Monday, February 13, 2017

How to Maximize Your Sales and Revenue Potential with Subscriptions (And What's the Rule of 78?)

Here's your warning: this post may ramble on and include lots of math. It has charts and tables to help.

Now that I've got that out of the way, I thought I'd share with you what seems obvious but might not click until you can actually walk through and visualize it: subscriptions are more powerful to your revenue model than single sales.

I'll say that one more time in case it is revolutionary to some of you: subscriptions are more powerful to your revenue model than single sales.

Well, duh, you might think. Of course, subscriptions are better because you get money over and over again. But did you know that they are seventy-eight times as powerful? It's a little phenomenon that in the utility industry (or presumably other service subscription industries) goes by the name "rule of 78s."

To illustrate this process at work, I'm going to walk through some examples. Let's start with a product that sells for $1000. If you make one sale a month, then you have brought in $12,000 in your first year. Here's a very simple representation of that.

Looks easy. But convincing 12 different people to part with $1000 in a single sale is not easy work. Every additional zero on that price becomes exponentially more difficult to convince someone to buy with a single stroke of the pen or swipe of the credit card.

But what if you could somehow redesign your product as a subscription product? How much would you have to sell in order to make the same $12,000?

The answer is $154. And if you sold twelve subscriptions at $154 each, you actually pull in an extra 12 bucks over the course of the same year.

If you look closely, you may notice that Sale 1 there actually causes the customer to pay you $1848 out of pocket instead of $1000, but since it is broken into nice $154 payments, it may cause less pain to the customer in terms of an individual monthly purchase or budgeting perspective.

Think about your own budget. Are you more likely to buy something for $1000 this month? Or sign up for a subscription that would only cost you $154 this month? Chances are the latter.

As you can see, you can generate the same $12,000 in revenue over a year with a price point of $154, which is roughly 1/78 of the total annual revenue (hence the name - rule of 78s).

If you want to figure out your price point to convert a single month sale into a subscription sale and hit the same annual revenue, divide your price point by 6.5 (that's 78 divided by 12 months). $1000/6.5 = $153.8462 or $154.

The untold story of this subscription model may come in year two, pictured here:

This is a chart of the second year for the same 12 subscriptions. So, as you can see, without making any additional sales, the revenue for the second year is almost double the first year.

Even if you lost a few subscriptions year-over-year, the ongoing power of the subscription means that as time goes, your snowball will grow and grow and you can continue to grow the business with fewer reliance on new sales.

But what if you could sell your product subscription closer to the original price? You got it, your revenue would soar - 6.5 times higher in fact.

Now, if you are struggling to sell your product once at a $1000 price point, selling a subscription at that price point may prove near impossible. But if you can convert your product to a subscription model, then you can play with the range (between $154 and $1000 in this example) to maximize revenue.

Still reading? That's it: the magical power of subscription models to maximize revenue while reducing the pressure on sales teams to make huge new sales monthly. Hopefully it helps explain the math behind how it works and gives you some ideas as to how you can maximize your own sales revenue by retooling some of your product design.

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