By: Tien Tzui
42 MINUTE AUDIO / 5,500 WORDS (22 PAGES)
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How can your company take advantage of the subscription-based model, the most dynamic growth sector of the economy? This book describes how companies from software-as-a-service to auto manufacturers, music providers to construction equipment manufacturers, are turning customers into subscribers by teasing out the service-level agreement that sits behind the product.
With consumers increasingly focused on access over ownership, the key is to start with the wants and needs of your particular customer base, then create a service that delivers ongoing value. This will require a new organizational structure; a shift in the focus of the sales, marketing, and finance teams; and, a new approach from IT. But, the initial drop in revenue and rise in expenses will be more than worth it.
Whether for an established company like GE, a streaming service like Netflix, or a new service provider like Box, accessing customer data to create a subscription-based offering is the growth path of the future: companies running on subscription models grow their revenue more than nine times faster than the S&P 500.
In today’s digital world the focus is on the individual customer not on the product, and those customers prefer outcomes over ownership. Brick-and-mortar retail is transforming, focusing on customers’ online experience and using the data gleaned there to inform the stocking of physical stores. The news industry is enjoying a renaissance thanks to online subscriptions; media is in a new golden age of on-demand streaming; and car subscriptions give access to a range of vehicles from the same company. Adobe led the way in cloud-based subscription software services, overcoming the initial drop in revenue and rise in expenses to reach a position of steady growth. With the Internet of Things even heavy equipment like construction supplies can move to a subscription model by teasing out the service-level agreement that sits behind the product. The subscription access model is being used in healthcare, government, utilities, and more. The customer-focused subscription company has to break down the old production silos and use customer data for perpetual innovation. It needs an IT system focused on the customer’s entire subscription life-cycle. Pricing becomes the key metric and annual recurring revenue the cornerstone of the financial statement.
How subscriptions are transforming industries
We are at a pivotal moment in business history, one where the world is moving from a focus on products to a focus on services, and where consumers are increasingly favoring access over ownership. Subscription-based companies are transforming business across a range of different industries. To turn your customers into subscribers, start with the wants and needs of your particular customer base, then create a service that delivers ongoing value. This is the growth path of the future: companies running on subscription models grow their revenue more than nine times faster than the S&P 500.
The digital transformation
GE was #4 on the Fortune 500 list in 1955; as of fall 2017 it was still on the list, at #13. During the 2017 Oscars GE ran commercials with the tagline, “The digital company that’s also an industrial company.” This transformation is what has allowed GE to remain so high on the Fortune 500 list. Companies like GE and IBM no longer talk about refrigerators and mainframes, they talk about “providing digital solutions.” Most of the companies that have stayed on the list for 60+ years have similarly transformed.
Alongside these transformed companies are the ‘new establishment’ companies like Amazon, Apple, and Netflix—companies that were focused on building direct digital relationships with their customers right from the start. And then there’s the up-and-coming new disruptors, like Uber, Spotify, and Box, who have not only gone beyond selling products but have actually invented new markets, services, and technology platforms.
These types of companies—GE, Amazon, and Uber—have all recognized that we now live in a digital world, where customers prefer outcomes over ownership and the one-size-fits-all approach just doesn’t work anymore.
The new business model
For the past 120 years or so, the dominant business model was focused on products: inventory, shelving, and cost-plus pricing. Companies were organized into product divisions, something that was exacerbated by the emergence of enterprise resource planning (ERP). The margin and supply chain economics ruled, with the goal of matching supply and demand with the least inventory possible.
Today, that model has transformed. Customers are more informed than ever, and they don’t want the burdens of ownership. Forrester Research says this is the beginning of a new 20-year business cycle that it calls The Age of the Customer. People want the ride, not the car; the music, not the physical record; and they want it now.
Today’s successful companies don’t start with the product, they start with the customer. This means that the more information they can learn about the customer, the better they will be able to serve the customer’s needs. This shift to a customer-centric organizational mindset is a defining characteristic of the Subscription Economy. And it’s happening right now because the advent of the digital age means that those subscriptions can now be delivered digitally. As a result, the subscription model is transforming every sector of the modern economy.
The retail transformation
On the surface, the data says that brick-and-mortar retail is dying. About a quarter of the 1,000 or so enclosed malls in the United States are expected to close within five years, and Silicon Valley is convinced that Ecommerce is the future. However, over 85% of all US retail sales still happen in physical stores. Amazon now owns 460 Wholefoods stores and breaks out revenues from physical stores in its quarterly reports.
It’s not that brick-and-mortar retail is dying—it just needs to flip the script. For example, most Americans shopped at Walmart at some point in the past year, but unlike Amazon Walmart can’t tell you what you last bought there. Once you pass the cash register, you fall out of Walmart’s sight. The issue is not so much Ecommerce vs. traditional retail, it’s that the likes of Amazon always put the customer first.
Successful subscription companies—like Birchbox (cosmetics), Freshly (meals), and Fabletics (active wear)—have taken a customer-first approach to retail. They create fun, compelling experiences that get smarter over time. It’s an approach that can work even with an expensive product.
Take the example of Fender, maker of amazing electric guitars for over 70 years. Sales of electric guitars are falling, and most new guitarists quit playing the instrument within a year. Fender needed to keep people playing, and to keep them as customers. So, the company came up with Fender Play, a subscription-based online video teaching service that encourages customers to keep playing.
Studies show that most people research online first, then head to the stores to try out a product before buying. So, another key to today’s retail brand experience is to prioritize the online experience. A smart company like Birchbox knows this and uses rankings and reviews from its website to inform the layout and stock in its New York store.
The 329-year-old start-up
Husqvarna is a national institution in Sweden; founded in 1689, it manufactures equipment for forestry, lawn, and garden maintenance. And, it’s embraced the subscription model with a service called the Husqvarna Battery Box. Subscribers in Stockholm pay a flat monthly fee to get access to all kinds of heavy-duty equipment, like hedge trimmers, chain saws, and leaf blowers, which are dispensed from a storage shed in a shopping center parking lot. When the subscriber is done, they just return the tool—freeing the customer from the hassles of storage and maintenance.
Media’s new golden age
The Golden Age of Hollywood ran from the late 1920s to the early 1960s, when the big five movie studios churned out dozens of films every week. The internet challenged this model of the entertainment industry—but some smart companies have made it easier to consume media through online subscription services. Netflix started streaming movies in 2007 and today has over 100 million subscribers. Spotify now has 50 million subscribers and is responsible for more than 20% of global music industry revenues. With algorithms and playlists, Spotify has added a whole new discovery layer of music.
Roughly two-thirds of all Americans now subscribe to a streaming video service. Streaming video on demand (SVOD) subscriptions now generate more than $14 billion in annual revenue, compared with nothing ten years ago. Freed from the blockbuster movie mindset of the old studios, today’s entertainment industry is enjoying a new golden age, where streaming services can take a chance on smarter and edgier projects, like Stranger Things or Orange is the New Black. Netflix invests $8 billion a year on new content that both attracts new subscribers and extends the lifetime of current subscribers, regardless of whether a particular show is successful or not. This short-term spending boosts the company’s profitability in the long run.
The one genre missing from the universe of SVOD is sports. The UK-based company DAZN (“Da Zone”) is positioning itself to be the Netflix of sports. It is currently hosting over 8,000 sporting events a year for a monthly subscription of $20 and is starting to win sports-rights away from major cable networks like Sky Sports.
Vehicle subscription has arrived. This is not the same as leasing, which ties you to a particular vehicle. With a car subscription, you get access to a range of vehicles from the same company; plus, you don’t have to deal with annoying things like registration, insurance, and maintenance. You can get a subscription to Hyundai’s new hybrid car, Ioniq, for $275 a month; Porsche’s new Passport service gives you access to half a dozen car models; and Cadillac, Ford, and Volvo are starting subscription services.
Car companies are reacting not just to the sea change in customer preferences for services, but also to the challenge of Uber. In many ways Uber is already like a subscription service—it has your ID, payment information, and a history of your preferences—and in some cities it is testing a flat-rate monthly subscription service that includes bundles of reduced-rate trips with no surge pricing.
America’s big automakers have some definite advantages when it comes to the next stage of personal transportation, and they already understand that in the future they’ll be doing less individual vehicle sales and more fleet management. They have the distribution, with vast dealer networks; they already have a huge scale of operations, which will be hard for anyone else to beat; and, they have massive financial resources.
Similar changes are happening in the airline industry. Surf Air gives members access to limitless flights for a flat monthly fee of $2,000. The subscription model gives the company predictive revenue, something that no commercial airline enjoys.
This new competition in the transportation industry is not just vertical—airlines competing with airlines, car companies with car companies—it’s increasingly horizontal—light rail competing with rideshares and with budget airlines. France’s state-owned railway, SNCF, realized it needed to compete with all these other modes of transportation to stay viable, so it launched a subscription service targeted at young adults, giving them unlimited rides for a flat monthly fee and using new software services to make sign-up easy. The result was astonishing—the company hit its annual growth target within a couple of months.
Spreading the news
In 2008 The New Yorker declared that “newspapers are dying.” But, the news industry is not dying, it’s transforming. More than 169 million US adults read newspapers every month, in either print, mobile, or phone-format—that’s almost-70% of the adult population.
Readers and publishers are embracing the paid subscription model for news, rather than the old ad-based business model. People don’t like advertising in general; digital ads don’t make sense from a business point of view; and ads risk turning content providers into clickbait factories. With an increasing number of customers comfortable with the subscription model thanks to services like Netflix and Spotify, people are also more likely to pay for online news content.
Take Motor Trend magazine, which first appeared in 1949. In 2016 the company launched a subscription streaming platform called Motor Trend on Demand, which gives access to hundreds of hours of exclusive content. Today, less than half of Motor Trend’s revenues come from its print edition and the company anticipates that recurring subscription revenues will soon account for 20% of its overall revenue.
The Financial Times newspaper knew they would see a surge of traffic the weekend after the Brexit referendum, so they dropped their paywall and made sure the flood of new readers saw plenty of subscription offers—resulting in a 600% surge in the number of subscription sales compared with an average weekend. Today, the FT has more than 900,000 subscribers and over 75% of their revenues comes from digital subscriptions. The company also uses a simple framework to gauge reader engagement, scoring every reader on the recency, frequency, and volume of their visits, allowing the promotions group to target churn risks with discount offers.
Today, more than 60% of The New York Times’s revenue comes directly from its readers. It has reached the crossover point where a dwindling proportion of its revenue comes from advertisers: in the second quarter of 2017, for the first time, digital-only subscription revenue exceeded print advertising revenue. And, it now has subscribers in 195 countries.
Lessons from Adobe
In November 2011 Adobe CFO Mark Garrett announced that the company was going to stop selling its profitable Creative Suite software in boxes and would move to a subscription model. The company saw that its business was mostly growing thanks to price increases and not to a larger user base…