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How Your Supply Chain Changes When Migrating to a Subscription Pricing Model

Subscription services have become a part of our daily lives – whether it’s prescription medication or streaming services.

But, one service that has stood the test of time is the Book of the Month Club. Rewind to nearly a century ago when a journalist-turned-advertising professional began charging a monthly fee for book deliveries, rather than wait on them to pick out a book from a catalog.

This business model permeates our everyday lives, and it’s now evolved beyond the direct-to-consumer sector to attract B2B organizations also looking to capitalize on recurring customer relationships. B2B companies are now racing to add services on top of the hard and soft goods they already sell – with some exploring how to offer a subscription to the product itself versus outright ownership.       

In a subscription business model, getting a customer to order a subscription is only half the battle. If you think about it, a large percentage of a customer’s interaction with a brand today happens during the supply chain process. One could only imagine what a huge effort it was to send books from New York City to a family living on a ranch in rural Texas nearly 100 years ago. Present day, there’s still a massive engine that ensures a subscription service is fulfilled and delivered on time and accurately, but a key difference from 1926 to 2020 is how digital the world has become.  

Customer service representatives need to check inventory levels, track order statuses, look at estimated delivery times or make changes/cancellations/returns immediately at a customer’s request. Customers don’t care where they are in the buying process – they just want a seamless experience that is accurate, fast and convenient. This experience determines customer loyalty – the very foundation of the recurring business model that makes subscription services so successful – and to deliver on it, companies need to have their entire front and back office operations connected.

Given that subscription services have been around for a century and continue to grow, it’s reasonable to assume that consumer adoption will continue to increase for the foreseeable future. This is good news for B2B organizations, but moving to a recurring business model impacts every portion of the supply chain and businesses must be prepared.

Here are the 5 steps of the supply chain impacted when migrating to a subscription pricing model:

1. Planning 

Planning is a foundational element of supply chain management and a subscription model will make businesses rethink their entire existing operations. They’ll need to ask themselves questions such as:

·      “How many distribution facilities are now needed and where?” “Is it more or less than prior?”

·       “If our goal is to increase revenue by 10% with subscriptions, what needs to change in our supply chain configuration?” 

The good news? A subscription model makes planning easier. Consistent demand means less fluctuation in order volume, which makes forecasting, inventory management and scheduling more predictable. There are also specific tools that leverage predictive analytics and artificial intelligence to help make these decisions even easier.

2.  Sourcing and manufacturing

With subscription models, ensuring that the right products and services are sourced and manufactured correctly is more important than ever – since businesses have made a commitment to their customer to deliver on a service. Whether it’s the same good each month, curated items, or a service on top of a product, the commitment to deliver is the same, and if a subscriber is left without use of the product or service, it’s likely to lead to a negative customer experience.

There are a few things to consider when it comes to subscription models in this category including: Is the product pre-built or can it be customized? If each product can be uniquely configured, businesses need to ensure they have procured enough material to meet demand.   For businesses adding subscription services on top of products, Internet of Things sensors need to be sourced and built into products to enable tracking and provide usage monitoring.

3.  Warehousing and inventory management

Similar to the previous step, warehousing and inventory management will be critical as well. Inventory management ensures that customers get access to the right products in the most efficient way possible for businesses.   

In this category, it’s important for businesses to again consider what type of offering they’re launching, as that will impact whether the inventory levels and/or SKU counts will shift up or down. If it’s a curated service, a wide assortment of constantly changing inventory is needed. But if it’s a replenishment service, inventory can be easily predicted, and businesses can ship from the most efficient and cost effective warehouse. For the latter, sometimes businesses can even implement shipping directly from the manufacturer if they’re simply acting as a fulfillment service.     

4.  Fulfillment and delivery

For subscription models, fulfillment and delivery could mean shipping a physical good and activating the subscription upon receipt, or the fulfillment could be instant with digital downloads and access. 

This is where it’s particularly important to have processes connected and streamlined with an enterprise resource planning system – or better yet, a subscription management system. This ensures that the billings and revenue recognition are correctly applied to the goods and services. In order to recognize any revenue, a business has to fulfill and deliver the services to the customer. If businesses don’t have those two portions connected, they will cause themselves a financial headache.  

5. Servicing

Some may assume the supply chain reaches its endpoint after delivery, there is the all-important element of servicing. 

Subscription models add significant complexity to servicing, because unlike a one-time purchase, subscriptions can be changed, amended and cancelled, and all of that can be done mid-cycle. Although most monthly services are generally non-reimbursed, the same cannot be said for annual subscriptions. By accurately tracking deferred revenue, it becomes possible to handle customer cancellations quickly and efficiently. Renewals are also an important element of servicing, and having an accurate picture into the health of a subscription base not only helps businesses improve churn rates, but also improves the data feeding into the planning process.   

To deliver subscription experiences, businesses need to have the right technology in place to connect critical information between front office customer experience applications and back office data and processes. By understanding how subscription models impact every step of the supply chain process, businesses can ensure they are doing everything possible to deliver on customer expectations, build reoccurring relationships and ultimately help their bottom line.   

 

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