This article was originally written for and published by Fast Company.
GoPro recently announced some exciting metrics: the company surpassed two million subscribers, generating $100 million in annual recurring revenue (ARR) at a 70%-80% gross margin. Let that sink in for a moment. A publicly traded consumer electronics company known for pioneering the action camera finds it worthwhile to issue a press release sharing metrics usually associated with Software as a Service (SaaS) providers.
There is no mention of units sold, average price, or contribution margins. Just those big beautiful subscription metrics. The world is certainly changing for product companies.
Like GoPro, many product companies in the high-tech, medtech, and consumer space are embracing recurring revenue models that rely on deeper post-sale engagement with their customers—something that is becoming increasingly possible thanks to digitally connected products that track engagement, usage patterns, and trends.
In a recent survey conducted by One Poll, a whopping two-thirds of U.S. consumers stated they want companies to engage with them after the initial sale. Faster-moving companies are capitalizing on this by evolving their business models to meet the needs of today’s customers. And subscription models are gaining traction across industries because they deliver benefits to so many stakeholders: buyers can pay over time and ensure they continue to receive value for their spend, companies gain a predictable and highly profitable revenue stream (assuming they can deliver that value), and shareholders reward recurring revenue models with higher valuation multiples.
As with any business model evolution, the move toward subscription models is having a big impact on a number of key roles at product companies. These companies need to think more like other industries that traditionally focus on delivering long-term successful outcomes and services rather than a one-and-done product—and they better adapt quickly or risk becoming obsolete in the near future as their competitors embrace this new model.
Business Models are Changing to Meet Evolving Customer Needs
As the post-sale experience becomes more important to revenue growth, success metrics and key performance indicators (KPIs) are also evolving.
In the GoPro press release, we see subscribers, ARR, and gross margin. Another KPI we see more frequently at product companies is average revenue per user, or ARPU, which is usually reported on a monthly basis (some companies use daily, quarterly, or annual depending on their specific need). The number of subscribers x monthly ARPU x 12 months = ARR.
If we break this down further, the number of subscribers is driven by new subscribers and retention of existing subscribers. As the total subscriber base grows, so does the impact of retention. Any company focused on building recurring revenue models knows this, and will push their teams to maximize long-term customer satisfaction and retention in order to grow recurring subscription revenue.
Product companies have more control over long-term customer satisfaction because connected devices provide real-time visibility into how their products are used well after they are sold. And, with software’s greater role in high-tech products, product teams can adapt to customer needs by updating how their products work years after they are sold.
In recurring revenue business models, products can—and should—continue to change in lockstep with changing market trends. Companies have no choice but to stay abreast of changing customer needs and evolve their products quickly to meet them—or risk losing those subscribers, and their revenue, to competitors who have adjusted faster.
The second part of our equation, ARPU, is another big change for product companies. Previously, we expected product managers to focus on units sold, average price, and contribution margin. Once a sale was made, the metrics were locked in. That’s not the case with subscription models.
ARPU can increase over time, allowing companies to increase the value of that initial sale if their customers see value in paying more. A happy customer paying a monthly subscription is more likely to accept an annual increase in that subscription price instead of churning. A happy customer is also more likely to buy a related add-on, pay for an enhanced experience, or upgrade their subscription tier for an enhanced offering.
Here again, customer engagement never ends. Product companies must remain as connected to their customers as possible, for longer periods of time, in order to deliver the products and experiences that will allow them to increase ARPU over the lifetime of their customers.
ARR and ARPU growth are vital success metrics for subscription-based XaaS companies. These metrics, in turn, rely on deep customer engagement over the long-term. As more and more product companies understand what delivers that deep engagement for their specific customers, you can expect to see more press releases like GoPro’s to share their success with the outside world. Next, we need to dive into how companies can put the customer at the center of every business process.
Ray Hein is a member of the Fast Company Executive Board, a private, fee-based network of influential leaders, experts, executives, and entrepreneurs to share their insights. Check out all of Ray's content for Fast Company here.