sales teams.
Hold a physical or virtual group discussion and speak with each representative individually. Listen to their views and make sure to incorporate their feedback into the approach. Once the new compensation plan is drafted, send each team member a copy and give them sufficient time to review it.
Be careful not to get complacent when everything is said and done. Leaders should ask for feedback on a constant basis, track the compensation plan and their reps’ performance, and be open to making adjustments when needed.
Technology is a means, not an end
We are in an era where most companies have already adopted a digital-first business strategy or intend to do so, with cloud services lying at the heart of their digital transformation efforts. Worldwide end-user spending on public cloud services, for example, is forecast to grow 18.4% in 2021 to total $304.9 billion, up from $257.5 billion last year.
Technology tools that aid companies in areas such as billing accuracy and finance, customer relationship management, and professional services automation are great enablers for making the transition to a subscription-based model, but they’re not the silver bullet.
As technology opens up a world of possibilities and levels the playing field, the ultimate winners will be organizations that appreciate the fact that everything stems from an efficient human-centered approach and that technology is only part of a bigger picture.
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