The dawn of subscription-based business models is well and truly upon us. While the impact is more widely felt at the consumer level with businesses like Spotify and Netflix disrupting some of the larger players in the space, it’s now the B2B players that are driving the next wave of growth. More businesses are shedding the baggage of legacy pay-per-product models and transitioning to a more flexible service-based relationship using subscriptions to build their recurring revenue. Recent transitions include tech biggies such as Adobe and Cisco which have discovered newer revenue streams through subscription models. In fact, Gartner has even predicted that by 2020, more than 80% of software vendors will change their business model from traditional license and maintenance to subscriptions.
So what’s prompted this change in mindset? Surely, the traditional pattern of ownership of resources served well for many businesses, even at a time when certain subscription services (think newspapers and magazines) were around?
The answer lies in the rapid rise of digital technologies and the consumerisation of IT which has set new expectations for what companies want from their business systems. As a result, more businesses are now prepared to offload key IT applications to subscription service players, in part because these companies offer more specialised technology skills, but primarily because these services help them achieve a greater focus on the most important aspect of their business – customers!
Of course, pricing is also an extremely important element fuelling this growth. Progressive software vendors are enabling businesses to be more flexible and scalable by offering pay-as-you-go plans. This allows even mid-sized and smaller businesses to compete in a market dominated by large enterprises. In essence, subscription-based software is levelling the playing field for businesses in all domains.
For vendors adopting subscription-based, recurring billing models, it gives them a chance to rapidly scale their business based on recurring revenue. In addition, subscription-based models lead to a greater focus on customer satisfaction and loyalty, as well as accelerated product innovation and improved business planning, providing a win-win for both customer and vendor. Subscription models may also aid further innovation as they offer enhanced flexibility in billing cycles and transfer more power in the hands of the consumers.