The move by many businesses across many different industries to engage with their customers on a subscription or recurring revenue basis, rather than perpetual, has had a profound effect on the overall customer sales engagement model, not just the billing model of monthly subscriptions.
In this article we look at the differences between the traditional “perpetual” sales engagement model (sell once, service and replace) versus the continual engagement required for successfully growing a subscription-based business.
Traditional Sales Cycle
For the purposes of this article, we will describe the traditional sales engagement model for capital goods, software licences or individual items – where you as the customer purchase and own the rights to use the goods – as a “perpetual” or a capex type sales model.
Depending on the price of the goods acquired, financially they may be depreciated or written down in book value over a period of time, or perhaps just used to the point in time where they need replacing. Depending on the item, there may be a semi regular service engagement over the life of the product, which is typically charged additionally and separately from the initial cost of acquiring the goods.
Therefore, the customer sales engagement and selling cycle is quite linear and often looks like this:
In today’s fast moving business environment, coupled with customers having access to unlimited amounts of competitive product information, brand alternatives, customer reviews and recommendations, the perpetual sales model is fast becoming outdated.
Perpetual Business Model
Looking at the traditional perpetual business model and how this is supported across the various functional areas of the selling business, these are the typical activities.
|Sales||Hunt, close, hunt close, hunt close|
|Marketing||Lead generation to feed sales. Inform and entice|
|Finance||Collect revenue less COGS, lease or cash. Pay salesperson a percentage of sale|
|Cash Flow||Lumpy around individual sales and the general sales cycle|
|Service||Separate from sales. High margin business as customer is now “captive”|
|Operations||Accounting, inventory & business management (ERP) CRM for sales & marketing|
A subscription centric business however has a very different structure as the emphasis is not just on the initial sale, but on continual customer engagement to drive usage, uptake and long-term customer retention.
Typically, if a perpetual sale was $1,000, in a subscription model the sale would be $50 per month for a minimum of 36 months. So just with this simple awareness of the sale value, it is obvious how a subscription-based business will need to be structured differently to survive and thrive. In this article we will focus purely on the difference in the sales models.
Subscription Selling – Dynamic Customer Lifecycle Model II TM
The essence of a successful subscription-based sales model is continual customer engagement or customer lifecycle management. Customer lifecycle management is an integrated approach that recognises the long-term value of the customer to the organisation, not just the initial sale and service revenue.
Therefore, it is focused on all interactions between the company and the customer. This is to ensure the customer’s needs and expectations are met or managed to maximise their use or consumption of the company’s products or offerings beyond the initial sale.
Companies that have successfully grown their subscription or annuity revenue and associated customer base realise that it is not just as simple as monthly billing or implementing cross sell marketing campaigns. Rather it is a holistic internal and externally focused discipline, and often requires a completely different set of people and skills compared to the perpetual sales motion.
Channel Dynamics describes this as a continual and integrated 4 step customer engagement model called the Dynamic Customer Lifecycle Model II TM
Customer Lifecycle Management Business Model
With this change of emphasis from solely “winning” a customer to winning and unlocking the long term (and often uncaptured) value of the customer to the business, it should be clear the functions and skills to support this go-to-market model will need to be different.
|New Sale||Hunt, close and hand to Customer Success|
|Customer Success||Educate and assist the customer to unlock and use all of the features and make them aware of other relevant products or offerings that might fit their needs|
|Renewals||Focus on end of term subscriptions or to adjust subscription as required|
|Marketing||Customer awareness of the range of company’s offerings. Use case examples|
|Finance||Billing accuracy & automation. Subscriptions greater than monthly break even|
|Operations||Billing, help desk, ticketing & customer lifecycle focused plus business management|
The transition from a perpetual sales model to a subscription-based sales model is not easy and takes time. However, in working with our clients who are undertaking and embracing this modern form of selling and customer engagement, getting the sales motion aligned to subscription selling is the number one tip for success.
This often requires a well thought through transition plan from perpetual to subscription both internally and externally, as you must take your customers on this journey as well. Not every customer wants or needs to move to subscription immediately.
However, without firstly changing or realigning of the customer acquisition model from perpetual to an ongoing subscription orientated customer lifecycle management model, supported by the right compensation schemes and metrics any transition to a subscription business model will be unlikely to succeed.