The main focus of starting a business is to make a profit. And as a successful entrepreneur, what you look for every day is implementing that strategy that's capable of increasing your business's recurring revenue. Pretty sure you found yourself reading this article. By the end, you're going to discover why switching from a one-time product to a subscription-based product is what your IT business requires to realize a higher ROI.
Traditionally, IT companies, including those selling software, used a business model in which a customer pays a one-time payment. However, customer needs are fast-changing, calling for a model that entirely moves from outright buying to a subscription-based one. This explains the rise of Software as a Service (SaaS) business across the globe. The subscription model is beneficial to you as an IT business and also advantageous to the customer as it creates a better customer-business relationship. To place things in context, studies have found that switching to a subscription model can make your company 271% more profitable.
Furthermore, the cost of obtaining new customers is about 70% more than retaining the existing ones. Therefore, subscription models offer more profits than the one-time purchase model. For instance, you continually increase your revenue by making more bucks from the customers you retain after the acquisition. The subscription model offers businesses a more efficient way to provide services and make customers closely and better associate with both the products and producers, hence significant returns.
The subscription model is one of the digital marketing trends that looks like it's here to stay. Are you ready to switch to subscriptions? Contact us today and we'll guide you through it.
So, what is a Subscription-Based Business Model?
To put it simply, it refers to where businesses offer products as services — customers pay a recurring fee (e.g., monthly, quarterly, annually) to use the product. Despite this trend being new, its popularity is growing fast. But why have things changed so quickly? Consumer preferences change recurrently; customers want to be able to personalize and acquire relevance in whatever they pay for. And for the subscription model, this is right at its core. It's important to note that for the subscription model to be successful, it is essential to reduce customer churn. Additionally, this model becomes even more lucrative, especially when using the automatic renewal method as an option in the billing system.
Recurring revenue allows you to predict the future and makes forecasting easy. And this aspect is vital in futuristic planning and assuring investors of the business continuity. Naturally, the CAC (customer acquisition cost), which is the cost of acquiring one customer, is easily offset by customer lifetime value (CLTV) in the subscription model. For example, the rough minimum ratio of CAC: CLTV for SaaS businesses is 1:3, which further shows if customer churn is checked enough, the recurring revenue can work like magic in making the company more profitable.
Categorically, subscription IT services have the following benefits:
- Attracts more customers as it's cheap for customers to pay less frequently than a huge one-time purchase.
- Recurring buying offer foreseeable revenue
- High return on customer acquisition cost
- The model increase earnings through up- and cross-selling
- Easy to offer trials and testing periods as opposed to one-time payment where that's difficult.
What to Consider when Switching to Subscription IT Services from Product IT Services
1. Existing and Potential Customers of Your Business
The first step is getting to understand the end-users of your service. What are their preferences and personalization needs? You need to analyze these customers and establish features and price tiers that are attractive and reflective of your current and target customers.
2. Competent Customer Support System
Before rolling out your subscription IT services, you'd first want to consider what can potentially go wrong and appropriately plan for the same, including managing problems, questions, requests, and customers' feedback. Making sure you have a proactive support system grants you an effortless and smooth onboarding process.
The good thing with having good customer service is that happy customers stick for a long time, increasing the MRR and CLTV.
3. The User Experience
IT companies such as SaaS offer their services obviously through the internet. Therefore, the UX design of the service platform (e.g. web application) is crucial to guarantee customers an exceptional experience. In a subscription-based model, customers are expecting easy-to-use platforms that can increase their productivity and proficiency. Incomparable UX gives a cutting-edge advantage over your competitors.
4. Ensure the Billing Process is Streamlined
If your customers don't have a smooth way to pay for the subscriptions, they might be forced to unsubscribe. You'll want to simplify the complex billing processes. Suppose you implement an option where customers can choose their subscriptions to automatically renew through linked credit/debit cards upon expiry after the set period. In that case, that can also go far in making subscription payment more straightforward and flawless.
5. Maintain Strong Customer Relationships
Creating efficient relationships with customers is one of the major tweaks of the subscription model. You build relationships by regularly checking that the customers are happy and are reminded of the value of the service they've subscribed to. One of the core attentions is to retain customers as long as possible. Also, fostering strong customer relationships involves respecting customer preferences and having varying pricing tiers friendly to existing and prospective customers.
Key Takeaway
With more than 90% of IT companies planning to embrace subscription business models, its acceptable rate and popularity are growing daily. The bottom line is that it allows you to sell your product more affordable and improve service quality over time. With this model, both the business and the customer benefit, so it's a win-win situation.
Considering switching to a subscription model? Get in touch with the Eternal Works' team to learn more about how you can make your transition seamless.
