How to thrive in the subscription economy

A potential win-win-win for customers, business and investors means technology leaders should quickly take charge to realize the opportunity of this business model innovation.

ecommerce subscription ts
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The era of ownership is ending; the era of usership is the future. Subscribe or die- because the “divinely discontent customer’s” expectations are always going up and you will be left behind if you don’t act now. That is the message from Zuora’s CEO, Tien Tzuo, at the company’s annual user conference, Subscribed, in San Francisco in June 2018.

To “subscribe” is to give consent to receive a product or service regularly, with agreement to pay (in advance or upon receipt). While subscription business models are not new (e.g, newspapers, cable, or car leases), business model innovations and technology are enabling companies to continuously evolve the product or service rapidly enough to meet customers’ needs before losing them. Who wouldn’t want access to the latest features, with less commitment, without prices materially going up?

With a risk of buyer’s remorse removed, this paradigm shift has the potential to yield a win-win-win situation that benefits customers, businesses, and investors simultaneously.

Customers, or subscribers, win because they:

  • Freedom: Subscribes can change their mind if they are unsatisfied
  • Time-distance to innovation: Companies push new features to retain customers faster
  • Investment risk mitigation: Subscribers avoid up-front capital expenditure and consumers pay as they go, or businesses pay as they grow

Businesses win because:

  • Lower acquisition cost: A base of subscribed customers lowers overall total acquisition costs, freeing up capital to invest in innovation
  • Free R&D: Subscribed customers engage in active feedback and provide free R&D
  • (Exponential) scale: Nearly all subscription-based businesses are structured on platforms that can scale up or down with demand

When the subscription is information, data, or media (e.g., Netflix, Thomson Reuters), the sales-to-investment ratio can grow exponentially. If the subscription is a physical good or a human-delivered service (e.g., HP’s Instant Ink), one model can be easily repeated across customers based on demand growth. 

Investors also gravitate towards subscription business models because of this scalable speed to growth and the stability of predictable recurring revenue. In its 2018 Subscription Economy Index, Zuora found that companies with a subscription model grew sales 18.1% year over year, or 5 times as fast as the S&P 500 and U.S. retail sales, with much of that growth attributed to new customer acquisition. As subscription-based companies mature and saturate markets, you would expect that most of the growth engine would shift towards cross and up-sell of existing customers, requiring companies to expand from single-product companies to offering a portfolio of products and services.

This win-win-win scenario almost seems too good to be true. That is because it does not come without a foundation of offering a differentiated product or service, choosing the right products or services that are appropriate for a subscription, and ultimately a complete retooling of a company’s business model

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