‘How should we build our subscriptions?’
Recently I’ve had a lot of companies ask me to help them with their subscription models. There’s enough interest that it was suggested that I create some documents to hand out that might benefit the companies that I can’t work with directly.
Sounds reasonable so I thought about it.
It’s pretty challenging to develop something that can help anyone because the development of a revenue model/monetization plan is not a primary thing — it is derivative.
It’s like trying to publish something that tells all people exactly how to decorate their house. What kind of house? What’s the layout? What is the desired look? What climate?
To answer these questions you need to know something primary and particular about the situation. So if you try to answer it straight away you end up in the (incredibly unhelpful) land of ‘it depends.’
Revenue models are a reflection of the value equation for your product or service (different names for the same thing). And those value equations (or propositions) in turn come from your go-to-market-strategy (GTM).
And your GTM comes from your Corporate Strategy.
It all comes back to Strategy.
And Strategy (like these other things) isn’t one-size-fits-all.
However, I do think there are some basic things that people can look at that will help them make better decisions about which monetization plan to use and will clarify their subscription model.
The first place to look at is the precursor to monetization — value.
What kind of value are you creating? To whom? In what circumstances?
I know a company that has a subscription service. They have a number of other services but primarly it’s an ‘all you can eat’ model for some professional education instruction. The instruction itself is high-quality and relevant. So I was asked, ‘How should we structure our subscriptions? How can we grow our user base?’
Pretty big questions.
We talked a bit and they said the really wanted to grow their membership for the instruction. They were confident that this was what they were really selling.
So I asked them ‘why?’
After a moment of thought, they said that the instruction allowed people to develop new skills, which in turn allowed them to get new jobs, get promotions, etc.
So I asked, ‘do you think this or do you know this?’
They had had some anecdotal evidence but admitted it was mostly a hypothesis, but one that made sense.
What I said was, “your subscriptions, and how you stratify them, price them, pick the service differentiators within them, etc all depend on this question: —’How are you creating value for your customers?’ Not from your perspective, but from theirs.”
I know — it sounds like the kind of thing everyone already knows — so reasonable and intuitive that it can lead to a sort of, ‘Duh!’ However, in my experience it is often overlooked, or more often assumed. It is a question that too few companies really dig into.
Probably because it’s hard. Really getting into the weeds with customers is a big commitment — setting up the interviews, scheduling the time, travelling, cost...
Some companies do the work, but more often, companies feel they ‘know what the customer wants’ or just ask their sales team what they think people want, and then turn to the product and marketing teams to build it and package it. Sometimes that works. However, I have seen even big, smart, F500 companies take this ‘we know best/ if you build it they will come’ approach and fail.
The first step in developing a value proposition that resonates comes from talking to you customers — directly. Not surveys, not focus groups (though they both have their place), not consultants, but one on one, face to face interviews. This is particularly critical at the early stages of development when your value proposition (service/product) is being formulated. At that point what you really have is a hypothesis of value. And like any hypothesis, it doesn’t really do you much good until it’s validated.
One thing to consider when talking to customers is that you don’t take a sales approach. Don’t even have a sales person involved. That sets up the wrong dynamic. Best is if executives who formulate strategy and product plans do the interviews. The approach should be about exploring — not necessarily confirming your hypothesis (though you should talk about it). Often times customers, if you set the right mood and expectation, will take you in a different, and much more valuable direction than you ever imagined. One that is well worth the trouble and inconvenience. One that leads to real differentiation or huge market growth.
This basic tool — talking directly to your customers about the value you create for them is something that most every company can benefit from. Forget the stories of Jobs and the ‘we’ll tell them what they want’ approach.
That worked for him.
Okay, that’s one company out of millions. Imagining that your team has the natural market instinct that he had might suggest some ‘overconfidence.’
The process I described will yield real direct and actionable value to you and your team and help you take the first step in creating products that delight your customers.
‘Um, okay — but you didn’t really answer the question. I mean, what does all this have to do with building subscriptions?’
The notion of a subscription is pretty simple. Customers pay a recurring, set amount of money and in return they get something that they want/need.
If you want to put together a good subscription model — or really any monetization scheme - you have to first know what your customer wants and needs. Then you have to know how your product or service fills that need — from their perspective.
Once you are clear on the value drivers for the customer, and on how you match them, setting up a monetization plan is pretty straightforward. There are a lot of variables, but some things to consider are:
Competition: How are those needs being filled by other companies and at what price points? Chances are very good that if you say, ‘there is no competition’ that you are being too narrow in your definition. You are probably only looking at direct competitors — not functional ones. Example: Tesla’s direct competitors are other car makers. But their functional competitors are things like public transportation, walking, bikes, planes, etc.
What do different segments need? Think Netflix — some people just want video streaming, some want streaming plus 6 discs at a time at home. Different needs, right? This is the information you need to build different programs and price points.
How does that change over time? You need to build in the ability to collect metrics to understand how your customers’ needs change over time. Maybe they start with streaming but then learn to love binge watching and go for the disks.
How does conversion happen? Understanding exactly how, when, and where someone fills in their bank information and hits ‘subscribe’ is both tactically and strategically vital to understanding your model and your GTM. Without it you don’t get paid.
Customer life-cycle. Often neglected, this is important because it impacts how you view the cycle of revenue generation, how you build in upgrades and bundles, when and where to focus on retention, etc.
Far from exhaustive — these are just a few elements that go into a well designed subscription program. However, they give you a place to start. The key is in understanding your customer and their use/benefit model for what you are providing — from their perspective. Only after you know that can you start talking about subscription models and price points.
If you are dialed into your customers you are well on your way to building a successful program.