We are in a time where the global recession and unemployment numbers are set to get worse. Many startups and big companies like Twitter and Disney have been hit hard. But Adobe seems to be doing better than ever. By the end of the 2020 fiscal year, Adobe achieved a record yearly revenue of $12.87 billion, which translates to 15% year over year growth.
What’s their secret to thriving in such difficult times? Recurring Value.
Adobe was among the first companies to realize the power of the subscription business model. In 2012, they sold software in a box. But in 2013, they decided to jump into the deep end, embracing the subscription business model.
After transitioning, they saw a 4X and 10X increase in their earnings and valuation, respectively. From a recurring revenue of $200 million in 2013, they now are at $5+ billion.
There’s nothing more stabilizing to cash flow, profitability, and revenue visibility in hard economic times than recurring revenue. Twitter has just realized this and is now looking into subscription options.
A subscription model helps companies build a resilient business with higher customer retention, predictable revenue, and improved profitability. Because of added predictability and consistency, companies can even estimate the customer’s lifelong value. Therefore, it’s no surprise that companies across all industries are looking to transition into the subscription business model.
Why customers are embracing subscription business models
It’s evident why companies are attracted to subscription models, but what’s in it for the customers?
Customers love companies like Birchbox and Adobe because they offer unique and high-value products at lower prices. For Adobe, products that went for between $1300 and $2500 are now available for between $10 and $50.
Convenience often entails replenishment, curation, and access. Why would a customer run to the store every couple of weeks to get dog food while a subscription box, like BarkBox, will deliver it to their doorstep every month when the supply runs out?
This is an area where companies like Loot Crate and Blue Apron excel. They send boxes tailored to the taste of every customer. Personalization makes the customer feel seen and valued.
This is slightly different from personalization in that it’s the feeling that consumers have that an expert is piecing together their boxes to give them the best experience. This is the magic behind subscription businesses like Birchbox and Stitch Fix (of course, curation is seen differently in the SaaS space).
Making the Switch
The transition to a subscription business model involves a lot of moving parts. It’s best to create a strategic roadmap for the transition. This might include testing the waters with a pilot program like Adobe did with Creative Cloud.
The pilot subscription model for Creative Cloud was run in Australia in 2008. What they learned from this project about product value, customer behavior, pricing, and business resilience they used in the 2012 Creative Cloud launch.
Though subscription business models are trending, they aren’t an easy sell. A handful of businesses are currently implementing the new model, but very few generate significant revenue from it. This variation is due to fear of disruption and siloed operations.
Traditional systems don’t support recurring revenue because the siloed processes make it hard to accommodate subscriptions and the new customer life cycle. But with new automated systems that support recurring revenue, the transition is smoother.
But even as newer software makes the transition easier, remember that a successful transition relies on more than just allowing subscriptions. You’d have to rethink your product strategy, marketing, and customer engagement.
This calls for lots of cross-functional collaboration to accommodate real-time customer response and improved business agility. Siloed systems just can’t do that. Make sure you invest in software you can trust to support the transition.
Now, you plan for the switch. Don’t wait for a competitor or crisis to disrupt your business to switch gears. By that time, it will be too late, and you’ll be playing catch up.
Yes, we realize it seems like a risky move, and you might be hesitant to push through with it. But you should know that the market is moving in that direction with or without you, so you need to consider it as an option.
For help with the recurring revenue, contact us today.