The Subscription Economy and why it’s a win win for you and the company.

The way that we consume everyday products and experiences have all started the transition to subscription-based models. Where you used to go to Blockbuster or even Redbox to get a movie, you now pay monthly for your Netflix subscription. Where you used to go to Best Buy when your favorite artist was releasing a new CD so you could add it to your ceiling high CD tower in the 90’s, you now listen from anywhere via Spotify. And from the days when buying a new computer meant buying a brand new one-time license from Microsoft so you could get their entire Office suite or their new operating system you now subscribe to pay a monthly fee and get it all!

These examples are just the tip of the iceberg. I specifically remember when Microsoft switched to having Office 365 as a subscription for $10/month instead of the typical $250 one time license. In running my quick financial equation, I quickly knew that if I had this laptop for more than 3 years then I was paying way more than the one-time license and I was upset. It was not until 1 year later when I realized the good that came out of the subscription model.

While using my computer to write a paper I got the notification that I had an upgrade for my Office suite. As a technology-focused millennial, I always wanted to newest software so I looked to see how much it would cost for me to get the new upgrade. It was free! I quickly initiated the download, and within a few minutes I had the newest software without having the pay a new $250 for the new license. Now I did my financial model and I just spent a total of $120, and got $500 in value that I would have needed to spend if I went the single license model!

I get it now. This allows the company to have a steady stream of income…while providing the customer with a steady stream of new software.

Now this is nothing completely new. We have been paying monthly subscriptions for cable TV, our cell phone, and our utilities for years. However, these older types of subscriptions have not taking the next step into turning themselves from a product based service, to a subscription based service with a customer focus.

The Company Perspective

This subscription type model is now impacting the world economy, and the opportunities are readily available when it comes to how a company could transition to a new subscription-based model.

The expert in this field is Zuora, a Mountain View, CA company that helps companies transition from their outdated product models to subscription-based models. The CEO, Tien Tzuo, recently released a book called Subscribed which helps explain the movement of the subscription based economy.

In the book it explains a few key topics:

1. The move to subscription-based models can work for almost any company once you focus on a customer-focused mindset instead of a product-based mindset.
2. When making the move to a subscription based model you are going to have a HUGE transition in both profit, customer base, company culture, and the typical business process.

Subscription-Based Models & The Customer Focused Mindset

When we think of subscriptions we normally think of easily scaleable products such as software, music, video, and other digital assets that can easily be replicated through the use of technology. But we know that is not true because we have product based companies that sell clothes and razor blades on a monthly basis to their customers via subscription models. You can even have a Porsche subscription so you can continuously swap out and drive a different model Porsche whenever you’d like!

So what do all these subscriptions have in common? They all transitioned to focus on the customer. When these companies had product focused companies, the goal was simple. Create a product people like, ship it off to their distribution channels and then the distributors would sell it to end users. Then when the company wanted to make more money, they would come up with either a marketing plan to lower the cost, or they would invent a new version of the product, and then go through the process again and ship product to their distribution channels who would sell it to the end users. Here is the graphic below.

The old business model no longer works because subscription based models need to be both scaleable, as well as customer focused. Besides a direct sales force, the producer does not have any direct connection to the customer. There is normally very limited information being passed backwards through dealers and retailers during the sales process, and even on telephone and internet sales the goal is to have a large reach and fast, one time transactions. Not to mention, when you are trying the scale to millions of users, you would then need to continue to hire a large workforce of sales reps, and that is no small cost.

The importance of being customer-focused is the blood line to succeed in the subscription economy. The business needs to be able to consistently be providing both value, and continued innovation for the customer so that they would be willing to keep paying month after month.

So in order to achieve this, companies must follow the model that Zuora speaks about in their new business model. This model makes the company own the customer. Everything from distribution, experience, innovation, and other services are all run from one central hub that rotates around the consumer. The change from the business side is that you now have an ID (think your AppleID) that is your digital person for this company. They continue to then help build a better experience for you. This before would not be possible through the old business model. In that case, you were just another transaction that went through their ordering system with no connection to you.

With a subscription based ID, companies can now look at how they can continue to make the product experience better for the subscriber and learn about ways to keep you as a long term customer that will not unsubscribe from your service. With the subscription based model, you as the consumer become the main center of attention for the company instead of the focusing their attention on different marketing tactics that get your interested in a one time purchase.

The Transition Period

The transition from the old business model to the new business model is no easy feat. Companies are going to see a drop in revenue, a drop in customers, unorganized business processes, and a bunch of employees who don’t like change.

From the revenue side of the house, Zuora provides another “fish like” graph that shows the revenue over the transition and why you need to wait for the long term benefits.

The basic premise of the above graph is that you are going to have a ton of up front costs to transition your company which will then get more efficient over time as well as as the company scales with more users. The end goal is that if you have 1 million users or 10 million users that you do not need to 10x your operation to make it work.

Companies are going to have to spend initial funds on new technology to be able to maintain your users and any software or CRM tools to engage with your customers. Money will also need to be spent on training employees to be able to work directly with customers instead of their typical engagements with distributors. Not to mention, there are probably going to be multiple iterations of “what” the new subscription model is going to be and what is going to work and bring in subscription based companies.

However, over time, the company will figure out what will work and what will not work. This will then increase the efficiency of the business, and then eventually if done correctly, will increase profitability as a whole as you can see in the fish model above.

The Customer Perspective

At this point, you now understand the company perspective, which probably alluded to the customer benefits with subscription based models.

Some basic benefits:

• Streamlined Purchasing: One website, with a simple interface to sign up and quickly get your hands on the services provided. No need to go to a distributor whose job is to sell a wide variety of products. Instead you are making a purchase from the company who knows literally everything about the product.
• Returns: If you do not like the service, you can just stop the subscription! Most subscriptions have no contracts, so you are able to make sure you get spending your money on things that provide you value. If you want to try Spotify, then sign up, if you don’t like it a month later, then just cancel without any hassle.
• Continued Improvements & Upgrades: Since the companies are trying to get you do be a long term customer, they need to continue to bring you new content, features, and add on value so that you will not leave. This means that you are not going to have the old experience that we used to have with Microsoft Office products when you had compatibility issues between Office 1997 and Office 2003 because you never wanted to buy the new version.
• Focused Spending on Products & Services: With subscriptions, you can get access to highly focused products that you are looking for. Through platforms like Apple TV, you can choose to subscribe to channels and content that are specific to you. If you are looking to only pay for Baseball and CNBC, then you can subscribe to both MLB and CNBC through their individual subscription offerings and not have to pay for cable where you never watch 90% of the channels they provide you. This allows you to have an option to lower your monthly costs. Sure, you may have 35 subscriptions hitting your credit card, but the value of the money spent and the experience are much better.

There are many reasons we all love subscriptions, and most of them all share the same consistent benefits in their respective areas. Think of Netflix. We love the low monthly price, we get continuous new content that get delivered to all of our devices daily and Netflix even has a personalized “playlist” of recommended movies based on my specific tastes, and the best part unlike cable packages, I can cancel anytime I want without a penalty!

The Win Win Scenario

I believe that subscription models will help both the consumer and the producer in the long run. Where it used to be more of a game of how many widgets or how many sales transactions a company could have in order to boost revenue and profits, it is now turning into a different game. It’s a game of continuously looking for ways to impress customers by adding new features and functionality to continue to solve their day to day needs, wants, and problems.

Now you could think that last statement was a way for me as a typical consumer to think that now “it’s all about me” instead of the other way around at the company. But, I think there is something a little deeper here.

In the new business model, there is a strong focus on efficiency, scaleability, and overall customer satisfaction. In this model, the company can not do well unless they provide valuable services which helps increase transparency. This mandatory transparency helps increase customer satisfaction, and in return means higher customer retention which is a big portion of the subscription based financial model.

With increased efficiency and scaleability, companies will be able to expand much faster than they used to. Where it used to be a hassle to get a product overseas to international customers, now they can have a simple sign up form on their website to help provide more customers with more value all over the world. Since this is much easier than before thanks to the internet, companies will be able to scale bigger and be more successful where product based companies used to struggle. Then in return the companies are able to gain more valuable, long term customers who are in return getting incredible access to the services and content they want.

More subscription based offerings = More Transparent and Efficient Companies = More Satisfying Customers w/ High Retention Rates = Win Win for Everybody.