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.

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What’s required to succeed in the subscription economy

While the benefits can be meaningful, enabling a subscription business model is not as easy as putting a “subscribe now” button on your website. Businesses must be “always on” in every sense.

As an analogy: in baseball, the best performances from players come in years when their contract is up for renewal. They hit .300+, slug 40 home runs, and are Gold Gloves in the field. The reward is a long-term contract for 10s of millions of dollars. Then, two years into that contract, they are a shell of their former selves. The general manager of the team is fired, the team misses the playoffs, the fans boo the player, and everyone is sour.

The same used to happen with multi-year service contracts, product purchases, or purchases of Software that would not be upgraded for several years. Harry Moseley, the chief information officer of Zoom, explains, “Software as a Service is about speed to value: land and expand if you are delivering more value. Get fired if you’re not showing your value, reliability, and scalability every single day. You can’t have a slip- if you do, there is viral push back.”

There are five major differences in a subscription model:

1. Constant innovation as a service over planned obsolescence

There’s no question some single-sale products perform exceedingly well (see: iPhone), but there are as many examples that did not (see: Pontiac Aztek). Rather than big-bang product releases, contracts that force lock-in, or forced upgrades, customer retention can be driven through a constant pace of new value delivery. R&D functions have to partner closely with go-to-market teams to ensure timely delivery of new value that wards off competitors. The nature of a subscription is that a customer can cancel at any time, so businesses must have the organizational agility to sustainably innovate.

2. Outcome management over order management

Tzuo says businesses have to shift from selling products to selling outcomes.” In practical terms, a company still needs to be able to effectively leverage a product or service catalog, bundle, quote, establish an order and entitlements, fulfill licenses or deliver orders, and then collect cash. However, products and services should be thought of “as a service”, so that a company stays as close as possible to solving the core customer problem. The industrial company Caterpillar, Tzuo explained, provides “earth moving” services. By adopting this mindset, companies will be able to assemble an offering that is structured to fit customers’ needs, whether it is enabling suspend and resume capabilities or changes to growth and subscription length terms.

3. Sustainable pricing over opportunistic pricing

It may not be sexy, but the stop-the-trains moment of scaling a subscription business model is in the quote-to-cash process. First, there has to be a well thought out product or service catalog. Second, the pricing must be profitable for the company and sustainable for the customer. Zuora finds that while companies see an 8% increase in growth after the first year of usage-based pricing, the “sweet spot” is really when only 1-50% of revenue is usage-based. Tzuo encourages companies to establish value pricing rather than unit-pricing with an emphasis on customer lifetime value rather than unit margins.

Third, with a subscription, the expectation is that companies will actually increase value without raising the price, so getting the first price right is important. Zoom’s Moseley says that “we believe you need to deliver more value without increasing price. If you buy a Tesla and drive it for 45,000 miles over three years, you actually have a car with enhanced functionality. Elon Musk doesn’t go to you and tell you the car will cost more money. So why should software?”

4. Self-service speed over bureaucracy

One of the fundamental shifts, however, is the power that has to be in the hands of the customer to flexibly adapt subscriptions to meet its needs. Not being able to do so can make a customer feel extorted or cause havoc on back end processes. The pace of this behavior is only accelerating, with the number of changes per subscriptions doubling from 0.3 to 0.6 since 2016, so systems, processes, and policies must be prepared to evolve. Whether it is spinning up a new AWS virtual machine, or adjusting a dog food repeat delivery at Petco, the power has to be in the hands of the buyer without bureaucracy. Symantec’s CIO Sheila Jordan explains that “‘In a world of instant gratification, we have a desire to be easier and simpler to do business worth. We have to enable enterprises to try, start, and validate that our product is the right fit for them.”

5. Customer success over customer service

While self-service enables scale, burying a 1-800 number in a Contact Us form doesn’t cut it. Support organizations have to shift from reactive fire fighters towards change adoption experts. Customer Success teams have to monitor usage metrics, provide education, and pre-emptively offer help to drive adoption so that a customer does not become a jaded flight risk.

CIOs should lead the charge to enable a subscription business model

Enabling a subscription business model requires an end-to-end systems thinker that understands the value of re-use, the complexities of business logic permutations, and the politics of navigating organizational change across functional silos. For many organizations, this change enabler has been, and should be, the chief information officer, which is why Zuora’s CIO, Alvina Antar, organized a forum of leading CIOs to discuss how they were traversing their subscription journey.

Attendees at the “Subscription CIO Exchange” included leaders from Symantec, Unity Technologies, Workday and Zoom, among others. Across conversations with these thought leaders emerged an essential playbook for how CIOs can lead the charge to enable a subscription business model:

Answer key business model questions

Before anything else happens, the company’s leadership should be aligned on what they are trying to sell via subscriptions, and why. Force the conversation around how different products and services could fit together to enable unique value. Because subscriptions can be cancelled more easily, offering the same exact bundle of services as a competitor may cause people to switch based on price, which is a race to the bottom.

Know what parts of the business are not right for a subscription.  Subscriptions should be targeted to products or services that repeat at a high enough volume that the opportunity cost of lost access exceeds the (potential) value of seeking out alternative options. Opportunity cost can be missed value, stress from risk, or because assembling the collection of offerings oneself is prohibitively difficult. The missing ingredients around differentiation and substitutes are the reasons I believe services like Blue Apron flew high and crashed quickly.

Understand the expected rate of growth. Ask what the model looks like at 10x. Define pricing structures based on product/service use and evaluate whether usage-billing is appropriate. Most importantly, gain alignment on the mindset shift that this is a fundamental business model change.

Map the subscriber journey against end-to-end processes

Use design-thinking to define the subscriber’s needs, pain points, and desires at each step in accomplishing a particular task. Simultaneously map this to your own internal business capabilities, end-to-end processes, and technology, and identify where the company is adding, or detracting value in improving the subscriber’s experience. Leverage this mapping exercise to expose process and technology dependencies, so that leaders can be hyper-aware of the degree of cross-functional collaboration necessary to make this shift successful.

Zuora’s Antar recommends that “in order to develop a unified experience, you have to understand who your subscriber is: are they recurring, what are the purchase and usage patterns, but more importantly, are they happy, healthy and likely to renew? It’s only then that you are invited to highlight opportunities for new offerings.”

Define metrics core to business health

Define what a healthy subscriber is to ensure that decisions are aligned towards common KPIs. Unity Technologies’ CIO Brian Hoyt recommends that a “CIOs can add tremendous value by harnessing data to give a company real-time visibility into predictive patterns that gauge the health of a subscriber, so the company can be proactive, rather than reactive.”

Questions to ask yourself include: Do you know your monthly and annual recurring revenue by product by customer? What is the expected usage rate that indicates retention or churn? Are all of our subscription models profitable, and if so, at what volume? Do we know the up and cross-sell patterns? What is an acceptable amount of time to complete a given business process?

Build an end-to-end architecture

The outset of any journey starts with your current architecture. Few companies will be able to start from scratch, so CIOs must examine the technology used to acquire leads and convert them into opportunities, manage customer and product master data, structure product/service catalogs and pricing tables, sell commodity or configurable quotes, create and manage recurring orders of various quantities and durations, collect recurring payment- both system to system or credit card, manage returns or credits, and then examine the analytics of each step in the process.

As technology leaders, we need to provide the business confidence and transparency in the transformational journey required to pivot their business,” says Antar. “You cannot just bolt on subscriptions to your existing homegrown or highly customized legacy processes and systems, you have to look at the entire Order to Revenue lifecycle and redesign for agility and scale.”

As the architecture is developed, “buy what is proven, says Symantec’s Jordan, “and build where you need to truly differentiate and integrate. No one solution solves it end-to-end, so you have to stitch together what makes sense.”

Agile delivery and governance

Because subscriptions touch so many cross-functional domains, CIOs should chair a governance structure that aligns the core business decisions and priorities. This group should elect which product/service area to start enabling via subscription and be positioned to adapt to the market’s demands. While certain capabilities, such as the product catalog, will require some end-to-end thinking, the execution of the roadmap the future state architecture should follow a phased agile approach.

What is critical to remember is that “having a subscription business model is not a differentiator in itself,” says Symantec’s Jordan. “It’s about your ability to re-innovate to win the relationship with the customer. This requires a new operating model where teams are structured with product engineering, IT, and business subject matter experts to prioritize the roadmap and deliver in Agile sprints.”

Small teams that build-test-learn in order to identify the potential risks and limitations in the architectural design will uncover flaws in a design much faster than those that go through a big-bang plan-build-QA-release cycle. One of the biggest risks in this entire effort to enable a subscription business model is not teams’ ability to technically execute, it is the paralysis of business leaders defining the logic and rules that have to be codified in the system. Create a sense of urgency for the business subject matter experts aligned to the delivery of this type of work, or the quality will suffer.

Technology leaders have the unique opportunity to drive the transformation to enable a subscription business model from end-to-end and enable a win-win-win scenario for customers, businesses, and investors. Just remember that success is not implementing a new technology or launching a new bundle of services- it is winning with the hearts and minds of the subscriber over, and over, and over again. Be on your toes or get knocked on your heels.

To find out what’s next in subscription economy, attend Subscribed 2019 and request an invite to the fourth annual Subscription CIO Exchange.

This article is published as part of the IDG Contributor Network. Want to Join?

Copyright © 2019 IDG Communications, Inc.

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