Subscription Sales

What are Subscription Sales?

Subscription sales are a way for businesses to keep customers engaged and make revenue over a longer period of time through repeat purchases. Instead of selling one-off products or services, the subscription business model involves charging customers on a regular basis (typically monthly or annually).

Subscription sales models include:

• Flat-rate
• Pay-as-you-go
• Freemium
• Seat- or usage-based
• Unlimited usage
• Fixed usage
• Subscription tiers
• Some or all of the above

The defining characteristic of subscription sales (and the subscription economy as a whole) is recurring revenue. Thanks to technological advancements, it’s often more economically feasible for the customer to pay a monthly charge for access to something rather than buying, owning, and maintaining it outright.

Synonyms

• Subscription-based sales
• Subscription-based business model
• Subscription revenue model

Why Companies Use Subscription Business Models

There isn’t such a thing as a ‘perfect’ business model. But the ability to close a customer in one instance and count on them for predictable revenue for months or years after creates more ‘passive’ revenue streams.

When a company has stable revenue they can reasonably rely on, a few things happen:

• Additional time and resources. Companies can ease off the gas once they reach a certain point in customer acquisition. A solid subscriber base gives them the chance to invest recurring resources into new product/feature development, enter new markets, and test pricing strategies.
• More accurate forecasts. When revenue is more reliable from one month to the next, revenue analytics models are more accurate. Algorithms have an easier time predicting sales and demand trends when data is predictable and provides a more accurate assessment of future performance.
• Better decision-making. With proper analytics, business leaders can make sound decisions about their product and target market. They can also use data to personalize communications through tailored offers and discounts.
• Faster innovation. All these factors come together to create a more agile, methodical operation. When company leaders and execs have accurate data and the resources to act, they can pivot quickly, enter new markets, and scale much more quickly than other types of companies.

That’s why investors love subscription businesses. The average SaaS revenue multiple in 2023 is 7.8x, and that’s down from 2021 highs of 18x to 19x.

For reference, most companies are valued between 1x and 3x revenue, with very few reaching over 3.5x.

Equally importantly, customers prefer subscriptions to outright ownership. Especially at the rate software improves (and since everything lives on the cloud), it’s more feasible to pay monthly to access a platform than it is to own a license.

Industries Using Subscription-Based Sales

The subscription model doesn’t work for every type of business. Recurring customer billing only makes sense when the company offers something that provides ongoing value the customer can’t get themselves.

Most direct-to-consumer products, for example, don’t do well as subscription services. Customers typically need physical products once.

A few niche ecommerce products have success with subscription sales, but it’s hard to get the cadence right. Accurately reflecting subscriber needs and demand is much more challenging with physical products like subscription boxes.

SaaS

SaaS is basically the poster child for subscription sales. Software platforms are the best candidates for this kind of revenue model because:

• They’re highly complex from a technical standpoint.
• Once a software program is created, it can be maintained and scaled.
• Maintaining and scaling the platform offers huge value to the customer, but they couldn’t do it themselves.
• Even if they could, it would cost tons of money.
• The cloud makes it easy to access the platform and its data from anywhere.

For better or for worse, most software tools people use today (including DealHub) wouldn’t be profitable without subscription sales. The two go hand in hand.

Streaming Services

Streaming services are similar to SaaS in that they’re platforms based on software that hold, recall, and present data. When a user opens Spotify or Netflix, they get access to millions (or even billions) of songs or movies.

Think of streaming services as SaaS platforms, but for media. They allow users to access a huge library of content without having to own each piece individually.

Meal Kits

Meal kits are an example of a physical product that works in the subscription economy because they’re based on an infinite need. There will never be a time where people don’t need food.

However, they still share the same challenges other consumer goods companies face when breaking into subscription sales. The existence (and dominance) of one-off sales models in this sector mean customers are constantly considering other options. Since products companies can’t bring prices down like software companies, they run into problems.

Meal kits typically send three to five meals per week. If a customer has a mid-week birthday celebration one night, then craves takeout two more nights, they immediately lose tangible value from the subscription (which isn’t cheaper than regular food, just more convenient).

The cost of not using a software platform or streaming service for one day is incalculable (and insignificant). So customer retention is a lot easier than it would be for a meal kit company.

Personal Care

Personal care subscription boxes are extremely popular among women who love trying new products. The business model works because of the repeatable nature of these products (shampoo, conditioners, face lotions, perfumes, etc.) and their relatively high cost when purchased individually.

This type of product subscription differs from meal kit subscription sales because it isn’t based on a product that expires. And the vendor can bring the per-unit price of each product down because channel sales partners want to use it to sell more of their own products.

The key challenge for companies in this space is making sure they get the product mix right each month. Too much or too little, and the customer won’t trust them enough to remain a subscriber.

Subscription Sales Revenue Model Challenges

Subscription businesses are more scalable, more sustainable, and generally more attractive to investors. But they don’t have everything under the sun.

It’s harder to get buy-in when there are strings attached. And the need to focus so heavily on retention means companies have to offer incentives and services that don’t generate new revenue.

Here’s a look at some of the biggest challenges with subscription sales:

• Churn risk. Customer churn is more of a risk than for other types of businesses.
• The need for automation. Payment needs to be automated to prevent involuntary churn, which is 20% to 40% of all churn for subscription businesses.
• Price optimization is an inexact science. Finding the sweet spot between subscription pricing and value perception requires years of testing and refinement.
• For many, enough is enough. The average consumer has 12 paid subscriptions. “Subscription fatigue” and potential cancellations follow when the sheer number becomes too hard to manage.
• Scaling technology is extremely resource intensive. Growing subscription businesses struggle to maintain and scale technology and infrastructure while growing their subscriber base.
• Customers increasingly expect more personalization. Personalizing the customer experience at scale proves challenging — subscriptions themselves are automated, but the customer experience should be tailored to each individual.
• Buyers want to see more value upfront. Customer buying habits are a lot different for subscription services because they’re based on ongoing value rather than impulses and in-the-moment needs.
• Revenue is only as stable as demand. While subscription services can provide steady revenue, demand fluctuations can still hinder revenue growth.

Best Practices for Growing Revenue Through Subscription Sales

Every organization has its own revenue strategy, but there are a few tried-and-true ways to grow subscription sales:

Upselling

Upselling is the best way to capture higher-value sales without increasing acquisition costs. And it’s a win win — customers get more value from the transaction and the company gets more revenue.

A sales team can upsell a new customer during the sales process or a customer success rep can upgrade them later in the customer journey. The goal is to get customers to buy into higher-value subscription plans when they have an opportunity to do so.

Cross-Selling

Cross-selling is another excellent way to make more money through subscription sales. It involves offering a related product or service that complements the original purchase.

For instance, if a CRM software company sells a subscription package for its product, it can also offer custom implementation and onboarding services for enterprise customers.

In the case of SaaS businesses, many also offer microservices (separate services that can be added on for an additional fee) to their subscription plans. Amazon, for example, sells its AWS and Apollo platforms to businesses across the world, but its main platform is its ecommerce store.

Optimized Pricing

The concept of price optimization is simple: when a subscription company’s product pricing accurately reflects its value proposition and buyers collectively agree the product is worth it, revenue should increase.

An optimized pricing strategy depends on a few main factors:

• Target market
• Target market’s willingness to pay for the subscription
• Profitability of the product at the price point
• Competitive landscape

When the price buyers are willing to pay and the price that’s profitable for the business don’t match up, there is significant room for revenue growth. If the customer’s perceived value is higher than the current price, raising it could increase the organization’s average deal size and potentially draw in new customers. If it’s lower, they should use the opportunity to create a more valuable and/or sustainable product.

Product Bundling

Upselling and cross-selling during the sales process are a lot easier when companies bundle their products together. Product bundling works best when there are distinct products or services customers frequently buy together.

Product bundles in subscription sales might involve standalone products, additional subscription services, or a combination of both. For example, a streaming service might have a movie and TV show platform. Purchased individually, the customer pays $15 for each, but if they buy them together, it’s only $20.

Bundling products boosts upsells by reeling in buyers who might not have considered using multiple services. It’s also a solid customer retention strategy for customers who would have paid either way. They’ll see less of a reason to leave if they’re getting great value and a great deal.

Efficient Billing

A huge proportion (20% to 40%) of subscription churn is involuntary. And most involuntary churn is tied directly to billing.

When a customer’s payment doesn’t go through or the billing system fails, the customer either gets locked out of their account or stops making payments altogether.

To prevent this, subscription companies must invest in an automated billing system that handles payments, alerts, customer information, and renewal processes.

Subscription Sales Metrics

Monthly Recurring Revenue (MRR)

Monthly recurring revenue (MRR) is the most basic measurement of subscription success. Most other subscription metrics are tied to it in some way. And the ones that aren’t still impact it directly.

To figure out your current MRR, all you have to do is sum up all the monthly payments of active customers. Your sales dashboard will typically display this automatically.

Companies use MRR as a snapshot of current revenue. After tracking MRR for enough time, it’s also useful for YoY comparisons and trends analyses.

Annual Recurring Revenue (ARR)

Annual recurring revenue (ARR) is like MRR, but zoomed out. To calculate it, you just have to multiply MRR by 12. It’s a better benchmark than MRR when looking at macro trends, budgeting, setting long-term goals, and planning out marketing/sales strategies.

However, it isn’t as useful for judging the results of a particular marketing or sales strategy. MRR will reflect the immediate impact of a change since it looks directly at the current and last month’s subscription sales.

Customer Retention Rate

A company’s customer retention rate is the percentage of current customers who remain subscribed over a certain period. For example, a company with 1,000 subscribers that retains 800 over a year has an 80% customer retention rate.

Companies measure their retention rates at monthly, quarterly, and yearly intervals. When they implement new retention strategies, they’ll look at monthly or quarterly retention rate changes first. To understand long-term averages, they will turn to annual averages.

Churn Rate

The churn rate is the inverse of the customer retention rate. If an organization retains 80% of its subscribers, its churn rate is 20%.

A company’s churn rate can highlight critical problems with its subscription sales. High churn rates could indicate poor product-market fit, a low-quality product, or bad customer service.

Customer Acquisition Cost (CAC)

CAC is the total cost of acquiring a new customer. To calculate it, add up all the expenses related to sales and marketing (divided by how many customers were acquired).

CAC can help subscription companies figure out their short-term ROI on sales and marketing initiatives. Lowering CAC while customer retention improves or remains unchanged means they can reach profitability from each subscription sale more quickly.

Customer Lifetime Value (CLV)

On its own, CAC only tells businesses what they spend to land a new subscriber. When they want more context, they figure out their customer lifetime value (CLV).

CLV measures the average amount of revenue a customer brings in over the course of their subscription. Comparing CLV to CAC shows buyers whether or not investing in that type of customer is actually worth it.

Called the LTV:CAC ratio, this metric provides a benchmark of how long it takes to recoup the costs of selling. A ratio of 3:1 or better — i.e., the company makes at least 3x what it spends on acquiring its customers — indicates financial stability.

Subscriber Growth Rate

The subscriber growth rate is the percentage change in subscription sales over a certain period. Companies track this number to measure the success of their sales and marketing campaigns, pricing strategies, and product positioning.

It isn’t perfectly correlated with revenue. A business could grow its subscriber base with lower-value customers and grow less quickly than expected. To get the full picture, companies need to calculate their revenue growth rate and compare the two.

Customer Satisfaction Score (CSAT)

The CSAT survey is one of the most popular and straightforward ways to measure customer satisfaction. It’s a quick questionnaire that asks customers how satisfied they are with a product or service on a scale of 1 to 5.

To calculate the CSAT score, companies add up the amount of 4 and 5 scores from all customers and divide it by the total number of respondents. For example, if 70 out of 100 respondents give the product a 4 or 5, the CSAT score is 70%.

The higher the CSAT score (ideally 75% to 85%), the more likely customers are to renew their subscriptions. It it’s too low, the company has a lot of at-risk customers.

Average Revenue Per User (ARPU)

Average revenue per user (ARPU) is a metric similar to CLV. It’s the average amount of revenue a customer brings in over their entire subscription period.

Since it communicates expected customer value, it plays a role in lead scoring, product pricing decisions, and budgeting. Companies may adjust their lead scoring criteria or sales targeting to focus on customers with higher ARPU.

Active Subscribers

An active subscriber is any customer who is currently making regular payments. Companies keep track of them to stay on top of revenue and churn.

It’s important to note that many companies define an active subscriber differently. Some consider a subscriber active only if they engage with the platform or product a certain amount. Others count a customer as active until they cancel.

Technology Enabling Subscription Sales Growth

Modern subscription sales are really only possible thanks to technology. Without it, there would be no way to track customer data, automate payments and billing, or even truly understand the metrics discussed above.

Here’s a quick look at some of the most important subscription sales technology and how it works:

Configure, Price, Quote (CPQ)

Companies offering complex subscription products can’t live without CPQ software. It streamlines the product/price selection process by generating customer quotes and automating subscription bundling and configuration.

It also streamlines the entire sales process, leading to shorter deal cycles and higher conversion rates. If it’s integrated with a company’s website, prospective customers can use it to see what their subscription level and requirements would cost in real time.

Subscription Management

A subscription management platform handles every part of the subscription sales process. It integrates with CPQ software to help companies create new subscription plans, customize billing logic, and manage customer data.

It also handles ongoing customer communication, like billing notifications, payment reminders, and automated processing. It also works with most leading ecommerce platforms, which makes it easy for businesses to start selling subscriptions online.

Contract Management

Contract management tools help subscription companies manage customer agreements and related documents. They automate document creation, signature collection, and other legal processes to save time and money.

These platforms also provide visibility into when customers agree to contracts or change their subscription plans. That’s important for both compliance purposes and understanding how customer behavior impacts revenue predictions.

Sales Analytics

Sales analytics platforms provide insights into the entire sales process. They track performance metrics like CAC, CLV, and ARPU to help companies optimize their marketing efforts and pricing strategies.

They also use predictive analytics to forecast future customer lifetimes so companies can budget for upcoming expenses and plan for growth. That helps them focus resources where they’ll have the most impact.

Billing Platforms

At the end of the day, subscription companies need a way to collect customer payments. Billing software is usually a function of subscription management, but some companies prefer to use a separate system.

A billing platform handles subscriptions and one-time payments, tracks customer payment data, automates billing cycles, and generates invoices on demand. Most of them support multiple payment methods and currencies so businesses can easily sell their products globally.

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