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28/09/2016

The new Megatrend – Subscription Economy

4 minute read

Forbes,  January 17th, 2016:
Fortune, June 2014 (already):
Mind Valley Insights, April 4th, 2016:
 

Big claims, but let’s take a closer look.

The Subscription Economy is a phrase, describing new business landscape in which product (or service) companies are moving toward subscription-based business models.

Amazon Prime has over 70 million subscribers. 10,99 USD/month gives you free 2-day delivery, unlimited photo storage and tons of other benefits. Netflix has over 80 million subscribers, who no longer wish to run through the rain to return DVDs, but instead enjoy an unlimited supply of movies for 9.99 USD/month. Zipcar removed the need to own a car. Spotify has 40 million paying subscribers. And the list continues.

According to the Economist, “80 % of companies are seeing a change in how their customers want to access and pay for goods and services and 50 % of these same companies are changing their pricing models as a result.”
Well, something is definitely happening and actually has been happening for a while now!

Subscriptions have been around for a long time, for example in the newspaper business. But the modern era really took off when software companies, such as salesforce.com started to offer software as a service (SaaS). Other software companies followed, and nowadays it is the standard to offer a cloud-based subscription model to your customers.  Things have taken off when the physical good entered the game. The retail industry has realized the shift in consumer purchasing preferences.

Zuora website, September 29th, 2016:

 

Ownership vs. Subscription Experience

According to Tien Tzuo from Zuora, one of the leading evangelist for subscription economy: ownership, especially by millennials is no longer considered important. In his view, the old world was all about things. Acquiring new customers, shipping commodities, billing for one-time transactions. But in this new era, it’s all about relationships. More and more customers are becoming subscribers because subscription experiences built around services meet consumers’ needs better than the static offerings or a single product.

This is how Zuora sees the different approaches (source: Zuora CFO presentation Slideshare, accessed September 28th, 2016).

 

For retail, originally the best fit for subscription model was either necessity, that is purchased on a regular basis, or something a consumer feels very passionate about. Dollar Shave Club started their 1 USD/month razor subscription business in 2012 and sold it to Unilever 4 years later for 1 Billion USD (for a laugh, take a look at their marketing video gone viral ). It seems they know customer subscription experience should be a fun journey.
Wall Street Journal  July 20, 2016:

 

Today you can pay monthly recurring fees to buy physical goods such as clothes, food, even pet food, flowers, glasses and many other things.  Subscription model solves one big challenge for retail – the inventory and the related very costly wastage. Knowing your demand for many months to come by product item level is a great tool to manage your supply chain. This is especially true for goods with fast spoilage like food.

Success = Engaging your Customers in Long-term Relationships

According to Zuora “In the Subscription Economy, every company must better manage a direct, complex, responsive, multi-channel relationship with its customers. Customers are absolutely key in this relationship and rather than putting the focus of the business on the “product” or the “transaction,” subscription economy companies live and die by their ability to focus on the customer. Now, the formula for growth is focused on monetizing long-term relationships rather than shipping products”.

Considerations for Businesses

What gives the subscription model a competitive advantage over the traditional model?

Legacy product vendors have a clear advantage in their resources, customers, and partners. It takes a disruptive approach to capture their customers. Subscription-based businesses could potentially provide that disruption with lower up-front costs, greater flexibility, intuitive delivery mechanisms and a sharp ongoing sense of their customers’ needs and wants.For businesses, the big value of a subscription is the ability to forecast revenue through recurring billing. This certainty in revenue also allows subscription-based companies to easily calculate the lifetime value of a customer, manage inventory, offer simple pricing and many other business benefits. In addition, businesses get free market research (instead of telephone surveys, focus groups etc.) completely free. Subscription model gets you close to your customer, and lets you track customer preferences in real time and you can simply ask them what they’re thinking.But what is the obvious monetary downside?

It can take an enterprise company an average of two to three years to recoup the cost of a one-time sale on a subscription model. Product vendors that shift to subscription have much less initial cash flows and their financial numbers would suffer temporarily. Also, it is a fundamental shift to move from selling products to managing services, which require huge amounts of customer engagement and new processes and tools.In addition, you have to reconsider what are the right metrics to guide the subscription business to success. Traditional product metrics like units, margins, and inventory would have to be replaced by a whole new set of related metrics like average recurring revenue, customer acquisition costs, lifetime values, renewals, upsells, and churn.

 What to do next?

If transforming perhaps some area of your business to subscription model may be relevant for your business in the near future, it might be a good time to start putting some great fundamental building blocks in place. The first step would be to thoroughly understand your Customer Journey, from the expectations they have before the experience occurs to the evaluations they are likely to make when it’s over.

The journey of recurring billing is more profound and more lasting than the customer journey for a one-off purchase. The customer is prepared to make a purchase commitment that could keep repeating itself for years. The experience leading up to and continuing from that point is extremely significant for that customer’s happiness. Transitioning isn’t quick and easy, and a business needs to take a deep look at the outcomes their customers desire from the relationship — and from that perspective see how subscriptions could potentially open the door to new customer segments and new revenue models.

Aki Rahunen

CFO

Fluido

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