Welcome to our Drive to Subscribe blog series, created to provide readers with insight into the world of subscriptions while drawing parallels with the world of Formula 1. In part four, we look at how to handle market volatility to ensure subscription performance is not affected.
Formula 1 teams do everything in their power to maximise performance, but variables make performance unpredictable. The weather, other teams’ performances, and the car’s performance on each track cannot be guaranteed.
It’s the same for all business models and products. Subscription performance is susceptible to many hard-to-predict market variables and proactive mitigation often has limited success.
Therefore, to manage the impact of these variables, it’s important to build flexibility and the ability to react quickly as part of your subscription offering and operations.
We recommend the following approach to help you deal with subscription uncertainty:
1. Proactively plan for known variables
Formula 1 teams know that each track presents unique challenges. The number of corners, the length of straights and average track temperatures will all impact how well the car performs. At the start of the season, teams identify where they expect their car to perform well and where they expect to struggle. This is factored into the season’s strategy, informing them when to go all in and invest in making changes to the car or replacing key parts to maximise performance and where to accept that it’s unlikely to be their weekend and preserve performance and parts. Similarly, there is a set of more predictable human and market behaviours that you can prepare your subscription offering for.
Budget cycles:
In the B2B market in particular, buying behaviours tend to be cyclical. Purchasing, continuation, and renewal decisions are often tied into annual or quarterly budgeting. This should be factored into your sales planning and strategy. You can pursue a light touch continuous engagement model with customers year-round to reduce capacity spikes during key moments. Meanwhile, ensure other high-effort activities such as strategy development and lead generation are targeted outside the cyclical ‘renewal’ window, directing focus effectively and maximising chances of subscription performance success.
Competition:
In F1, the teams are competing against nine other teams to win the Constructor championship (overall team points) each season. Any subscription product faces a similarly competitive landscape with success ultimately always being relative to your competitors. Competitors, like you, are all constantly developing their offering to try to acquire customers and gain market share. You need to be set up to monitor subscription performance and react quickly to any market shifts. This will maintain competitiveness and identify the emerging features and success factors your competitors are developing.
Economic uncertainty:
Subscriptions, while excellent at providing greater revenue resilience, are also highly susceptible to wider economic performance. They can and often are deemed a discretionary operational cost when reviewed in purely financial terms by budget holders. With this in mind, you need to empower customers to control their subscriptions and associated costs. If you do not build this flexibility into your subscription offering then your revenue risk and volatility increase. If a customer can’t easily modify their subscription to manage costs then they are more likely to drop it altogether. Customer re-acquisition is significantly more expensive and labour-intensive than retention, so invest in providing customers with this flexibility upfront.
- Subscription terms: While strict terms might appear to protect revenue, they also represent a poor customer experience (CX). Customers can feel trapped and this will impact customer loyalty. Once the market strengthens and they’re in a position to purchase again they’ll be less inclined to return to your subscription.
- Building flexibility into your subscription: Modularity in the subscription gives the customer greater ability to pick and choose features they do and don’t want, allowing them to manage their own costs effectively.
Usage: There has been a recent surge in the number of subscriptions based on usage (the emerging and rapidly growing Generative AI market is a great example of this). It’s a highly attractive proposition as customers only pay for what they need and use and it’s more effective in accommodating wider market volatility.
2. Monitor key indicators to analyse subscription performance
While you can proactively prepare for some more predictable variables, ultimately no one has a crystal ball. But by monitoring key indicators, you can respond quickly and get ahead of the competition when things start to change. One of the best examples of this in F1 is the weather. F1 teams constantly check their weather radar on race weekends to make sure they are the first team to react and get ahead of the competition.
In the case of subscriptions, this is far more nuanced and subjective to the specifics of your business model and target consumers, but below are some guiding structures that can help.
- Local and wider market economics: Stay on top of wider economic indicators such as stock market performance, inflation, interest rates, and also key supply chain influences to identify potential threats or opportunities to the consumption of your subscription.
- Key Performance Indicators: This is Business 101 and not specific to subscriptions. Make sure you’re measuring the things that matter. Operationally, measure your lead generation, pipeline volumes, conversion ratios, and your costs. Within your subscription itself, look at usage data, the frequency that consumers are accessing and using their subscription, the features that are used and adding the most value, product performance and how it might be improved.
- Customer feedback: Back up the insights from your data with insights from your customers, measure your CSAT, understand what customers request support for, and analyse the qualitative feedback you receive.
Monitor your competition and market trends: Keep a close eye on how your competitors are differentiating themselves. What are their win themes against you, what new features are they launching, and how can you stay ahead of the curve? What wider market innovation and technology advances might be deployable within your product? Set new customer expectations around how you interact with them or take payments etc.
3. Respond rapidly to maximise subscription performance
The pace at which you respond to volatility and change is critical. In F1, a change in the weather, the deployment of a safety car, or an issue with the car sparks a hive of activity to either limit losses or capitalise on opportunities. Changes can also take place over a longer timeframe and require more significant shifts in strategy and design. This is particularly prominent when it comes to long-term, social, and environmental changes. Examples of this in F1 include:
- The removal of mid-race refuelling
- Limiting the number of tyre and component changes
- The banning of cigarette advertising and with it the removal of many longstanding and incumbent sponsorship revenue streams.
The same financial, social, and environmental pressure and regulation are present across businesses. Innovation and disruption come at an increasingly rapid rate, new complementary technologies may be released – AI being particularly relevant at the moment, or competitors may release new differentiated features.
You must have robust ongoing product development and back-office technology functions that can quickly respond to, and introduce change into, your products and supporting systems to help manage subscription uncertainty.
- Product development: Introducing agile practices into how you manage ongoing product development will ensure that you can effectively adapt and pivot your subscription strategy and product roadmap to respond to shifting market dynamics and customer behaviours. (We will expand on this theme later in the series).
- Flexible subscription technology: Back office technology needs to be flexible and agile. Market shifts will see an influx in requests from customers to modify their subscriptions. Ideally, these changes are facilitated by digital self-service interactions and fulfilled via automated workflows, however, this is not always the case. If you do not make the right back office technology and process decisions upfront, you can incur significant subscription fulfilment, amendment, and billing overheads associated with time-consuming and manual subscription adjustments. We will expand on this theme in our next article in the series.
There’s no silver bullet to managing subscription uncertainty but the above approach can help mitigate your susceptibility to marketplace volatility.
In the coming weeks, we’ll be addressing these themes in more detail with deep dives on:
- Subscription technologies
- How to optimise subscription operating models
- How to set up product development teams for success
- How to build and manage subscription business models as part of your wider organisation
While there is market volatility influencing subscription performance, the lead indicators are still strong with continued growth of the subscription economy forecast. Over the last 11 years the Compound Annual Growth Rate (CAGR) for SEI companies has been 17%. Despite various macroeconomic headwinds, companies in the SEI continued to outpace S&P 500 companies in 2022, with 12% revenue growth compared to 10.6%, respectively (1). The next articles in our series will help you capitalise on this continued growth and opportunities it presents.
If you need help revving up subscription success for your business, please get in touch.
References
- Subscription Economy Index from the Subscribed Institute
