Swallowing the fish: the risks of transforming your service into a subscription

Making the switch from product sales to subscription services comes with the inherent risk of alienating your existing customer base. How can you encourage your customers to become subscribers, rather than one-off buyers? And what does “swallowing the fish” have to do with it?

No-one wants to find themselves having to pay for something they used to get for free.

This is the dilemma that customers of any business looking to shift into a subscription model will face. While it’s easy for a business making the change to get caught up in the rigamarole of settling on a new offering, ensuring business processes are up-to-date and investing in the requisite tech to power this overhauled service, the customer’s experience cannot be neglected, particularly if these changes are met negatively.

Earlier this year, users of Wink’s smart home platform were shocked to find that they would be charged $4.99 a month from then on for the bulk of the service’s once-free features, including crucial things like API support, voice controls, third-party integrations, and even the ability to update device firmware.

Originally announced to begin in May (giving users just a week’s notice), outrage from users saw Wink postpone the change. The move was, however, inevitable to keep the company afloat; in a statement, Wink claimed it “had no other way to continue the Wink service as it is currently known,” as “long term costs and recent economic events have caused additional strain on [their] business.”

They did, however, stress that the new charges would allow for expanded support, new integrations and continued enhancements through firmware and software updates: “Your support will enable us to continue providing you with the functionality that you’ve come to rely on, and focus on accelerating new integrations and app features.”

As a one-off purchase, a smart home hub as a standalone product is not well suited to generating additional revenue to support ongoing updates. Rivals such as Amazon Echo and Google Nest are ostensibly a one-off purchase, but act as a gateway to subscription services; if their most basic, free features were to suddenly be paywalled, users would no doubt be equally reluctant to accept such a change.

In a traditional product sales model, the focus for companies is on customer acquisition and one-off purchases. But with 80% of software vendors expected to be using subscription-based business models as of this year, companies taking this step must shift their focus from sales to service in order to keep their customers happy and loyal.

Subscription models have grown to include companies where the “product” being offered isn’t a product at all — it’s a service, and the value being provided isn’t ownership, but access. While cost and convenience are massive benefits for new subscribers, switching to such a model without adequately preparing existing customers – and associated business processes – can result in an exodus.

When Adobe announced their plan to move their Creative Suite from perpetual licensing to a subscription service in 2013, they took a gamble in offering access to the likes of Photoshop, Illustrator and Premier Pro for $49.99 a month, or apps on an individual basis for $19.99 a month; an attractive proposition for those making use of Adobe’s full suite of products, and updating annually, the move to Creative Cloud would actually save them money. But how many customers were actually updating annually?

Though the headline pricing of Creative Cloud was many times less than the cost of the perpetual licence, the cumulative cost over several years would eventually exceed the previous one-time cost for a Photoshop licence, for example, priced at $999.99. Naturally, this caused some backlash among fans, and company stock plunged 35% with over 50,000 people signing a petition to try and halt the move.  Nevertheless, Adobe stuck to its plan and whilst expenses grew and income dropped initially, after three years, Creative Cloud became an almost 100% subscription service.

Adobe had “swallowed the fish.”

 
When a company shifts to a subscription model, an initial drop in revenue is almost inevitable as smaller, recurring fees replace larger, up-front payments. During this period of financial tumult, companies must invest in new capabilities and processes for a subscription-based model, with costs for this period often exceeding revenue. The result, however, is a fish-shaped double curve of rising revenues and lower costs, as seen above, for those who succeed.

So how can businesses “swallow the fish” and make the leap to subscriptions without sinking their finances in the process?

A big bang change of business model would be a huge risk, so companies should look to offer options and new products for customers with a subscription-first strategy, while maintaining their traditional model for existing products and customers during the transition period.

However, converting your existing customer base within a specific timeframe should be a priority to minimise financial impact. One way to reduce the backlash from an introduction of subscriptions is to roll out the change incrementally, moving new customers to your nascent subscription service while gradually converting existing customers, making the subscription offering more acceptable when it’s implemented. You can even make use of your existing brand assets to provide further incentive to make the change to a subscription model; Amazon is a perfect example, tapping into its wide ecosystem of cloud storage, streaming and ecommerce services to incentivise existing customers to make the switch.

Transitioning to a subscription business requires significant time and investment in your product or service, and in the right technologies to give customers a greater user experience than under a transactional model. However, the shift is necessary for any company to connect with their customers and compete with native SaaS businesses and subscription companies. Your business must be committed to making the switch, and be prepared to “swallow the fish” – provided you have the appetite.

Get in touch today to learn how Cerillion Skyline can support and energise your move into the subscription market.