If you’re in the Subscription Economy, the most dramatic effects of trends like cloud computing and mobile won’t be felt in your company’s product line. The real disruption will be to your revenue model. In the Subscription Economy, customers will not pay to own your products. Instead, they expect to pay for the value they receive by using your products. Revenue management is the common approach to solving that challenge of optimizing the revenue model. Unfortunately, the rules of the Subscription Economy render traditional revenue management ineffective. To manage revenue and profits in the Subscription Economy, companies need a new recurring revenue management process to optimize the revenue model.
What is revenue management?
Revenue management is common practice in the distribution-centric Transaction Economy. The goal is to maximize revenue and profits by pricing products to match customer demand. Revenue management is pervasive in such industries as airlines, hotel rooms, surgery, advertising, retail, media and rental cars. For example, airlines offer a passenger a seat between two cities defined by departure time, legroom, seat width, and associated service. Because the product, in this case a seat, is both standardized in terms of customer fulfillment and limited in inventory, the airline can forecast demand at specific prices from different customer segments and manage seat availability to optimize revenue. The airline can forecast demand for higher priced seats from business travelers that value last-minute bookings and sell the remaining inventory at a lower price to early purchasing leisure travelers who value cheap travel. While the business traveler and the leisure traveler sitting next to each other expected the exact same product, each valued the trip differently and consequently paid a different price. By selling the right standardized, inventory-constrained product to the right customer at the right price, the airline maximizes revenue and profit.
Why can’t traditional revenue management be used in the Subscription Economy?
Unfortunately, distribution-centric revenue management doesn’t work for the consumption-centric Subscription Economy. For example, imagine if your cellular provider informed you that all the minutes of data transfer were sold out for the day and you could not buy anymore regardless of price?! Or imagine if you wanted to sign up for a subscription and the provider said they were sold out?! These are principles of the distribution-centric revenue management process.
The revenue management process is different in the Subscription Economy for two reasons as shown in the figure. 
The first difference is that customer fulfillment is variable. While each customer receives a standard subscription agreement, each of them will use the product differently. Unlike the airline example where the airline defined customer fulfillment (i.e., a seat), in the Subscription Economy, customers define fulfillment based on their individual usage (e.g., amount of texting consumed in a cellular plan). Customer demand can no longer be determined from purchase data alone. Customer demand must be measured by usage data and purchase data together.
Second in the Subscription Economy, there is no limitation in inventory. In other words, differentiated value between customer segments cannot be derived simply from product availability (i.e., inventory management). Unlike airlines that create differentiated value and revenue based on managing inventory of a particular product package (i.e., a seat), in the Subscription Economy, differentiated value and revenue opportunities have to be created by providing differentiated product packaging (e.g., different combinations of minutes, text, and data in a cellular plan). Rate plan management replaces inventory management for revenue optimization.
These differences highlight why revenue management in the Subscription Economy requires a new approach which the “use it or lose it” dynamic highlights the most. The “use it or lose it” dynamics states if the customer does not use your product at a level that matches the subscription agreement, the customer will cancel the subscription, and you’ll lose the revenue (A complete description of “use it or lose it” can be found here ). So in the Subscription Economy, recurring revenue management (i.e., the ability to proactively manage the subscription revenue model) boils down to matching the right rate plan to the right customer usage at the right price.
Why is recurring revenue management required?
Just as revenue management was is a well-chronicled competitive advantage in Transaction Economy industries such as airlines, recurring revenue management will be a requirement for competitive advantage in the Subscription Economy. Recurring revenue management is rapidly becoming a necessity rather than a nicety. Companies that currently leverage recurring revenue management, are able to increase topline revenue 10-15% compared to their competition. That statistic by itself makes recurring revenue management a required discipline for survival the Subscription Economy.
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