Would you subscribe to toilet paper or organic tampons?
With Kevin Jenkins
This article was first published in The New Zealand Herald on 19 August 2018.
You might subscribe to a newspaper, but would you subscribe to toilet paper? You might have wine delivered to your home each month, but would you sign up for chocolate to be delivered each month? What about clothes, flowers, or use of a range of vehicles?
Subscriptions aren’t new, but they are back with a vengeance, and they have the huge advantage of providing reliable cash flow.
Tien Tzuo is the founder and CEO of Zuora, the self-proclaimed world’s largest subscription management platform. He’s just published a book called Subscribed — Why the Subscription Model Will be Your Company’s Future — and What to Do About It.
He invented the phrase “subscription economy”. The model has a few other names, like the membership economy, retainer model, SaaS, or plans (think mobile phones or utilities).
“Subscription” has a good ring to it though, and it also goes right back to the beginnings of the model itself with the foundation of newspapers hundreds of years ago.
Tzuo’s formula is simple: identify the needs and wants of some customers, create a service delivering ongoing value, and turn customers into subscribers to secure recurring revenue.
Others describe it as replacing ownership with access.
Tzuo has a software background, and cites the rise of his old employer, Salesforce.com, as a great example of an early subscription insurgent disrupting the enterprise world. His favourite example though is Adobe, which took a huge punt in abandoning a lucrative “software in a box” model by moving to a cloud-based software-by-subscription model.
Tzuo argues that the old model was about creating products and then managing the supply chain as efficiently as possible to maximise margins. What was missing — and is now fatal for firms which don’t respond — is engagement with customers.
Tzuo talks about how big car manufacturers handed over customer engagement to their dealerships, depriving them of what today is the pure gold of customer insight. Around 2000, when corporates realised that just focusing on productivity was disrespecting customers — including products that didn’t necessarily work that well — they did respond, but he is scathing:
“So what did the big companies do to address this problem? They set up customer service departments! When in doubt, build another vertical silo — they launched market services, technical support lines, warranty contracts, and maintenance groups. The customer had truly arrived — they had their own department now. And that department was located way down at the far end of the supply chain, just past the loading dock.”
Not your regular book club
Amazon took the customer-first idea to a new level. No more customer segments, no more tedious point-of-sale transactions. Enter a direct relationship with each customer, each with their own activity history, their own red flags, their own algorithm-driven suggestions.
It’s the digital bit that underpins the new model though, because digital platforms enable frictionless transactions, and the data generated enables profound insights into customers’ wants and needs.
New patterns are emerging in e-commerce generally. And the answer to success competing doesn’t lie in an old-school subscription model — remember music or book clubs that delivered default product, and then made it difficult to return stuff you didn’t like, or even to leave the ‘the club’? Gyms famously rely on inertia — another old-school technique — we sign up, don’t go, but take ages to cancel our membership.
The trick is to stop trying to increase your profits by selling more products at better margins to strangers. The new breed concentrates on knowing their customers and Tzuo notes they create “compelling subscription experiences that get smarter and smarter over time”.
Almost counter-intuitively, he says you have to make it easy for your customers to leave if they want to. Think of how effortless it is to leave Netflix when you’re over the catalogue. A few simple clicks and you’re out.
It’s also about tweaking the system. Take Uber, for example, which is now experimenting with a flat rate monthly subscription. The company is willing to trade some short-term profitability for the certainty of recurring revenue, and looking to deep customer loyalty to hold off rivals.
It isn’t only the big tech companies that are looking for the right formula. Thousands of start-ups are now based entirely on subscriptions.
The French Cellar is a perfect example of a weightless subscriber-based digital platform creating value through an efficient marketplace and a great customer experience. It’s described as “pioneering the Wine Subscription E-commerce Model into Asia”. It is headquartered in Singapore and delivers customers two bottles of wine selected by a three-star Michelin sommelier every month, with a tasting guide.
As one commentator noted “this is a radically different experience to buying your own wine in a supermarket. It takes the pressure off the end user, and provides The French Cellar with regular business, not dependent on the whims their customers have each month”.
Wine, toilet paper, chocolate, tampons
In her widely anticipated annual report on the internet, venture capitalist Mary Meeker highlighted the move to subscription services.
The growth of the international services shows no sign of slowing down, and customers seem more willing than ever to pay for an ongoing service that gives them access to something they want.
But, how is this trend playing out in New Zealand? Which local businesses are taking advantage?
Right now, it’s springtime for growth in subscription businesses in Aotearoa. Some are copycats of overseas ideas, some are original. One commentator noted Callaghan Innovation counts more than 400 subscription businesses alone.
One study reported on in 2016 noted Generation Y (26–35) and Baby Boomers were the heaviest users of subscription services in Australasia, spending about 7 per cent of their disposable income on them. It also noted “subscription services are showing far stronger revenue growth than those with traditional payment and service offerings”, and “over the last 12 months, the interest … (NZ companies) have expressed in the subscription economy has probably increased by five-fold over the previous year”.
In July, Kiwi firm Re-Leased was reported as raising $2.3m to help it become the subscription-based software commercial property sector equivalent of Xero. It allows tenants to log issues, and landlords to manage properties more efficiently due to the economies of scale a platform offers. Started in 2012, it received Government funding, but now manages over 35,000 properties for over 500 companies in 40 countries, with the UK being the largest market.
My Food Bag is the highest profile recent subscription success story in Aotearoa, with one report noting it now has over 50,000 subscribers. It has spawned a bunch of copycats, but there are also lots of niche food offerings.
An older example is two Otago students starting MeatMail in 2014, which quickly grew to delivering over a tonne of meat per week to subscribers’ homes.
Some are squarely at the premium end, with experts selecting artisan product using quality, scarce and/or organic ingredients. The Chocolate Bar offers three levels of monthly subscription. Their pitch combines a bunch of selling points: quality, rarity, obscurity, ethical, variety, convenience.
This targeting of a niche reflects a phenomenon Tzuo has identified. On the one hand we have supermarkets and of course Ali Baba and other online general merchants and trading platforms offering all things to all people. On the other hand, we have an explosion of subscriptions for very specific products.
There are lots of flower subscription services, like The Flower Project or Juliette Florist. There are also lots of beauty services, like Beauty Box.
We have long been able to subscribe to have wine delivered, but WineFriend claims a point of difference in first assessing your tastes, then selecting six bottles per month out of the thousands they taste for us, and “all for around the same price as you’d pay in a supermarket”.
One that intrigued me — which presumably means I need it — is Otto + Reid. You give them a “style profile” by completing a survey, and they send you a box of five to 10 clothing items. Anything you don’t like you return free of charge. They focus on Kiwi brands, but the guts of their pitch — the pain point they are easing — is “most men can’t figure out what looks good on them”.
Being environmentally-friendly is part of the pitch of lots of subscription services, like Toothcrush which offers to deliver “a beautiful, eco-friendly toothbrush” each month.
Smartass delivers “tree-free” toilet paper made from fast-growing sugar cane and bamboo fibre wrapped in a variety of colours and designs (and yes, they do mention the bottom line).
Smartass adds to its “feelgood” offering by also donating 10 per cent of profits to Million Metres (“helping Kiwi communities plant native trees for healthy rivers, improving water quality and enhancing freshwater biodiversity”).
The Monthly Co and Necesse both offer subscriptions for the delivery of 100 per cent organic cotton tampons to-your-door, with every purchase resulting in a donation to women in need (Necesse support the Canterbury Women’s Refuge).
Will it last?
There’s a lot of debate about whether subscription companies actually make a profit, with commentary about churn rates and the cost of “buying” subscribers and so on. Tzuo and others argue strenuously that recurring revenue is undervalued, and — like Netflix — first building a large subscriber base is simply setting the company up for the future. You can harvest when, say, you hit 70 per cent of the market.
It’s always difficult to predict what will last and what will disappear. Just ask anyone who invested during the dotcom bubble.
That said, it’s difficult to overlook the growth.
Digital is the fastest growing part of the world economy, digital platform companies are the fastest growing part of the digital economy, and it’s looking like subscription companies are the fastest growing trend amongst platforms.
I subscribe to two music and two “TV” streaming services, cloud storage, several online news services, and a bunch of apps. In the physical world I subscribe to two newspapers and one magazine, a gym, and the Koru Club. Tzuo’s book is a great read, but you can learn just as much from looking around at the explosion of subscriber businesses in Aotearoa.
About the author
Kevin has undertaken a wide range of assignments in the science and innovation, economic development, and tertiary education sectors — for example, work on the establishment of Callaghan Innovation (New Zealand’s advanced technology institute). He has worked a lot in the justice sector, including leading a major programme targeted at leveling off the increase in the prison muster, and another at ensuring that the cost of the sector is stabilised.
Kevin is a regular contributor to the New Zealand Herald.