Analyst Perspectives

Having just completed the 2023 Ventana Research Value Index for Subscription Management, I want to share some of my observations about how the market is evolving. The era of subscriptions has transformed the way businesses operate and consumers engage with services across every industry. Organizations are increasingly adopting a digital approach to selling goods and services, wherein customers have the option to purchase through periodic subscription pricing or based on consumption, rather than traditional one-time ownership. Add to this an increasing desire for customers to purchase when, how and where they want, whether via digital commerce, self-service portals by and by voice and text and the landscape looks very different from even just five years ago. 

The subscriptions themselves are not new. Newspapers and magazines were early in this process many decades ago, while Netflix started out mailing DVDs paid for via a flat monthly fee. Now, subscriptions are regularly used to pay for any number of products or services over a duration established by the provider. Digital products and services such as software as a service (SaaS) and mobile applications were at the forefront of the adoption of subscription pricing. HBO, Netflix, Spotify and iTunes are examples of subscriptions in the business to consumer (B2C) market. 

We have all become familiar with the subscription model in our everyday lives, both as individual consumers and at work. This has created an acceptance of and an appetite for subscriptions as a pricing model. Subscriptions enable consumers to spread the expense over time rather than making a one-time upfront payment. In business, extending cost across the lifetime of product usage shifts risk more evenly between buyer and seller. For the vendor, subscriptions enable a more predictable revenue stream paid on a predetermined basis over the course of an engagement or contract. 

For organizations that started with or for whom the majority of their business is subscription based, and for those primarily involved with B2C business, the predominate technology and process challenge is to provide a direct method for customers to initiate and modify service plans and orders. Complexity in these cases is most often the need to scale the number of subscribers. Contrast that with B2B organizations where there are typically far fewer customers, but more complex, multiple product and service orders with individually negotiated prices. With organizations for whom subscription pricing is new, and in addition to a predominately one-time sale, it is important to ensure that new subscription models are incorporated in such a way that it appears seamless to the subscriber avoiding duplicate bills and payments, or different ways to purchase depending on the product or service. 

Subscription management is the process for a subscriber as an existing or new customer to be engaged with a seamless experience from the selection, configuration, order, contract, billing, payments and fulfillment. It supports an organizational need for managing subscription revenue and the recognition of the subscription, but also the operations and life cycle including the automation and workflow, analytics and reporting, integration with other systems, management of the data, loyalty and incentives and the pricing of those programs. 

Effective subscription management needs to support a variety of business models and use cases, either with functional capabilities of their own or with the ability to integrate with existing systems, or additional third-party providers. For organizations who are not digitally native (those organizations that started or have been using subscription pricing for much of their existence) existing ERP and CRM systems will have been implemented to handle the existing one-time sales transaction. Inclusion of subscription models will require additional systems and processes that must work in conjunction with the current systems. The complexity of the underlying systems should not be seen by the customer who expects a seamless subscriber experience. This requires the ability to interoperate with existing systems, whether a new system becomes the consolidated subscription management or billing system, or whether that system generates the necessary information for an existing system to handle the process. This extends to customer and product master data that is either synchronized against an external system or managed within the new system. 

One-time sales models change relatively infrequently, especially when it comes to the price to be charged. Likewise, product lists and listings are somewhat static. However, the subscription model and digital products lend themselves to frequent changes in price and to product and services, especially around combination bundles requiring subscription catalogues that need flexibility and simplicity in how they are managed. 

Effective subscription pricing changes must go beyond the traditional repeating flat fee model, and also consider incorporating usage- or consumption-based pricing for optimal subscription management. In this model, the eventual cost charged is dependent on how much was consumed in the preceding period. The price is decided using a formula for whatever is being measured, such as the number of transactions, to derive what will be billed for that period. Depending on the product or service being purchased, this pricing model can further redress the balance of risk between buyer and seller, with the buyer only paying for what was used. 

Pricing formulas for usage models can be quite complex dealing with pricing tiers that are invoked when certain volume levels are reached, either incrementally or on the accumulated total. In addition, multiple attribute pricing can consider a number of different factors associated with the transaction; for example, what time of year, month, week or day, what geographic location, characteristics of the buyer or what combination of products and services. 

Usage pricing may appear to be the most consumer friendly, but neither the buyer nor the seller knows what the charges for a particular period will be. The usage charges themselves could be transactions from an IoT sensor, a credit card swipe or a cloud data storage device. Traditionally, telecom providers have been some of the most onerous users of usage charging, with every call and leg of a call recorded and priced. It is one reason why many telecom providers in the U.S. moved to unlimited minutes or block pricing models, though the calls and legs are still recorded; they are visible on a bill, and they may be used to calculate third-party carrier cross charges. 

For usage transactions, data mediation is needed. Raw usage data comes from a variety of sources and in potentially different formats. As part of the mediation process, data is normalized and aggregated to the required level to price. When volumes are large, it may make sense to pre-aggregate and price on a rolling basis, then be ready to reprice if the formula is based on different pricing levels dependent on a periodic or cumulative threshold having been met. It is also sometimes necessary to pre-price outside of the system and tag the usage transactions to not be priced at all. All variations are use cases seen in real life. 

Usage pricing also puts an added onus on the ability to project or forecast usage to give some idea to both consumer and provider as to what future charges may be. Unlike a flat fee repeating each period, usage pricing is variable. A needed feature, though not often offered as part of most subscription management systems, is the capability to forecast usage. This usage projection has multiple uses: as part of revenue forecasting, used to validate whether periodic invoices are similar to the expected amount or not and therefore need auditing, as part of customer churn predictions, and as part of customers being able to track expense against budget, especially the cumulative trend. 

One often unrecognized need when adopting subscription management is a way to effectively account for revenue that is owed to partners who are either providing a complementary service or product as part of the overall subscribed offering. Historically, partnerships have described a reseller arrangement, but for a growing number of industries, there is a trend for organizations to develop deeper partnerships within a partner ecosystem. These partner ecosystems can take different forms, but organizations are recognizing that to compete for and to retain customers, offering complementary products and services can enable smaller companies to compete with larger ones, or larger companies to bundle products and services without having to necessarily build or buy every aspect. The mantra “build or buy” is now extended to “build, buy or partner.” 

In addition to the examples of resellers originating orders with a commission or mark up from cost, partner ecosystems can also result in bundles that include products and services or offers of complementary products and services that originate from third parties. In the consumer world, this could be a nutrition service or vitamin products to go alongside a gym membership. Or it could be a rental car company that doesn’t own all its cars and leases them from a third party. That same rental car company pays out commissions on rental reservations originated from partners such as airlines, hotels and travel sites. For many, their existing processes for accounting for third-party relationships are thought of as an accounts payable or back-office function. But as third-party partnerships and ecosystem deepen, more complex formulas for revenue allocation will be developed and will need to be linked to the same complex pricing models that are used to calculate customer charges. 

For a more efficient approach and one that lends itself to a better understanding of performance and profitability, revenue allocations to third parties should be treated as the other side of payments received. To handle this, the system should have the concept of contracts that not only describe the terms of the purchase of products and services but also the terms of any revenues to be allocated to a third party. This accommodates any business where there are royalties or other payments due from third-party licensing arrangements. I’ll go into more detail about contract management in part two of these market observations. 

The Subscription Management Value Index Market Report evaluates the following vendors that offer products that address key elements of subscription management as we define it: Aria Systems, BillingPlatform, Chargebee, CloudSense, Conga, FastSpring, FinancialForce, Gotransverse, LogiSense, Maxio, NetSuite, OneBill, Oracle, Ordway, Vindicia, Recurly, RecVue, Salesforce, SAP, Zoho, and Zuora. 

You can find more details on our site as well as in the Value Index Market Report. 

Regards,

Stephen Hurrell