Subscription services have seemingly exploded in the B2C space. Netflix alone added 7.05 million subscribers during the fiscal fourth quarter of 2016, the largest-ever quarterly subscriber growth in its history.
But this opportunity isn’t exclusive to B2C. One of the common threads for big winners in the B2B software and media space is their transition to subscription-based services. Just look at Salesforce and Adobe – their massive market growth illustrates the power of SaaS.
By hosting software services in the cloud, businesses can reduce overhead costs, earn higher valuations and keep pace with the complex expectations of today’s business software buyers. Most businesses that make this transition ultimately experience a significant growth in sales and profit margins.
Adobe is a perfect example of a company that successfully transitioned to a subscription-based model. In 2012, the company launched Creative Cloud, which gave users the option to pay a monthly subscription fee rather than purchasing the entire boxed creative suite, and then periodically purchasing upgrades.
This shift enabled Adobe to attract a wider net of new customers, cross-sell and upsell current customers, and drive more consistent monthly revenue. The launch of Creative Cloud initially attracted more than 700,000 new customers, and in 2015, the company saw a 44 percent growth in revenue.
Here’s a closer look at why the subscription-based business model is a right move for B2B software companies today.
Why the subscription-based business model works well for B2B businesses and customers
As leading B2B software companies grow sales and expand their customer bases thanks to the cloud, companies that have yet to embrace the subscription-based model need to seriously consider making the transition. There are several reasons why a subscription-based business model makes sense for B2B software companies looking to increase digital revenue and steal market share from competitors.
- Customers don’t want to buy more than they need: With a subscription-based model, customers can pay a monthly fee for services they use rather than paying large upfront costs for on-premise software with features they don’t actually need. Not only does this approach meet unique customer needs, but it also allows software companies to attract new customers of all shapes and sizes.
- Companies want to expand their reach into small businesses: Similarly, subscription-based services are an efficient model for serving SMBs. Small businesses expect real capabilities, just like enterprise companies – and require easy to consume payment options and add-ons only when really needed. But oftentimes it can be costly for businesses to manually serve these customers. By enhancing self-service capabilities through a SaaS commerce platform, software companies can still deliver a high-touch, meaningful online experience for small businesses to better serve this market.
- SaaS businesses earn higher profit margins: Subscription-based business models are typically self-service. That means businesses do not need to employ sales staff to facilitate every customer transaction, which translates into a lower cost per transaction and ultimately, higher profit margins.
- Wall Street places higher valuations on SaaS businesses: Data shows that SaaS business models are more likely to turn a profit sooner due, in part, to the low cost per transaction and consistent revenue generated over time. This means Wall Street typically places these businesses at a higher valuation.
To execute this model, businesses need flexible cloud-based commerce platforms
While the benefits of a subscription-based business model are clear, many software companies struggle to find the right digital platforms to provide eCommerce for selling and servicing SaaS subscriptions. For the most successful businesses this means a cloud-based commerce system with self-service features, marketplaces for customers to sift through partners and add-ons, and the ability to seamlessly acquire new customers and automate renewal processing.
But traditional commerce platforms (on-premise or ERP-based) are ill-equipped to offer this type of complex functionality. Most are clunky and rigid, and are designed to enable traditional off-the-shelf product sales rather than seamless digital transactions. Additionally, legacy commerce platforms lack support for automating renewals and other self service functions for customers.
As a result, many leading B2B software and media businesses have invested in cloud-based commerce sites that offer the agility and flexibility necessary to facilitate the complex features today’s B2B customers demand. These systems can also be iterated over time to evolve along with changing customer needs.
The evolving expectations of B2B buyers has changed the way software companies interact with buyers and facilitate transactions. Perpetual license models and traditional maintenance plans are becoming less and less prevalent. Today’s business buyers want subscription-based software services and demand an easy buying experience. The businesses that succeed in this space will be those that invest in the digital platforms necessary to make these expectations a reality.