Subscription business models may be common among digital providers — think streaming services or software licenses. But if you’re a chief sales officer (CSO) thinking of introducing B2B subscriptions for the first time, prepare to manage disruption to the sales cycle, especially when moving to consumption-based subscriptions that tie fees to usage.
“Migrating to a consumption-based licensing structure can be risky operationally and financially,” says Dave Egloff, VP Analyst, Gartner. “But buyers and suppliers increasingly prefer subscriptions — both consumption- and term-based — so CSOs must engage and reward sellers to offer the type of subscription model in demand.”
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What is a subscription business model?
In a subscription business model, customers pay a recurring fee to access a product or service, regardless of where it’s deployed. But payment streams vary by license types; they can be upfront, equal installments or pay-as-you-go. Examples of B2B subscriptions include continuous-replenishment inventory models, financial data subscriptions and pay-per-click data searches.
Buyers often prefer subscriptions, because they limit upfront costs, and expense accounting moves from capital expenditure to operating budget. This dynamic makes it easier for buyers to switch vendors, potentially allowing them to be more agile and responsive to changing conditions.
Many suppliers also prefer subscription licensing since it tends to drive:
- less friction in acquiring new customers (due to lower startup costs).
- simpler, paid proofs of concept.
- more predictable recurring revenue streams, which investors tend to favor.
- greater flexibility in scaling, maintaining and supporting product sets.
How subscription business models disrupt B2B sales cycles
Traditional B2B resale opportunities occur as the product’s useful life nears its end — and a resale creates a new revenue stream. Subscription business models disrupt that cycle.
- Term-based contracts’ costs are fixed and based on access not usage. A new contract results in a new revenue stream, but the resale opportunity occurs at the end of a predetermined time period, not the product’s end of life.
- Consumption-based licensing is often pay-as-you-go. As a result, there’s no formal resale cycle, and contract renewals don’t guarantee new revenue streams as fees depend on usage.
Transitioning to a consumption-based subscription model is, therefore, the more disruptive of the two shifts. To ensure success, anticipate how stakeholders across the buying group will react, and support and incentivize sales teams to pitch consumption-based licenses. Without such sales enablement, deals will stall or be lost altogether.
Help sales reps sell usage-based products
Sellers who don’t feel confident enough to sell usage-based products will soon retreat to legacy offerings. As their CSO, you should provide them with sales-enablement support, just as you do for a new product launch. These tools ensure sellers clearly understand how the new consumption-based licensing types satisfy customer needs and how to clearly articulate the value proposition.
Sales enablement tools include:
- sales development and training.
- prescriptive selling and license comparison guides.
- sales collateral.
- updated buyer journey maps and customer intelligence.
Sellers can use these tools and resources to help buyers validate the feasibility and costs of different licensing options — both the financial and contractual terms and the added value that these new options offer.
Even as buyers are becoming better informed about the pros and cons of consumption-based licensing, sellers can play an integral role in helping them get internal stakeholders, such as those from finance, legal, procurement and IT who might have to sign off on a purchase, on board.
Clarify sales roles
CSOs must also clarify the roles and activities of business development reps (BDRs), account managers and customer success managers. These roles cover a buyer’s life cycle from a prospect to a managed account and serviced customer — a life cycle that the business-model transition will surely disrupt.
Consumption-based licensing lowers upfront costs and allows buyers to pilot products and services before scaling more broadly across their organization. If the relationship transitions too early, BDRs may miss out on receiving credit for increased consumption. If the relationship transitions too late, BDRs may spend too much time managing the account and not maintain the necessary bandwidth to prospect new accounts.
Incent sellers by shifting sales compensation structures
Consumption-based licensing also challenges compensation structures, because it’s more difficult to monetize the value of a buying decision. That complicates efforts to set upfront sales commissions proportionately. As leader of the sales organization, you will need to reexamine, for example, longstanding frameworks that rely on metrics such as bookings or contract value.
In B2B sales, you may also struggle to reward BDRs for the effort of bringing a new buyer into the consumption-based offering. While revenue is the most common sales compensation metric, it is more applicable to account managers focused on maintaining and growing existing accounts than to BDRs or others tasked with building the new-business pipeline.
Also make sure to manage the risks of overpayment. It is far easier to offer sellers more compensation retroactively than it is to claw back commissions later. You might, for example, need to drop tactics like new-customer spot bonuses in favor of compensation based on recognized revenue.
Ultimately, though, CSOs will likely be most successful using a sales-compensation approach that blends multiple elements. Despite the flaws of revenue-based compensation plans, they remain the most precise option and should be a key part of any rewards structure.
It’s not easy to migrate a sales organization to a subscription model, especially a usage-based approach. This shift represents a fundamental transformation of the economics, strategy and operations of a commercial organization. To succeed, be careful not to underestimate the support you’ll have to provide to your sales teams and the far-reaching compensation design changes you are likely to need.