Could Subscription Models Work for Cloud Services?

The pandemic ushered in a period of digital transformation so unprecedented that it made futuristic endeavors a reality. One major trend that emerged was consumers gravitated toward platforms and services that offered a subscription-based model -- a trend that isn’t slowing down. In fact, UBS estimates that the subscription economy will expand into a $1.5 trillion-dollar market by 2025, making it one of the fastest-growing industries globally.

This shift occurred partly because subscriptions reduce the risk of a daunting up-front cost for customers during a time of heightened uncertainty, and give organizations the ability to earn consistent, recurring revenue and build business resiliency.

One area that could benefit greatly from subscription offerings is cloud. With many organizations shifting their businesses to the cloud, the question remains whether organizations should consider subscription models for their cloud services as a way of incurring increased revenue and improving their customer experience (CX). What’s further, concerns associated with the cost of cloud migration continue to be a barrier to accelerated cloud adoption -- a problem that a subscription model could help alleviate.

Solving Problems Through Key Benefits

The market is constantly changing, and enterprises should always be looking for ways to stay ahead of the curve and unveil new solutions to benefit their overall business. The subscription cloud model offers several key benefits to organizations seeking to stay relevant in their respective industries. In addition to giving companies an opportunity to look at their entire stack of products, platforms, and services to see how a vertical integration can impact their offerings, subscription models can also improve the relationship with customers by driving loyalty and a better, more standardized CX. Instead of a one-time transaction, a subscription is an ongoing relationship between the enterprise and the customer -- keeping the two engaged in a partnership based on mutual benefits.

There are also significant financial benefits. Fundamentally, the nature of recurring revenue is more durable, and the security of clients committing to long-term purchases ensures a stronger cash flow and more homogenized revenue. Beyond an increase in returns, analysts place high importance on recurring business, which has the potential to be a major advantage in proposals to banks for any type of funding. The pandemic put this into perspective more than ever, where companies with a strong revenue stream fared better than those without.

Moreover, subscription-based services provide higher resiliency and performance due to in-built multi-tenancy and scalability design. Companies that have not migrated to the cloud can start integrating with subscription-based services beforehand to enable API-first and cloud architecture in their ecosystem, which will make it much easier for them to migrate to the cloud later as it will reduce the overall complexity of refactoring and re-architecture of their on-prem workloads that already leverage subscription-based services and APIs.

Potential Roadblocks

While subscription services are gaining impressive traction due to the multitude of benefits, there are still several challenges that remain. One major hurdle is operating model re-design and understanding how to build new technology and architecture over existing stacks. This affects many standard operating procedures, such as launching and building new features, developer access to organizational resources, and more. It also will most severely impact companies whose existing operating model has multiple silos, rather than one that is bundled together.

There are also partner challenges. By switching to a subscription model, the enterprise is shifting to sell products as a service, which salespeople may not have the skillset or knowledge to accomplish. For example, imagine a salesman who has only ever sold toasters, and one day he is told that he must now sell breakfast as well. While the salesman is proficient at selling toasters, he may not be well-versed enough to sell breakfast, which requires a knowledge of additional factors, such as nutrition and allergens. The need for a highly trained salesforce that can sell subscription-based services may leave organizations questioning how they will retain their talent and train them for this new task.

Additionally, many companies have what is referred to as a “cash cow” product, which brings in significant revenue. Trying to tack on subscriptions and SaaS to an existing cash cow can result in friction and costly re-architecture of the legacy application. This is especially true when the resource utilization is highly predictable and already budgeted.

Seamless Integration

After identifying and addressing any potential challenges, it is time to prepare for a successful integration. The subscription model is highly suitable for all industries, but the transition differs for every company depending on its business model and ecosystem. For example, some companies have products that are oriented toward hybrid cloud -- meaning their model must be constructed to support clients operating on prem. Regardless, the integration of subscription-based solutions is usually much easier if the service endpoints are well defined with top-down API consumption in mind. It also reduces the huge complexity from platform infrastructure setup and maintenance and provides better control on usage and budgeting of underlying resources.

It is evident that there are two major trends at play when deciding whether to offer a subscription model for cloud technology -- a large-scale organizational shift to the cloud, as well as a consumer shift toward subscription model offerings. While trends signify that this technology has the potential to result in a wide array of benefits for both enterprises and consumers, there may still be many challenges to overcome.

Cloud is not a one size fits all, and organizations that clearly understand their business model and key objectives for the future will be first in line to overcome the challenges that await.