Digital subscription model

Intro

In a digital subscription model, a company makes money by offering a digital service for which customers pay on a recurring basis.

Cases

Why consider it?

In a digital subscription model, or Software as a Service (SaaS) model, a service is offered online through the Internet or mobile devices. Customers pay for it regularly on a pay-as-you-go basis. The availability of mature cloud technology has made this model the most popular choice when launching software and digital services on the market.

For end customers, this model has multiple benefits: they can enjoy the benefits of the software without having to worry about installing it, maintaining server infrastructure or having to deal with backups. The pay-as-you-go financial models mean that customers don’t need to spend a lot of money upfront to buy the software (OPEX vs. CAPEX) and have the option of abandoning the software provider at any time if the product and service does not live up to their expectations. 

For SaaS providers, life is more difficult because not only do they need to develop a good software product, they are also in charge of all the operational aspects, i.e. service availability (24/7), the smooth running of the application, security, performance and so on.

As long as you make sure that your customers gain (much) from your product, they will usually remain loyal and continue to pay their monthly fee.

What does it involve?

Successful SaaS companies are KPI-driven organisations

It is fairly clear which high level KPIs matter most for SaaS businesses:

  • Customer Acquisition Cost (CAC): The cost of attracting a new customer. Customers are typically attracted to a SaaS company by a combination of (online) advertising, content marketing and/or referrals. All these things come at a price. You can calculate your CAC by dividing the amount you spend on a monthly basis to attract customers by the number of customers you actually attract.
  • Lifetime value: The total revenue generated per customer throughout the relationship. SaaS is a 'pay-later model', which means that you first spend money (CAC) in the hope of earning back more than that amount in the future through monthly invoices. Customers who leave too soon are loss-making.
  • Month-over-month growth: The increase in paying customers over a certain period of time. This KPI shows you how good you are in attracting new customers and avoiding churn. Churn, i.e. customers leaving and cancelling their subscription, is a SaaS business's worst enemy. In a successful SaaS subscription, customer lifetime value is maximised while churn is minimised. The most crucial moment of your entire relationship with a customer might well be when they decide to try your service after visiting your landing page and reading the relevant content – if they get a good feeling, you may have acquired a new paying customer!

It is considered best practice to deploy dashboards to monitor these high level KPIs. A growing number of SaaS products and APIs are becoming available to help you with this.  

Successful SaaS businesses focus on creating a unique user experience

You have to put yourself in the shoes of a new user and start thinking about the service you give rather than the software you deliver. It’s true that you use software to implement your service but in the end, you will be held accountable for the service, and much less for the software. Therefore, make sure you focus on developing a unique user experience for your users, which is hard enough as it is! Be as economical as possible about the software aspect. Just do what is strictly necessary: only add features that are absolutely critical and the infrastructure you absolutely need. Where necessary, use components that already exist, such as web services, APIs and open source. This is the only way you will have enough time to focus on what really matters: a convincing, compelling user experience.

Further information