The Monetization Playbook for Subscription Launch

zuora.com/guides/the-monetization-playbook-for-subscription-launch

For today’s businesses, the question isn’t whether or not you have to start offering
subscriptions…it’s how. Just look to software as an example: as Gartner has noted, by
2020, more than 80% of software vendors will change their business model from
traditional license and maintenance to subscription and flexible consumption.

But this isn’t just a software story. This shift is happening across industries. According to
the Subscription Economy Index, subscription businesses are growing revenues about 5
times faster than S&P 500 company revenues and U.S. retail sales.

While transformation is inevitable, the path to transformation is not. There are many
different strategies to get you to a subscription model — with no one-size-fits-all
approach — but the pressure is on to do it right. According to research from the Forbes
Global 2000, 84% fail at digital transformation; only about 1 in 8 successfully managed
the process.

Any successful monetization framework has to take into consideration your particular
portfolio as well as the concepts of business transformation and technology
transformation. Furthermore, you have to put more emphasis than ever on the customer
experience because today’s demanding consumers have expectations that need to be
met (unless you want to lose your customers to your competition!).

In our work with hundreds of companies that have successfully launched subscription
offerings, we’ve consistently seen patterns of behavior that result in success. This led us
to the realization that there’s not really a playbook that shows businesses how to deploy
multi-pronged strategies to monetize a subscription launch — or at least we’ve never
seen one.

Until now!

Here we detail the 5 core monetization strategies for launching new subscription
offerings:

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1. LAUNCH NEW FLEXIBLE CONSUMPTION OFFERINGS AND RUN A
HYBRID BUSINESS MODEL
Summary

Businesses today are increasingly under pressure to monetize their offerings, through
products, services, and subscriptions. A hybrid business model is a combination of both
fixed models and usage-based ones. It involves continuing to employ traditional pricing
strategies while at the same time tapping into a flexible consumption model.

The idea behind this hybrid model strategy is to start small and then evolve: companies
launch new recurring revenue model offerings while maintaining core offerings as fixed
models. These new offerings are then managed as separate business units from core
legacy products (to avoid disruption to the existing business lines) but enable
opportunities for upsell and cross sell between hybrid lines of business.

Pros

Tap into new revenue streams

Experiment with subscription models with mitigated risk/disruption to the
organization
Cross sell and upsell existing customers with new monetization models
Legacy product revenue streams are protected — which means that companies
can avoid taking a massive dip in their revenues while making the shift to
subscriptions
Less volatility to cash flow
Evolving go-to-market provides a great competitive advantage
Greater customer satisfaction as consumers have increased control over their
subscriber experience and greater perceived value of your offerings (i.e. they are
getting and paying for exactly what they want)

Cons

Launching a new offering has its own complexities in terms of people, processes,
and technology
Potential lack of total organizational buy-in to this “side project”
Initial investment can be heavier with lower typical ROI due to small volume
Greater complexity is built into your business management processes, e.g. billing,
invoicing, and collections
More challenging to create a seamless experience for your subscribers, especially
with traditional systems that are built to support one-time sales, not recurring
revenue

Company Example:NCR
Zuora helped NCR, a 125-year-old company that made its start selling cash registers to
saloons in the Wild West, launch a new tablet-based Point-of-Sale solution to help it
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saloons in the Wild West, launch a new tablet-based Point-of-Sale solution to help it
compete with the likes of Square.

NCR Silver wasn’t the company’s first experience with a recurring revenue model. In fact,
in recent years, recurring revenue had grown to represent nearly 55 percent of NCR’s
business. What was different about NCR Silver is that recurring revenue was the
business: it was all cloud-based, with no hardware installs or perpetual licenses involved

The NCR Silver launch team had only a couple of months to build the business and make
the product available to consumers — and they did it, hitting their launch date with a
flexible subscription management solution that helps them manage the complex billing
involved with a subscription model and get accurate reporting on new subscription
metrics like MRR.

Bottom Line
This approach is a great way to launch a new subscription product without disrupting
existing operations. Businesses can keep the one subscription product line separate
and/or slowly evolve and transition their customer base to subscription models.This
hybrid model is a win win in that it provides stability while building a subscription
foundation on which a company can expand.

#2 REPACKAGE TO RECURRING REVENUE AND FLEXIBLE

CONSUMPTION MODELS
Summary

As Fast Company recently noted: “Some companies know that products only get you so
far, that services are the future — in fact, services already account for 75% of the global
economy.”

In short, this strategy is to shift from products to services, i.e shift existing classic
“transactional” offerings towards repackaged recurring business models or flexible
consumption models like usage-based, with a meaningful promise and a perception of
affordability. With this approach, while you’re not launching a new offering, per se, you’re
launching a new model for an offering.

In many industries, like software, conversion is typically the main play: moving from
traditional pricing models focused on perpetual licensing and support/maintenance
models to SaaS-centric subscription pricing and pay-per-use pricing models.

Companies can go all in on this strategy or opt for a partial conversion by shifting just a
portion of their portfolio to subscription pricing models.

Pros

Increase shareholder value by providing forward-facing recurring revenue business

metrics
Address market white space with limited investment 3/11
 Address market white space with limited investment
Good leverage to justify connecting associated hardware
Provide buying flexibility to customers and increase interaction (added flexibility
makes the customer stickier)
Provide more predictability in metrics — ARR/MRR per product line, ACV, TCV
Increase opportunities to sell more products to an existing customer — land and
expand model, i.e. increase growth with up-sell/cross-sell
Ride the wave of subscriptions with limited impact to your products
Easy-to-activate strategy — especially as a defensive play

Cons

Disruption of current business practices

Potential revenue decline in the short term
Necessary investment in new underlying technology to enable flexible pricing
and packaging changes

Company Example: PTC

PTC provides a good example of this shift in action. While PTC is one of the 50 biggest
software companies, in recent years their earnings had taken a hit. In the second quarter
of 2015, PTC recorded $303M in revenue. A little over a year later, that number dropped
to $288M. In the same period, earnings swung from $17.4M profit to a loss of $28.5M.

To satisfy consumer demand, PTC decided to implement a broad, systemic shift to its
business model from perpetual licenses to a cloud-based recurring revenue model. Since
implementing Zuora to build out the necessary infrastructure to launch this new model,
PTC now offers subscription pricing across its entire portfolio of solutions and
technology platforms.

As a result of this shift, PTC has seen customer adoption of subscriptions accelerating
every quarter. Based on their current course and speed, by fiscal 2021, they expect
about 95% of their software revenue to be completely recurring.

Bottom Line

Repackaging and introducing pricing flexibility is a great way to revive or boost an

existing product/service with low sales, low coverage, etc. A subscription “launch” isn’t
always a pure launch of a new offering; repackaging is a launch strategy unto itself.

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3. SHIFT FROM PRODUCTS TO “AS-A-SERVICE”
Summary
“As-a-service” is the strategy of repackaging an existing product as a subscription
offering.

For quite a few years now, we’ve seen companies moving away from one-off products
and into subscription business models to increase agility, revenue, and shareholder
value and ward off competition from nimbler startups.

And lately this trend towards “as-a-service” is picking up steam and crossing industries.
Just look at a company like Philips which makes thousands of products, but now refers
to themselves as “a technology solutions partner.”

By selling a service as opposed to a product, businesses shift not only their financial
model, but the value of their offering. Product-as-a-service is a customer-centric model
where customers subscribe for the time, usage, or outcome of the product — rather
than simply purchasing a product outright as a one-time transaction. The shift for
consumers is from an upfront price to usage-based pricing in which price is aligned with
use, i.e. value-based pricing.

It’s all about access and outcomes, not product ownership. This shift creates
opportunities for businesses to build ongoing, meaningful relationships with customers
that they can continue to monetize over time.

Pros

Disruptive model to enable upstream and downstream sales flexibility

Provides competitive advantage with smaller and nimbler companies
Very high stickiness for consumers because of perceived value (i.e. outcome-based
pricing: paying for the services/outcome/access you need)
Creates new revenue stream due to multiple ways of monetizing products
(usage/consumption and subscription models)
Increased upsell and cross-sell opportunities
Creates additional feature capabilities and introduces additional revenue
opportunities
Visibility into predictive product metrics due to recurring nature of business (e.g.
product adoption, ASP, MRR, ARR, CLTV, ARPU, Churn)

Cons

Lack of initial visibility into success and revenues of product-as-a-service offering

Paradigm shift due to complexity in product-related metrics (e.g. product adoption,
ASP, MRR, ARR, CLTV, ARPU, Churn)
Ongoing buyer-seller relationships require greater customer support which may
require the build-out of a new customer success function
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Company Example: Hive
Hive launched their first product, a smart thermostat, back in 2013. But in 2017, they
launched their first subscription service, the Hive Welcome Home, which bundles Hive
products and services for just £5.99 a month per month in the UK. And, since then,
they’ve gone on to create and launch a full suite of subscription services—including
heating, security cameras, sensors, lights, and smart plugs.

To make the shift from a product-led solution to a suite of subscription services, they
needed a platform that enabled them to launch, monetize, and expand their service
offerings. And a platform that gave customers the ability to self-manage their accounts
for a better subscriber experience and, ultimately, greater opportunities for increased
ARPU (Average Monthly Revenue per User/Customer).

Since making the shift from a product-led solution to a suite of services, Hive has seen a
70% surge in their customer numbers.

Hive is now the British leader in smart home technology, having installed more than
660,000 smart home hubs. As Jo Cox, Commercial Director of Hive, notes: “It’s less about
products, and much more about the services that they can enable.”

Bottom Line
Shifting to an as-a-service model is a highly disruptive strategy that enables new
monetization streams. With more flexibility in a service offering, as-a-service provides the
foundation for a much stickier customer experience while also empowering companies
to acquire more and more customers.

Once you pivot to as-a-service, businesses begin to measure profits in new ways, with
new metrics. This is a paradigm shift that can be challenging to undertake, but ultimately
this insight into more predictable business metrics consistently leads to greater
monetization opportunities and higher valuation caps and shareholder value.

4. NEW CONNECTED SERVICES

Summary
In short, connected services and connected devices capture value-add data that can be
monetized by companies. We’re seeing more and more companies with devices
beginning to launch these connected services in order to drive more value for their
customers. These connected services create opportunities for even age-old, traditional
businesses to introduce new ways to build long-term relationships with their customers
based on ongoing value-add data.

Because these new services drive specific data points, they can be used in many different
applications — thus opening up new revenue streams.

For example, we work with a company called Analog Devices (ADI), a multinational
semiconductor company specializing in data conversion and signal processing 6/11
semiconductor company specializing in data conversion and signal processing
technology. They have their own hardware and software connected app offering. The
device plugs into a hotel room and provides data on whether or not a hotel guest is in
the room. They can then sell this data to a cleaning service, for example, so that the
service knows when to enter the room to clean without disturbing the guest.

This is just one example of the interesting ways that traditional companies can use
connected devices to penetrate new markets to create revenue opportunities that
extend beyond their device.

This play creates opportunities for businesses to build relationships with customers.
That’s why it’s a particularly desirable (and much more common) strategy for an industry
like manufacturing in which, historically, the business doesn’t have much direct
engagement with their customers. But you can see that having ongoing relationships
with customers that are monetized over time is a valuable strategy for a wide variety of
businesses.

Pros

Launching connected services creates a brand new revenue stream (which means a
lower risk of cannibalizing other products in your portfolio)
High margin contribution
Greater stickiness with your customer
Increased market opportunities: new connected services can be sold to both net
new customers and existing install base

Cons

Requires connectivity (not a fit for all segments)

The learning curve for a sales team of a traditional device company is steep

Company Example: Caterpillar

Caterpillar is a leading manufacturer of machines and engines to the construction,
mining, and energy transportation industries. Although Caterpillar will remain a heavy
equipment manufacturer, they’ve begun digitally enabling machines to provide more
service-based offers.

They’ve coined the term “Smart Iron” to describe this shift to connected services. They
put sensors on their equipment and then take all of the information coming off the
machines and use telematics to help customers understand how they are leveraging
their equipment and to provide predictive analytics. The rich data helps customers better
manage their bottom line, and helps Caterpillar to develop better products.

This new digitally driven service arm is becoming a bigger and bigger part of their
business, under the CAT Connect portfolio. According to Tom Bucklar, director of IoT &
channel solutions at Caterpillar, “Today, we have the largest installed base in our industry
with over 500,000 connected assets and those connectivity-based services are
subscription-based services.”
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subscription-based services.”

Bottom Line
For software/hardware businesses, launching new connected services is relatively easy
to start with and puts a limited risk on the company’s financials. It’s a strategic play to
create brand new revenue streams, increase market opportunities, and become more
customer-centric.

5. MERGER & ACQUISITIONS (M&A)

Summary

With the M&A monetization strategy, companies work their way into a flexible
consumption model through the acquisition of subscription pure plays (and,
occasionally, through a merger). The play isn’t launching your own new subscription
offering, but integrating an acquired subscription business into your existing business,
i.e. “launching” the subscription offering as an upsell or cross-sell to your existing
customer base.

In particular, we are seeing an evolution of traditional businesses acquiring more

subscription savvy companies featuring recurring revenue models. Recent examples
include IBM acquiring Red Hat for $34 billion to “unlock true value of the cloud” for their
business; Walmart’s acquisition of online men’s store Bonobos for $310 million; and
Alphabet / Google consistently acquiring pre-revenue companies in the subscription
world to “enhanc[e] the technical capability of its cloud applications” — to name just a
few.

But M&A is a complex process, and every time a company goes through an acquisition,
they are faced with a whole new set of people, processes, and technology — and the
challenge of merging two separate entities.

The goal is to optimize opportunities to cross sell and upsell both the new product lines
as well as the legacy line of business, without stunting the growth of the acquired
company (or killing its agility!). To do so, you need to create an infrastructure that will
enable sales to easily sell new products along with the old.

From a technology standpoint, acquiring companies require a standardized platform that

allows for the sale of both legacy products and recurring revenue offerings — and a
streamlined order-to-revenue process across business lines — all on one system.

With a successful acquisition, the customer experience is consistent, with quotes,

invoices, and billing all coming out of one system — regardless of what product line they
subscribe to. And the customer view is also consistent, with all customer-related metrics
coming from one system offering a unified view, rather than a skewed perspective
derived from mixing and matching info from disparate systems.

With visibility into key subscription metrics like customer lifetime values, customer
acquisition costs, churn rates, and net dollar retention all available within one system, 8/11
acquisition costs, churn rates, and net dollar retention all available within one system,
companies can make better decisions based on live data thus optimizing the value from
acquisitions.

Building a monetization M&A-friendly platform plays an important role in facilitating a

repeatable process to successfully integrate new companies and accelerate a pivot to
subscriptions.

Pros

Jumpstart digital transformation by injecting new DNA into existing company DNA
Land grab for existing line of recurring revenue
Cross-sell opportunities

Cons

Only viable for companies with cash reserves that can afford the upfront financial
investment of an acquisition
Challenge to integrate new business in with legacy business in terms of people,
process, and technology
Companies risk breaking the order-to-revenue process and killing the agility of the
acquired company
Acquisition alone won’t transform your business into a subscription business and
help you to launch new subscription offerings unless you absorb and apply
learnings across your organization

Company Story
Edgewell Personal Care (the company that owns the Schick and Wilkinson razor brands)
announced their plans in Spring 2019 to purchase Harry’s (an online shaving startup) for
about $1.37 billion in stock and cash.

This acquisition is yet another example of a traditional established business acquiring a

nimble startup that was built on a customer-centric model.

For Edgewell, the acquisition gives them a chance to market directly to consumers. As
Rod Little, Edgewell’s Chief Executive notes, “We’ve had an interesting product portfolio,
but we’ve lacked a way to communicate with the consumer.”

With this acquisition still in the works, it remains to be seen how the integration will go,
but if Edgewell is able to capitalize on this acquisition to create direct lines of
communication with customers, it will prove to be a great move into the world of
subscriptions for them.

Bottom Line
An increasing number of businesses are acquiring companies to drive subscription
revenue. For established traditional organizations, acquisition can be easier than full-on
transformation. And the organizational knowledge brought by native subscription
companies is invaluable. At the heart of all of this M&A activity isn’t just a desire to build
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companies is invaluable. At the heart of all of this M&A activity isn’t just a desire to build
out or complement product offerings, or to subsume competitors, but a strategic play to
jumpstart necessary digital transformation.

GOALS FOR A SUCCESSFUL LAUNCH

Whether you choose to launch a new subscription offer, repackage an existing product to
a recurring revenue model, launch a new connected service, shift your business to “as-a-
service,” adopt a subscription model via acquisition — or all of the above! — your goals
will be the same:

1. Time to market. You want to capitalize on the opportunity as quickly as possible

— before a competitor beats you to the punch. The goal is to get up and running
fast without wasting time being held back by inflexible systems.
2. Fast iteration. The key to any successful subscription offering is not just
dependent on a successful launch, but on what comes after: the learnings and the
speed of iteration. What destroys so many new innovations is that they launch, and
the business learns, but then it takes too long to iterate because their underlying
systems can’t support the complexities of subscription models and aren’t agile
enough to enable pricing and packaging experimentation, support different charge
models, and more.
3. Minimize impact on existing business, systems, and processes. You don’t want
to disrupt your existing IT systems, financial processes, and lines of business with
any new launch. You need a subscription management system that can exist
independently as your subscription subledger, and that will snap into your existing
legacy systems.

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