Netflix, HBO, Spotify, Bark Box, Salesforce and Birchbox are all familiar names in their respective markets. Their customers are loyal, and the companies continue to grow their base quarter after quarter. However, behind that familiarity lies a dramatic shift in how companies are building relationships with their customers. Tien Tzuo and Gabe Weisert’s new book, Subscribed: Why the Subscription Model Will Be Your Company’s Future –– and What to Do About It, explores this new model and explains why it is here to stay.
Describing the development of the subscription model as “a pivotal moment in business history” may sound like hyperbole, but the underlying assumptions do represent a significant change to the traditional business model. Developing products and services and then promoting them like crazy to maximize revenue before competitors start chasing your market share is an accepted practice.
In the subscription model, the focus is on delivering ongoing value to your customers, turning them into loyal subscribers and generating recurring revenue. Being customer-centric rather than product-centric provides a greater focus on the needs and wants of your customers –– and a previously untapped source of new product and service ideas.
Losing Sight of Customers
Tzuo, now the co-founder and CEO of Zuora, the leading subscription-economy platform service provider, was the former chief marketing officer and chief strategy officer at Salesforce. His comparison of the difference between the onsite software solutions of companies like Oracle and Siebel and software as a service (SaaS) as provided by Salesforce captures how far the technology industry has moved away from their customers.
Any sense of perceived value in partnering with one vendor was replaced by a user experience of being held captive. Salespeople, who outnumbered engineers 10 to one, sold boilerplate solutions with the expectation that you would adjust your company to fit. Upgrades and bug fixes would come at the vendor’s discretion.
The authors argue that this perceived “hassle” with technology solutions has spilled over into other markets as customers have come to favor access over ownership. Why deal with the aggravations of owning a car when you can rent one by the hour (Zipcar) or get someone to drive you by using an app on your phone (Uber and Lyft)? Why buy and store hundreds of DVDs or CDs when you can access thousands of movies and songs on demand for a small monthly fee (Netflix and Spotify)?
The payoff of that “small monthly fee” should not be underestimated. Adobe, for example, switched from selling their customers blocks of user licenses to offering cloud-based access for a small monthly fee and quadrupled its valuation.
A Subscription Culture
The authors conclude with some tough words about managing a subscription culture. Recurring monthly revenue may be the new promised land, but it still depends on perceived value. Utilization and churn are the new key metrics. If customers aren’t continuing to use the service, they won’t see the value when that next bank statement rolls around and they see the monthly charge.
That is the tougher bargain with the subscription model. A low monthly fee may make customer acquisition easier, but cancelling that monthly fee is just as easy. If customers are happy, they will use more of your service (upsells) and tell their friends about the value it adds to their lives. That can lead to exponential growth, at least until they stop being happy. As the authors point out, “Subscriptions are the only business model that is entirely based on the happiness of your customers.”
Subscribed offers a compelling argument from industry experts on the power of a subscription model for your business. The potential for increased customer loyalty and revenue is documented in detail through multiple case studies, and the authors pull no punches in demonstrating how much of your company may have to be reinvented to achieve that payoff.