Since the Biblical story of Jonah being swallowed by a whale, it’s been clear that being stuck inside a fish is less than ideal. Similarly, many companies are “stuck in a fish” while transitioning to a subscription sales model. In this blog, you’ll learn about the SaaS fish model and discover strategies to navigate it successfully.
Understanding the Fish Model
Over the years, industries like technology, software, industrial automation, and medical equipment have increasingly adopted the subscription sales model. Several key factors drive this shift:
- Your customers value the flexibility that subscriptions provide.
- Subscriptions offer you a consistent stream of recurring revenue.
- If you adopt subscriptions, you avoid falling behind your competitors.
Despite these advantages, many companies are hesitant to embrace the subscription model. The reason is simple: transitioning from capital asset transactions to a subscription framework requires adopting a new financial model.
This new financial landscape can be challenging for you as a leader. It means that your future economic performance will not mirror past successes and may initially appear worse. Explaining this financial downturn to shareholders and other stakeholders is a task no one looks forward to.
Having monitored the journey of numerous companies toward subscription selling, TSIA has identified clear patterns in financial trajectories. When mapping these patterns, they resembled a familiar shape—the “fish model.” Today, this model is a concrete reality for many businesses operating with subscription models like yours.
Related: The Fish Model and Digital Transformation
The two lines that form the shape of a fish in the model represent your revenue and costs. Naturally, the difference between these two is your profit, depicted as the white space between the lines—the fish’s body.
Typically, your company starts on the left side of the fish, having built its business on a capital asset transaction model that has traditionally been quite profitable.
Now, if you’re considering offering subscriptions, your objective is to navigate to the right side of the fish. We refer to this process as “swallowing the fish.” Once your subscription model is fully operational, your SaaS company stands to gain significant benefits:
- Revenue growth will accelerate.
- Labor costs will be reduced.
- Efficiency will enhance as your operations shift toward a cloud-based model.
- Profits will eventually return.
However, the most challenging part of this journey is getting through the middle of the chart, transitioning from the left side of the fish to the right side. This phase involves crucial adjustments and careful management.
Navigating the Middle of the Fish Model
You’ll notice that revenue and costs diverge significantly in the middle section of the fish model. Costs increase while revenues decrease—but why does this happen?
Focusing on the revenue line, when your company shifts from up-front revenue recognition to recognizing multi-year subscriptions, your comparable revenue performance will inevitably dip. As your new subscription offerings cannibalize the old ones, these revenues may appear even worse.
Simultaneously, your company must invest to support the new subscription business. For success in a SaaS business, you must build teams for customer success and analytics, establish data centers, and more. These investments contribute to your rising costs.
So, you find yourself in the middle of a fish, where expenses are climbing, and comparable revenues and profits are falling. This segment of the fish represents a challenging phase and is not an ideal place to be stuck.
Essentially, the core issue depicted by the fish model revolves around expectations. Stakeholders are accustomed to sure profits, revenue, and costs and expect the company to maintain these levels. Any significant deviation from these levels can disrupt these expectations.
Swallowing the Fish
The transition the fish represents is only possible if your company was initially established as a cloud-based subscription business. The goal is to navigate the middle part of the fish as efficiently as possible, minimizing the gap between rising costs and falling revenues. You don’t want a fat fish, so keep this transition phase as lean as possible.
The key to successfully swallowing the fish lies in careful planning. You must know crucial tactical issues to prepare for a successful transition. These issues, commonly faced by many businesses, include adjustments your company must make as you shift to the subscription model and manage through this challenging phase.
Related: Five Steps to Solidifying an XaaS Strategy and The Fish Model
Issue #1 – Compensating Your Sales Team
First, consider how you plan to compensate the team selling your subscriptions. You need to establish a compensation plan that effectively incentivizes the sales team and is sustainable for your bottom line.
Many companies run into trouble by offering huge incentives to encourage the sales team to prioritize the new subscription offers over the old capital asset offers. As you can imagine, significant incentives inflate costs. Increased costs, of course, mean a fatter fish.
Nevertheless, you need to consider how you will encourage your salespeople to embrace the new subscription model. If you don’t, the salespeople will likely stick to the old offers, which they now offer upfront compensation for.
As you switch to subscription sales, consider how you will get your sales team on board. For the transition to succeed, your salespeople must have a vested interest in subscription offers beyond the initial contract.
Related: Swallowing Half the Fish
Issue #2 – Focusing on Subscription Renewals
Renewals are another major issue to consider when switching to a subscription model. The subscription business model is built on renewals, and customer churn rates determine whether a recurring revenue business succeeds or fails.
A subscription-based company with high churn will experience low growth, high costs, and a negative reputation in the marketplace. Conversely, a subscription-based company with high renewal rates will gain market share and experience growth.
Customer success is the team responsible for ensuring customers fully adopt the product. Adoption leads to renewals and reduces churn. Thus, adding a customer success team is imperative when moving to a subscription model.
Adding new personnel will increase costs and further bloat the fish, but the payoff should justify the investment. Once you get to the right side of the fish, the additional customer success personnel will help increase revenue.
By committing to a plan to develop a customer success team, the cost and revenue lines on the fish chart will cross again. Once revenue begins to outpace costs, you have successfully navigated into the fish’s tail.
Key Takeaways:
- Expect Initial Challenges: Transitioning to a subscription model often results in a temporary financial dip as initial costs rise and revenues appear to decline. This is a critical period where businesses must manage cash flow carefully and communicate clearly with stakeholders to set realistic expectations.
- Invest in Key Resources: As you navigate the middle of the fish, strategic investments in crucial areas such as customer success and analytics teams are essential. These resources not only support the operational shift but also play a pivotal role in enhancing customer satisfaction and reducing churn, which are fundamental to the success of the subscription model.
- Plan for Long-term Success: The journey through the fish model requires meticulous planning and a clear focus on long-term gains. Companies should prepare for and prioritize actions that enhance subscription renewals and customer loyalty, as these elements will drive future revenue growth and stabilize the business once the initial transition challenges are overcome.