Selling Less to Sell More: A Conversation with Zuora’s Amy Konary
Want to triple your sales efficiency? Think about trimming your product catalog. That’s according to the new benchmark study from the Subscribed Institute and McKinsey & Company (you can download the full report here). This week I’m talking to Amy Konary, VP of the Subscribed Strategy Group, about these surprising key results.
Amy, as VP of our Subscribed Strategy Group, you advise some of the biggest companies in the world on how to improve their subscription models. You’ve seen all sorts of successes and pitfalls. When it comes to B2B companies, or businesses that sell to other businesses, you’ve told me that one of the biggest mistakes you see is when they neglect to consistently “rationalize their product catalog.” Now for a reader who might not be swimming in subscription models all day long, what does that process entail?
It means thinking very carefully about how you present your service to the market. Successful B2B subscription companies are constantly optimizing their product catalog: removing redundant products, assessing bundling choices, figuring out which add-ons to remove or replace. And it’s not something that should happen just once in a while — it’s a constant, iterative process.
For a company that is shifting from a traditional asset sales model to a subscription service, this process is particularly tricky. Why? Because large product-based businesses have very complex SKU structures that tend to explode when they try to launch subscriptions.
And what is a SKU, exactly? Again, asking for a friend.
A SKU number, or stock keeping unit, is a code assigned to a piece of inventory, which allows a company to track the manufacture, storage, and sale of that particular asset. They’re generally associated with retailers and manufacturers, but they can be used by any company that wants to monitor a specific product or service.
Picture a lawnmower sitting in a Home Depot Aisle. When a customer buys that lawnmower, its SKU number (in conjunction with Home Depot’s ERP system) allows the company to account for the sale, as well as track its in-house supply and potentially trigger a new order from the manufacturer. Have you ever seen a bar code sticker on a box or a product? Well, then you’ve seen a SKU.
And how do SKUs work in a subscription model?
The short answer is not very well! Let’s say that Home Depot wants to get into the lawnmower subscription business. Or maybe for a fixed monthly fee, they will offer you access to a whole range of lawn equipment that you wouldn’t otherwise purchase.
Now Home Depot isn’t selling lawnmowers, they’re selling access to a lawnmowing service (probably involving connected devices attached to a cloud-based service) over a fixed period of time: 6 months, one year, two years. Maybe they also want to roll out different bronze/silver/gold tiers, a suspend and resume option, or a usage-based element which could trigger an upgrade or downgrade.
But remember, Home Depot is sitting on all this expensive SKU-based ERP software. In order to manage this new offering, every possible iteration of this service now requires its own SKU!
So a six-month bronze plan with an option to upgrade would have a different SKU number than say a 2-year gold plan with, say, a fixed number of times you can use the lawnmower per month.
Exactly. So you can see what this does to your product catalog. Things become complicated very quickly. But the problems go from bad to worse when that catalog is reflected in a confused customer offering and an inefficient quoting process. Onboarding takes way too long — it might take pages and pages to find the right plan, both for a rep or a customer. User experience suffers. It’s basically just much harder to sell. You can easily lose out to a faster competitor.
So all these hidden back-office mechanics like SKU numbers can have a real impact on real live customer experience.
Definitely. If the service is overly complex, then it reduces your trust in the service, right? You start asking yourself: What’s buried in the fine print? What exactly am I buying anyway? It can also create scenarios where customers are quoted two different prices by two different sales reps, depending on which SKUs are combined to create the service quote, which also reduces trust.
This is why you should never try to configure an ERP system to run a subscription service. I believe I’ve mentioned this before.
You have indeed, Tien. Successful subscription businesses are customer-focused, as opposed to product-focused. They offer clearly tailored offerings supported by systems that automate and support the inherent dynamism of subscription models. And if this sounds like common sense advice, well, for the first time ever, it’s actually been quantified.
Great. Let’s get into this new study you just finished with McKinsey! What did you find out?
So the Subscribed Institute worked with McKinsey & Company to analyze three years of performance data from nearly 500 companies and compared indicators such as revenue growth, expansion, and net retention against 30 metrics corresponding to design choices in the quote-to-cash process.
And the results are clear — revenues of higher-growth companies are typically concentrated in a more highly curated set of products:
So for a given amount of revenue, high growth companies actually sell fewer products than lower growth companies. High growth companies need an average of only 1.1 products for every $20 million dollars of Annual Recurring Revenue, while low growth companies need an average of 3.4.
They’re selling less to sell more.
They’ve done a better job of optimizing and editing their product catalog. And in an industry where most B2B subscription services sell less than half of their existing catalog during any given year, higher growth companies sell a significantly larger percentage of the catalog: 40% compared to 30%. There are several other key takeaways in the report, which you can get here.