The subscription model is the only revenue model that is gaining traction in the last decade. It de-risks a lot of aspects in your business
- Salaries can be given on time
- The cash flow is better
- Unit of Economics is simpler
- Revenue is distributed across
- Innovation gets funded
One of the skills that I must improve is explaining the value of some concepts in clear words to my team. Let’s say for example Opportunity Cost. It is the forgone benefit that would have been derived from an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.
Opportunity cost is what a person sacrifices when they choose one option over another.Investopedia
I had a debate yesterday over it. It was back and forth and I was putting forward a point of not to lose a delta of small subscription fee X just because we have a consulting with the same client. The consulting job will be a big work and it will have a payday of a large amount let say Y. My argument was and is that the consulting job is still not confirmed and may have different surprises in terms of what we end up getting paid and how much efforts we will end up putting. The end profit is still unknown because we are taking a bigger risk.
On the other hand, the subscription fee has no risk and a defined value both to us and our client. The client does not need a special call or additional time to explain the benefits. It can be done over email and will be easy to close the deal. It really does not matter what you think the value the customer gets for the money they paid. It’s the customers job to make that decision, you can only facilitate it. Let me explain this with another example. Let say if the engineers at Apple think that it only takes around $100 to make an iPhone (I am sure you know that already) and this customer is going to buy MacBook pro too. Should I give a discount on the $1000 iPhone to this customer and serve them better. The engineer will do a disservice because there won’t be a good service person sitting to at iStore next time, the website won’t have easy to use customer support, for a few customer when the iPhone breaks their won’t be no question asked replacement, Apple will have to shut down their R&D department (Steve Jobs will be really sad)
Value is the maximum amount that a consumer would be willing to pay for an itemRon Baker
Coming back to our story. The client will be with us at least for the next 3 years. If I calculate the delta X and multiple it with 36 months it will be almost half of the consulting job that we have proposed. The amount will be pure profit which we can invest back in the business in terms of R&D. The better way to serve clients is to charge more upfront and deliver the delight rather than giving effort based discounts. Even if we calculate this year earnings only with the delta it will be about 15% of the consulting project pricing. It can be used to hire a new UX Designer and give value to all other clients.
I guess it’s a skill to look at the big picture and understand it in abstraction, possibilities in opportunities is a rare find and mostly disguised. An iPhone buyer is not buying a phone that works, they are looking for premium features. Not everyone gets that and most will never.
[Updates] After sharing the article with my team it turns out my understanding was wrong on how they took the big consulting project of price Y. They meant it like they were more comfortable in pitching that and uncomfortable in pitching the small delta of X (I got my ROI on this article already). My bad on understanding however I would have thought about how can we add more value that would make me comfortable. Here are a few I can think of, answering any ad-hoc data related queries, increase in official support time covering the time difference, access to run ETL experiments in coming months on data generated by POC as they would need everything according to the new version so that there is no risk for the next cycle due to schema mismatch, Latest database schema access with access logs; email logs; response logs etc done in past 2 years, New Backup system needs to specially installed exclusively for the client and maintain it. Those are my 5 reasons for delta increase which we won’t do for any other client. The question is Can you build on it and add more value?