Top 5 challenges in the shift from a legacy economy to a subscription economy
Embarking on a digital growth strategy is a high priority for many companies, especially traditional companies that are seeing their businesses challenged by eroding markets and margins. The importance of having a strategy is essential for their survival. Following is an overview of the top 5 common challenges faced by many companies as they transform their businesses.
1. Shifting business models
We are familiar with the legacy economy that has been in place for decades where the flow goes from product definition, to marketing research, to sales, to channels and ultimately to the customer. There are all executed with one objective in mind — sell the product and complete the “asset transfer”.
In the new economy, subscribers are at the center of the business model, creating a shift to new business parameters. These include:
• Cost of customer acquisition
• Lifetime customer acquisition
• Annual recurring revenue
• Average revenue per user
Ownership mindset is shifting. Change is accelerating. Every day new companies and new entrepreneurs offer new subscription services, influencing customer views about new intuitive value propositions.
2. Changing the marketing strategy
When the product becomes the subscription we can no longer look at marketing in the traditional way. The 4P’s of marketing (price, product, promotion, and place) need to evolve. Traditional marketing spends (for print advertising, campaigns, billboards, and TV) are no longer effective. “Word of mouth” is vital. Customers need to be sold on the recurrent experience and service. Storytelling is becoming more critical, and the “who, how, and why” about the service need to be clearly communicated.
When customers subscribe, it provides access to a huge amount of data. If you manage the new information, data analysis, and customer knowledge effectively to create a dashboard, it can add tremendous value to your business and help to further define the subscription offering.
3. Innovation offers endless improvements
Ongoing innovation is a great concept and the subscription economy is ideally suited for it. Innovations can be launched and tested quickly, compared to traditional, longer term market research. Businesses can adapt, learn, and optimize based on customer feedback and collected data. The critical part is having agility and making an effort to talk and listen to customers and then apply the data analysis to your core business.
Collaboration with customers and being able to respond quickly to change become critical in an agile service development model.
4. Transform the selling behavior
One of the biggest challenges is shifting from an asset transfer model, to a long-term relationship sales model. Sharing what other customers are doing is key to this new sales approach. Selling a service can help with your company’s growth as sales are coupled with a growing subscriber base. An adaptive pricing strategy can help optimize revenue. Three sales imperatives are essential to the new selling model:
• Acquire more customers
• Increase the customer value (through upselling and cross-selling)
• Hold onto customers longer (reduce churn rate)
5. The new “as a service” income statement
A new subscription economy income statement needs to be created and monitored. The traditional net sales, COGS, income, R&D, S&M cost, net income, no longer apply to the business model. New financial indicators are required to make sense of this new economy and monitor appropriate finance KPIs. Indicators can include:
• Annual recurring revenue
• Recurrent cost
• Recurrent profits
• Growth cost
Finance teams must make significant changes to current models and make the right decisions to adapt and succeed in the new economy.
Key recommendations to grow business in the new subscription economy
• Most manufacturers don’t own their customer relationship, the channel does. Ownership of the customer relationship is paramount.
• Create a tracking system, analyze subscription behaviors, usage, and subscriber interest. Listen and learn, then adapt services based on the data. In the subscription economy data is the new “gold”.
• When Software as a Service (SaaS) initiatives start with high revenue product, many companies let their people sell both legacy product and lower subscription offerings, resulting in most cases, in the demise of nascent subscriptions. Subscription successes often begin with a small focused sales team.
• Lower priced basic, or freemium plans, are very important. However, if a large percentage of customers (>60%) are in this stage, even if they are happy with the services, it can be a double-edged sword that can harm company financials. In an ideal world, the goal would be to move customers to the mid and higher level subscription services. Of course you would have to create a sales pitch to encourage customers to willingly move to the next level of services.
• Channels are critical to success, in addition to the time and resources invested in education, workshops, and whitepapers, businesses must shift the channel behavior from “transaction based customers” to “managing customer relationships”. This would include clear communications about how subscription models can benefit their company.
• Last but not least, a subscription culture creates a customer-centric culture that promotes customer input and feedback, and drives services evolution.
In 2019 Alcatel-Lucent Enterprise celebrates its 100-year anniversary with a proud history of transformation. In keeping with this tradition, digital subscription transformation is well on its way and ALE is eager to involve customers, partners, and ecosystem providers to the new subscription economy.
Discover more about these opportunities with Alcatel-Lucent Rainbow™, Network on Demand, and other pay-as-you-go services at www.al-enterprise.com/en