Today, more and more businesses are migrating their products from a purchase-based to a subscription-based model. Ever since Salesforce.com pioneered software as a service (SaaS), companies across industry sectors—B2B and B2C alike—have made the move. In the entertainment business, Netflix ushered in monthly-DVD and online-streaming subscriptions, and Spotify supplanted iTunes. Even the everyday razor has been transformed from a one-shot transaction to a monthly plan, with Dollar Shave Club. Welcome to the subscription economy.
For business leaders, this move raises a raft of challenges, which boil down to this: How do you get an accurate reading of the business? Selling through subscriptions is, after all, fundamentally different from selling on a pay-up-front basis. It shifts the value from transactional event to lasting relationship; indeed, the lion’s share of the value is generated after the initial sale. For example, we’ve observed that for a customer lifetime of five years, a company went from earning 60% of the customer value in the first year to earning more than 90% in the subsequent four years. Otherwise stated, the subscription model flips the risk from the customer (in the form of adoption risk) to the vendor (as customer retention risk). An investment today presupposes a longer-term client relationship—and a longer-term profit stream.