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The Subscription Model is the New Standard

Magazines, newspapers, life insurance, phones, security services, and a long list of products and services have been sold for decades using the subscription model. What has changed?

The model has not really changed, but the relative importance has. The difference now is how important and meaningful the subscription model has become to the national economic engine. Technology is the undisputed future of the biggest economy in the world, and the subscription model is quickly becoming the dominant business model. Technology companies attract huge amounts of venture capital and the best, brightest, and most innovative workers in the world. The stakes are high, competition is intense, and the pace is brutal.

Over time, industries develop key metrics used to help gauge success and progress. Sometimes these metrics are normalizations that enable the markets to compare performance of different businesses. Same store sales is a classic method retailers use to help determine if a retailer is growing organically or if revenues are ballooning simply due to more store openings. Another example is airline industry analysts use metrics like load factor, yield, and available seat-miles. Within an organization, these types of key metrics can be used to measure performance against objectives, to determine where to invest capital, and how to compensate employees.

What is interesting about industry operating metrics is that they don’t appear on an income statement or a balance sheet, and may not appear in any published documents, but they are measured and discussed from the Fortune 500 boardroom to the start up break room. Operating metrics are essential to running any business well and are critical inputs for decision making around pricing, packaging, compensation, customer service, marketing, and the development of new goods and services.

Subscription businesses need operating metrics – metrics for internal measurements, planning and decision-making, and metrics that enable the markets to gauge relative performance.

In the crucible that is the hi-tech marketplace, change happens quickly. In a few short years, we moved from minimal awareness of the need for subscription metrics to almost complete saturation, largely driven by the capital sources who need these metrics to measure the investment risks and to manage the ongoing performance of their portfolios. Venture capitalists have really become the thought leaders for key subscription metrics such as churnmonthly recurring revenue and customer lifetime value.

However, the real driving need for subscription metrics is for information to make better-informed business decisions. Understanding churn will enable you to focus sales resources, identify winning product packages, and target your marketing dollars to the right buyers. Understanding MRR growth and trends will help you create the right compensation plans and enable better financial planning and forecasting.

Even with all this new awareness and buzz, knowing how to measure, track and use subscription metrics is still a challenge for most organizations. The challenge starts with deciding which metrics are important. The challenges grow dramatically as you try to figure out how to actually calculate the metrics, and they become daunting when you begin to look at operational changes needed to ensure you can accurately track performance against your key metrics.

Compounding the subscription metric adoption challenge for many is the big buzz around “big data”. Don’t get too caught up. Yes, some day you will get to the point where you want to mash up application usage data with churn and MRR data, along with market demographics to create a utopia of amazingly effective marketing, sales, and service offerings. Between now and then, you need a handful of key metrics and you need to learn how to use those metrics to drive your business forward.

 

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