Using Feedback Loops to Manage Subscription Business
Measure, iterate, scale
Everyone in business claims to want to listen to the voice of the customer; it’s a non-controversial issue. But the approaches are all over the map. There is little consistency and, truthfully, many vendors do a poor job of it.
Capturing customer feedback has always been a challenge for conventional vendors because they have to generate new processes to reach out to customers. Surveys, focus groups, and even social media are useful but many of these approaches are time and resource intensive and they are not automatic in business models that make and sell things then move on to the next opportunity.
Subscription vendors are in a much better position because they can take advantage of all the customer data generated in the normal course of business. Virtually every customer action gives off data that, when aggregated and analyzed can give a business great insights into the customer base. Savvy vendors can use the information thus generated to measure, iterate, and scale their businesses.
One of the greatest built-in data sources a subscription company has is its billing data and this data becomes even more valuable when it is time stamped. Capturing billing data and its timing enables a vendor to make comparisons between periods and even between years that can reveal variations in use, uptake, and signal some aspects of satisfaction.
Measure
Subscription vendors have to measure everything, at least they should. Often a subscription business can run on an impersonal website and a decision about continuing use or changing to a competitor might come down to cosmetics like ease of use, clarity of design, and other things that a vendor can’t improve without feedback. Customer feedback does not usually come from long emails or in-depth interviews. It emanates from simple decisions by customers about how and when to subscribe. So use data can be a gold mine and analyzing this data is what ultimately drives business improvement.
Measurement provides vendors with visibility into customer behavior from initial purchase to future demand. Leveraging this visibility gives businesses the assurance of customer knowledge on which to make decisions.
Iterate
Visibility is fleeting and gaining it must become a repeatable exercise. Once you’ve figured out what to measure to gain the most useful insights, there are two steps you need to take to ensure the health of your subscription business. First, by all means, keep measuring and compare results with earlier measurements. Some businesses notice seasonal fluctuations and understanding this makes it easier to see the difference between the start of a worrying trend and normal variation. Second, use what you learn to improve your business. This might sound like common sense but some times your research will suggest doing things that are either expensive or counter intuitive. In either case, don’t reject the findings out of hand. Do more research.
The measure-iterate cycle can do more than simply tell you the health of your cash flow. For instance, it also provides a simple and economical approach to researching product demand. Customer use data can provide a quick and economical means for A-B testing as in do customers prefer this or that? With subscriptions there’s no need to guess and hope you get it right. The answers are available if you know how to set up a controlled experiment.
Pricing and packaging are two areas where subscription companies must constantly iterate and the measure-iterate cycle can be a great solution for helping a company zero in on the best pricing and packaging approach for the moment. Keep in mind that customers constantly change their minds, which is why measure-iterate is a cycle and not a one-time event.
Scale
If you analyze your customers’ use and payments data you can develop the confidence to plow good ideas back into the business. This will enable you to scale your business with confidence because you have real customer generated information to back up each decision.
When combined, measures like attrition and customer lifetime value can combine to provide a powerful picture of future revenues before new business is counted. This can give you a more precise way to build and achieve sales targets. At the same time, triangulating with measures like lifetime value and the cost of new revenue can provide insight into not just revenue but its profitability too.
Final thoughts
Every business uses some form of measure, iterate, scale and some are more effective than others. Subscription companies are fortunate because they have so much data in their possession to start with and so many ways to apply it. But some measurements are best made against outside measures. For example, you might be able to measure and accurately predict customer attrition, something every subscription business faces. Objectively, it’s easy to conclude that less attrition is better than more and determine levels that are acceptable for your business. But how does your business stack up against other subscription vendors in general and in your market? What is the best practice goal?
Historically, this kind of information has only been available through independent research; however, it could also be generated from anonymous customer data. As the subscription market continues to evolve and mature, providing this kind of information will become a necessity and I foresee a time when subscription vendors will pool their resources through a trusted third party to provide this kind of information.
We hear a lot about the customer experience these days but many prognosticators have little more to go on than their opinions about customer behavior. Subscription companies have a great advantage in the data they collect if they collect it faithfully and analyze it rigorously.
The Order to Cash Subscription Process
Subscription companies face many of the same challenges that more conventional companies face but the nature of these businesses puts an entirely different spin on the challenges.
All companies have to acquire new customers, make products and price them attractively without leaving money on the table. Also, once a product is purchased, a company needs to get the cash in house as quickly as possible. If you think of this as the order to cash process, you’d be pretty close depending on how far up the sales trail your definition of acquisition goes. But while these ideas seem familiar there are major differences between how they are implemented and supported conventionally and in a subscription environment.
Acquiring customers
Order to cash in a conventional company is relatively simple. A conventional company makes products, its sales team sells them and operations produces an invoice that finance tracks all the way to collection. A subscription company is just like a conventional company in that respect but it is different because the subscription company needs to reacquire its subscribers all the time. For a subscription company the sale is never complete because there’s always next week, next month, next year — you get the idea.
Subscription companies are always in acquisition mode, which means much more than always be selling or always be closing. Subscribers want a bit of rest from the acquisition process and they need to get on with life with the new solution they bought. So maintaining their interest moves down stream to things like being successful using a product and resolving issues — whether support or billing — efficiently.
So a subscription vendor, even in acquisition mode, needs to keep a weather eye for forming productive bonds with customers. Customers that bond well are more likely to tell others about their experience thus becoming an unpaid sales team for the vendor. Customers that don’t bond don’t advocate and may be more likely to churn, a subject for another discussion.
Pricing
The difference between conventional companies pricing products and subscription companies couldn’t be more different. A conventional company has to sweat all the details — what’s included, how much does it cost, what are the terms and conditions, on and on. They have to because they rely on research, surveys, focus groups and more and even with all that they might not get it right. If they fail it’s a big investment wasted.
On the other hand, a subscription company can harness the power of the social crowd to accomplish the same thing and it can do all this proactively. By the time a conventional company gets a product to market, its information is weeks or even months old but look what happens with a subscription vendor.
Say the vendor analyzes aggregate customer purchases and discovers that customers that buy one service are likely to buy another. Why not offer a package containing both? The same analysis can also tell what the customers pay for the combination and from there the vendor might wish to make a price adjustment to promote the combination. With this approach the probability of success is much higher and if, for some reason, the idea doesn’t work so what? The cost of the effort is practically zero and you can always try something else rapidly. Try that in a conventional company. If you are a subscription vendor already doing this, give yourself a touchdown, you deserve it.
Billing
They have a word for billing in the subscription world — heartburn. Nothing generates more of it that trying to get the bills right in a highly fluid subscription business where customers can change their configurations as frequently as they need to. The heartburn comes from trying to process bills with a billing system that’s designed to support a conventional one and done invoicing and payments process because that’s not how subscriptions work.
Just as acquisition is a never-ending process, so is billing. As a matter of fact, it’s also ever changing. The secret to successful subscription billing is, like most things in business, having a system that supports the process you have and not the process some vendor wishes you did.
The other similarity between billing and acquisition is that it is another spot where customers subconsciously evaluate a vendor and make a subliminal decision about bonding with the vendor. Was the process easy, precise, and accurate, or did I spend half an hour on the phone again? These are the things that add up to customer bonding.
Final thoughts
This is only the order to cash process; there are lots of other processes in which subscription companies engage with customers differently than their conventional peers. More than ever, these processes are governed by analysis of the data crumbs that become part of the customer record. It’s imperative that subscription vendors fully understand the differences between their chosen path and convention. Doing so will enable them to choose the right systems they need to support business on this new frontier.
Subscriptions in the Enterprise
If this is going to be the year of the platform that I discussed last time, it will also be the year of the subscription business model. This is, I hope, the last time I drag out the “year of” phrase attached to anything significant unless it’s the year of MY Tesla and that’s highly unlikely. The real reason for any description in the context of “the year of” is that it is shorthand for, hey, this stuff has reached critical mass and it’s now time to pay attention or risk having your lunch money taken. So it is with subscriptions and their enabler the software platform.
Curiously subscriptions and platforms have grown up together even though neither is yet a necessary or sufficient requisite of the other. ZipCar and its ilk don’t have formal platforms and the idea is not relevant to their models. Wireless vendors all have homegrown platforms primarily to run their Byzantine pricing and billing models and while that’s closer to the heart of the matter it’s still off center.
Software platforms have lately become the enablers of subscriptions just as subscriptions have opened up the market for platforms. Platforms may be the saddle point of maximum technology flexibility and business agility and lowest cost to operate which fits well with the subscription model.
Late last year a report came out of the Economist magazine’s Intelligence Unit that pinpoints the state of subscriptions. It’s nothing that I haven’t been saying for the last five or six years but the Economist logo adds some prestige. To recap, subscriptions are good at enabling customers to get exactly what they want without the added cost and overhead of ownership. Subscriptions also enable the CFO to spend limited funds more incrementally and thus get greater value for every hard earned buck, pound or euro, etc., etc. What’s not to like?
However, one thing the report takes to the next level is the idea that subscriptions now have sufficient critical mass to be seriously evaluated by the enterprise and that’s breaking new ground. More importantly, the definite implication is that enterprises should not simply consider subscribing to things like Salesforce — if they haven’t already, their lunch money might already be gone. The implication is that enterprises ought to be thinking about how to deconstruct their products and services while reintroducing them as subscriptions.
Surely, the Economist doesn’t mean to say that everything should go to subscriptions in the next three years. If they did there would be much rejoicing at the intersection of Routes 101 and 92 in Silicon Valley, home to a disproportionate number of subscription pioneers. Taking business to subscription nirvana will take longer than three years and when it’s done there will still be conventional companies selling products and services just as there are still a few thousand pesky mainframes in mission critical business processes at this very moment.
I do think, though, that even those survivors out on the long tails of the Bell curve will have to adopt a subscription mentality. What I call the Subscription Culture takes us beyond simply the Subscription Economy to a place where customers think like subscribers regardless of what their vendors are doing. Succinctly, this means people have been trained to expect the same kinds of customer relationship that a subscription company provides and disappointing them is not good for the top or bottom lines.
The subscription relationship includes some obvious goodies like very low costs amortized over the life of the relationship and the absolute right to pick up stakes and move on if ever the customer sees that all the succulence of the subscription has dried up. In that regard, there is nothing as American as a subscription, westward-ho and all that, less obvious, but more critical for the vendor, is the imperative to never let the subscription get stale. That tall order falls again into the lap of, not just analytics and big data, but the platform, which ought to have the analytics, workflow, social listening and collaboration all built in.
By all that, you can see that the Economist’s report is not wrong in expanding the concept of subscriptions to include other related models like renting. It seems subscriptions are slightly more popular in America and rental models are slightly preferred at the moment in the UK. Either way you slice it — and it might just be tax laws defining the relative need to take title to something — the fundamentals of subscriptions like how to configure, price, pay for, and support them will be relatively consistent. So this leaves us with the year of the platform supported subscription service run by, and in many cases purchased by, the enterprise.
NOTE: Next time I write about subscriptions and even platforms it will be with an eye to Erik Brynjolfsson’s and Andrew McAfee’s excellent new book, “The Second Machine Age: Work, Progress, and Prosperity in a time of Brilliant Technologies.” These two MIT professors have their fingers on the pulse of a very important trend and I am advising people to take a look at it in the same way a time traveler might advise you to mortgage your house and put the cash on Secretariat to win the 1973 Kentucky Derby. (BTW, I don’t know these guys and I am not making anything endorsing their book.)
The Subscription Culture
I have been writing about the subscription economy for five years and I have enjoyed my ringside seat following this latest and most important disruption of our time. The subscription business model, and not CRM per se, is the disruption that got Salesforce going and changed the front office software industry entirely.
Today we’re well beyond software as a service (SaaS) because just about everything you can think about can be delivered as a service, though some things may be best left out. Commodities like sheet steel might be one of those things to leave alone except that if you look at the supply chain and the just in time inventory approach that commodities producers all subscribe (no pun) to today, you realize that manufacturers subscribed to sheet metal services long before the term was coined.
Give some credit here to the Japanese who pioneered just in time, which I think is the grand dad of subscriptions.
The subscription economy and the transformations it is causing in our society have important down stream effects. As subscriptions have reached critical mass they are changing the ways customers think about their relationships with vendors.
Consider critical mass for a moment. It’s an apt term borrowed from atomic energy and it refers to a mass of fissile material of sufficient purity that chain reactions, in which one atom splits and activates another, can become self-sustaining. Critical mass doesn’t mean that all the atoms are radioactive at once, just that there are enough to make the reaction go on without added input. It’s like riding without training wheels.
I think that’s where we are in the subscription economy. We’ve been successful enough at promoting the benefits that adoption is no longer in doubt. No, everyone is not a subscriber today and every company is not a subscription vendor either, but there’s critical mass — subscriptions are here to stay — and that’s why I think it’s time to introduce the idea of the subscription culture.
All of the subscription culture’s impacts are not known yet but let me focus on one that is or can be. It’s the effect on customer attitudes and behaviors. At critical mass, customers, i.e. you and I, are more or less trained to expect certain things like the ability to change or adjust an order with ease, a vendor with a call center and website tuned to taking care of our needs without a great deal of hassle. Good or even great customer service. We have also become accustomed to sharing our ideas and experiences with other subscribers — good and bad. Most important, we really like the ability to pay as we go and to go, as in leave, when we please.
You can do a quick mental comparison of the subscription culture’s values with a traditional transactional business model and while traditional relationships still have advantages and their loyal supporters, there is no arguing about the impact that subscriptions are having on business.
That’s why I think we’re at critical mass for subscriptions and why the next step in the evolution of the subscription economy is the subscription culture. Even if a company has no interest in offering subscriptions and even if a customer prefers to make purchases as he or she has always made them, the culture is changing, some might say liberalizing (in the best sense of the term). Cultural norms are shifting in favor of the customer and subscriptions and customers are acting more and more like subscribers regardless of the model. Subscriptions may be the most important thing to affect CRM since, well, subscriptions. All this suggests that if you are a vendor, the subscription model is something you can’t ignore.
Next week, in San Francisco, I’ll be attending Subscribed, the annual Zuora user group meeting. I am on two panels, moderating one of them and I expect to learn a lot. Zuora is riding high in the wake of a successful series E funding round that raised another $50 million for the company. If you are out there, please find me, I’d love to understand your perspective on subscriptions.
A Question of Granularity
There is a long simmering issue coming back to the front burner these days. It’s the question of best of breed software vs. a single system. I’ve been giving it a lot of thought and realized something.
The old discussion says that best of breed opens up application areas to greater competition from more vendors. This competition drives normalization so that everyone can build to the same open standards rather than proprietary architectures. This approach worked for the relational database and SQL, PCs and servers, and standardized programming languages just to name a few things.
Alternatively, those supporting the solo idea say that for complex processing having a single throat to choke is a valuable asset. Who is right? Can the answer depend on a tiebreaker of sorts? I think the answer is beyond this question and ultimately comes down to a question of granularity.
In the software business we’ve seen the industry veer from one extreme to another. Early in a lifecycle, it seems, vendors merge and integrate systems to produce that single solution but it may be highly proprietary. Those proprietary systems are an emerging vendor’s best defense against a copy cat coming in and taking over.
Often best of breed solutions pop up when developers see opportunities to improve a process or even a sub-process to optimize it. The best of breed approach basically says that the monolithic solution can’t be great at everything and that customers deserve great. That’s true but the idea has a half-life because the longer a suite is in market the better it gets and at some point a critical mass of customers won’t even consider the alternative.
Today we see vendors like Oracle leading the charge for the single vendor idea saying that its products are engineered to work together. That would be the argument for the sole source. NetSuite argues from the same premise. But we also see companies like Salesforce with a massive ecosystem of partner applications that offer specialized apps that the company does not provide. Salesforce does deliver a very good development platform in Force.com and API that its partners use to develop their solutions. In this case I’d say that the Salesforce solutions involve such new processes that they are functioning like the early market vendor with a high walled garden while still offering aspects of best of breed.
This is a bit different from conventional best of breed in that the Salesforce partners more or less pre-integrate their solutions via the platform so that the only difference between a Salesforce application and a partner application is often whose fingers did the work. That’s why I would suggest that Salesforce’s approach is more like the single provider than the best of breed approach from just a few years ago.
So to me the question is not one of single vendor vs. best of breed. I think that’s a false dichotomy. Whether or not we realize it we’re all in a best of breed era and the only question is at what level of granularity? I don’t know anyone who seriously thinks that some level of best of breed is NOT a requirement today — there are simply too many demands and options to expect a single provider to do it all unless all the software companies of the planet merge.
The best of the best of breed solutions will arrive at an appropriate level of granularity that optimizes internal lines of communication within the system while incorporating external best of breed solutions at the periphery.
That dichotomy will be different from system to system. For example, CRM has done a good job of integrating several generations of applications including whole systems like call center and social media as well as specialized hardware like IVR gear to produce good solutions.
ERP seems to be different because the back office is a bigger thing that needs to coordinate many more moving parts. Frankly, I think the critical mass of application solutions is just bigger in the back office than in the front office. So the discussion of best of breed has to be qualified by which part of the business we’re referencing.
In ERP I don’t think you gain anything if you suddenly offer best of breed GL and AR distinct from accounts payable or some of the manufacturing systems like supply chain, product lifecycle management and similar things that need to be tightly integrated. On the other hand, HR was never that tightly integrated with the back office and it was more of a traditional offering that went with the back office because it paid people and the back office was where the money is. But these days with a proliferation of human capital management systems, training, hiring and things like them, the ties are less strong which has opened HR up to best of breed offerings for these newer functions.
Billing and payments is another area that has recently come up for best of breed renovation. When those functions were associated exclusively with manufacturing it all made sense. But today the proliferation of the subscription model has placed new demands on back office billing that it was not designed to handle. Subscription billing and payments has become a satellite of conventional ERP and truth be told companies like Zuora, Aria and all the others in this niche, do a better job of managing subscriptions than old style ERP can. So, again, we are seeing an area open up to best of breed approaches.
For me, you need to ask about the level of granularity at which you are viewing the business problem in order to determine the answer to the bigger question. Then, too, we haven’t even looked at the new business processes that are being glued onto the front office through social techniques. It seems like the majority of new business processes are going to the front office and the back office is largely settled business. Even subscription billing is looking more like a branch of customer service than part of ERP. So, the issue isn’t best of breed vs. an integrated solution, it’s more about how much best of breed can you handle before you have too many balls in the air. I think the answer is it depends.
