Products and Services
There are a rapidly growing number of products and services on the market today that take advantage of the three basic recurring revenue models - subscription, usage, and subscription plus usage hybrids (we cover those models in more detail here). There are also a rapidly growing number of companies looking at their current product lines to determine whether or not they can exploit these models.
There are some simple criteria that will help you make that evaluation. We call it the CMRP Model.
- C - Products or services are Consumable
- M - Consumption is Measurable
- R - Consumption is Repeatable
- P - Consumption is Predictable
Consumable, measurable, repeatable and predictable. How do you apply this model?
When you hear the term consumable, you tend to think of something that is there before it is used and gone afterwards, i.e. you have a bottle of wine and a loaf of bread and all too soon they are consumed. We need to broaden that definition.
We can consume content (print, video, music, etc.) online. The content still exists when we’re done, and we could even consume the same content again if we wanted. We consume GB’s of data on our mobile devices or on cloud storage. We consume minutes of call time on our phones. We consume computing services on Adobe Creative Cloud or Microsoft Office 365. We might consume time and mileage if we use a car service like ZipCars. We can consume seats on airline or nights in a hotel room. By this expanded definition, almost any product would qualify, but it's important to identify what is being consumed. Every product or service will have one or more key metrics that define consumption, and those metrics will play a role in defining packaging and pricing.
If you are selling a subscription, part of what you are selling is time. A customer can access your product or service for a period of time. That has its up side - as a metric time is easy to measure and there are very few supply chain disruptions - but it also doesn't tell the full story. Did your customer access the service? How often? For how long? What resources did they use? The questions will vary somewhat, depending on your product/service.
This obviously becomes more critical in usage based scenarios, where charges are based on measurements of what was used. But even in subscription commerce, usage metrics play a key role, for at least two reasons. First, remember that recurring revenue is Relationship Commerce, To properly serve your customer, you need to be aware of their activity. This can help you with cross-sell and up-sell and can also help you identify potential churn scenarios. Second, you need to understand usage as a measure of profitability. Your business won't last very long if your $10/month subscribers all use services that cost you $15/month to provide.
The bottom line is, to get the most from a recurring revenue model, you will need a method for measuring and monitoring customer usage, even in a subscription based model.
For recurring revenue products, consumption is not a one-time event. It happens over and over again on a regular or semi-regular basis. Usage can be periodic or it can happen on a random basis. The key is that usage repeats often enough to entice a customer into a recurring relationship.
Think about your mobile devices. How often do you download data to your tablet or phone? How often do you make calls and send or receive text messages? Those activities are repeatable. Do you have a monthly plan? Is it all you can eat, or do you pay a set rate for a specified amount of service with overage charges when you go over the limit? Your service provider is measuring each usage activity and aggregating usage over a period of time. Your consumption is nearly constant (repetitive) and the measurement occurs with each use (repetitive).
With the right analytics in place, customer behavior begins to be predictable. You may not be able to predict the behavior of each individual consumer, but you will begin to see trends. At a micro level, you will see behaviors that are indicative of future customer actions like churn, or you might find opportunities for cross-sell and up-sell. At a macro level, usage patterns become predictable, allowing you to better manage supply chains and inventories and to better predict financial performance.
As you’re reading through this article, you should be thinking that these product definitions are so broad that they cover almost anything. And that’s the point. The possibilities are really only limited by your imagination.
Next up: Packaging and Pricing