Growth Frameworks

Transforming Your Company to a Subscription Business Model

What growth-stage companies can learn from those who have made the move

The growth in subscription businesses is a well-documented trend across numerous industry sectors. In software, we’ve seen subscription models growing more prevalent over the last decade, both in the ever-growing landscape of companies born as subscription-first businesses as well as in the form of legacy perpetual license companies transitioning their revenue models. It’s become a well-trodden path in e-commerce and other sectors as well. Tech giants like Microsoft, Adobe and Autodesk and legacy consumer companies like Unilever and Gillette have all successfully navigated the journey in high-profile, public transformations. And at Summit, we’ve supported numerous growth-stage businesses through this transition as well. With companies across industries increasingly embracing subscription-based revenue models, we take a look at what we believe are six keys to successfully navigating the transition.

1. Align Company Goals

The transformation to a subscription business model is a big one – and the entire company needs to lean in. Success requires alignment with your leadership team and open, clear communication of priorities and process with the rest of your company. Is your team prepared to navigate the inherent conflict (albeit temporary) between revenue growth and annual recurring revenue (“ARR”) or annualized subscription run-rate growth? Does your team understand the impact on cashflow that comes when you begin to collect cash periodically instead of collecting the entire value of the products/services upfront? Have you adequately assessed the new subscription pricing to account for any additional costs as well as customers’ willingness to pay? By aligning goals at the outset, you’ll be better positioned to manage these conflicting priorities as they arise or avoid them all together.

2. Over-Communicate

Don’t underestimate the importance of change management. Up front communication and alignment of goals is key, but in our experience, consistent, frequent communication with your employees is just as important. Expect to be asked (repeatedly) throughout your journey: Why are we taking this step as a company? Why is it beneficial for the customer? Will our priorities change – if so, why? How will this change my day-to-day responsibilities – today and in the future? Will my job be needed after we complete this transition? Clear and consistent communication will keep your employees motivated and ensure all are working towards the ultimate goal.

3. Get Customer-Centric

Expect different responses from your customer base. Some will meet the transition to a subscription business model with enthusiasm; others will lead with skepticism. Take the time to think about how your customers will respond and create a plan for each scenario. In our experience, most customers will fit into the following three buckets:

  • The Early Adopters will be ready for change immediately (and likely have been waiting with eager anticipation for you to make this transition).
  • The Pragmatists will need significant time and resources to shepherd them through the transition (“Change is hard!”).
  • The Laggards are resistant to change and stubbornly hold on to the old way of doing things (“I will leave you if you change”).

Consider how you will engage with the Early Adopters: Will you reward them? Celebrate them? Do nothing? Consider too, how to incentivize the Pragmatists to move faster through the change: How will you resource the organization to accelerate this work? Finally, consider how much and for how long you are willing to accommodate the Laggards before you cut them loose: Will you ever cut them loose? (Correct answer: you should, eventually, be willing to make this transition completely.)

As your customer base shifts to subscription, consider how your customer support and engagement model needs to evolve. You may need to invest more in resources and training to engage your customers more often and in different ways than in a one-time sale model. With the right investments and a focus on customer success, you will be rewarded with customer loyalty.

4. Incentivize Your Employees

What is the current incentive comp structure of your sales team? Consider offering extra incentives on top of current compensation plans to help change behavior; by doing so, you may be surprised by how quickly the “my customer will never buy subscription” turns into “I made it happen”. Any new incentives should be meaningful enough to mobilize your sales team and support your desired behaviors. Expect the transition to a subscription business model will cost you something: time (because change is hard!) or money.

5. Motivate Your Customers

Limit options for your customers. Sounds dramatic? It’s not. Removing non-subscription options helps to eliminate barriers to transition, particularly for the “Pragmatists” and “Laggards” in your customer base. For software companies, this often means creating a distinct EOL (end-of-life) date for legacy perpetual product and announcing it publicly to your customers. In the consumer arena, this may not mean eliminating purchase options from your customers but instead fully committing and investing in your subscription business rather than a gradual ramp-up. Consider tying your transition to a new product rollout, one that includes recurring features that customers want to use on a monthly basis. This can help nudge the “Pragmatists” along in their transition and improve your customer retention metrics in the process.

6. Once you decide to make the transition, Go Fast!

Faster than you think! Nearly all companies that have gone through this transition and have had public audiences – including Microsoft, Adobe, Autodesk, Splunk, and others – agree that while the journey was painful and it took an incredible amount of work, it was all worth it. The common refrain we hear is that they only wish they had made the transition more quickly.

If the transformation to a subscription business model sounds challenging and potentially expensive, it is. So why consider it at all? Investors, both private and public, recognize this value; in general, subscription businesses consistently trade at higher multiples than their non-subscription peers. In software, SaaS businesses trade on average at multiples that are 75% higher* than on-premise license software models – and this gap has widened over the last decade. And in the consumer space, subscription businesses have grown nearly 6 times faster than the S&P 500 over the last 9 years. Subscription models can provide companies with more predictable revenues, help attract customers wary of a big upfront commitment, and increase the lifetime value of a customer. The good news is that for growth-stage companies in any industry looking to make the transformation to a subscription model, there are numerous examples to follow and lessons to learn.

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Cae Keys

Related Experience

*Source: KeyBanc Capital Markets Software Valuation Charts, August 31, 2021

The content herein reflects the views of Summit Partners and is intended for executives and operators considering partnering with Summit Partners. For a complete list of Summit investments, please click here.

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