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Book review of Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

We don't have to look too far to see the impact that the subscription-based business models are having on everyday life.

We no longer buy music - we listen to it on subscription from Spotify. We no longer buy films, we watch them on subscription from Netflix.

In the subscription economy, instead of paying a lump sum up front to own or use something forever, we pay a monthly or annual fee for the right to access that benefit for that period of time. As soon as we stop paying, we lose access to that benefit.

Even fairly capital intensive purchases like cars are being impacted by this change. Instead of buying a car outright, more of us are entering into Personal Contract Plans (PCPs) or other similar arrangements where we effectively pay a monthly charge for the right to use a vehicle. Of course, under a PCP we have the right to buy the vehicle at a predetermined price at the end of the deal, but the dealer's hope is that you simply trade it in for a new car on a new PCP arrangement and keep paying.

I think that the financial services industry, where I do most of my consulting, has always run on something like a subscription basis. When you open a bank account, you pay for it either through explicit charges or reduced interest rates until you close it. When you take out insurance, you pay a monthly or annual premium. When you invest or take out a pension, you typically pay a monthly 'usage-based' fee based on the value of your assets.

As a result, I am quite familiar with many of the challenges that subscription-based business models bring: typically providers' expenses are highest at the start of the relationship, and then they hope that the customers will stay long enough to become profitable. As a result, providers spend a lot of time worrying about how to reduce the costs of acquisition typically sales and marketing, distribution and onboarding) whilst also reducing the churn rate (the percentage of customers who leave during any defined period).

In their book, Subscribed, Tien Tzuo and Gabe Weisert take a broader view of the trend towards subscription-based business models and its impacts.

The subscription economy is customer-centric


The book sets the scene with some bold claims, such as that "companies running subscription models grow their revenue more than nine times fast than the S&P 500". In fact, there is a whole addendum of juicy numbers describing the rapid growth of subscription-based companies. Most of this seems to be drawn from the usage statistics of a "comprehensive billing and finance platform for subscription-based businesses", called Zuora. Disclosure: Tien Tzuo is the CEO of Zuora.

One of the reasons for the success of subscription-based businesses is that each and every subscriber has a unique identifier to which all the data the company collects about them is mapped. I am a little tempted to point out that they may be conflating two separate issues - customer-centric data management and a subscription-based revenue model.

The authors point to companies like Amazon, Google, Facebook, Apple and Netflix as evidence of their hypothesis. However, I think Amazon was a runaway success long before it introduced it's Amazon Prime subscription model, and on the basis that it exploited customer-centric data on the basis of unique customer identifiers right from its inception.

Amazon, Google, Facebook, Apple and Netflix are all examples of digitally native customer-centric businesses, who also happen to be (increasingly) subscription based.

The authors contrast this against 'traditional' businesses that mass produce and distribute physical goods. Such businesses tend to rely on Enterprise Resource Planning (ERP) systems. These are designed around physical goods - raw materials and finished products - and while they do a great job of managing operational efficiency, raw materials, inventory, purchase orders, sales, shipping and payroll, they do a lousy job of managing customer relationships and experiences.

The book does not discuss Customer Relationship Management (CRM) systems, but I think it is fair to say that CRM systems have gone a long way towards addressing this. However, they are largely still bolt-ons to the underlying ERP-style systems. The result is a far cry from systems built around the customer and customer experience from the ground up.

Instead, what it does describe is how companies:
"...set up customer service departments! When in doubt, build another vertical silo—they launched market services, technical support lines, warranty contracts, and maintenance groups. The customer had truly arrived—they had their own department now. And that department was located way down at the far end of the supply chain, just past the loading dock."
The authors argue that the battle between Amazon and Walmart is not between online versus traditional retail but between customer-orientated data-driven app-centric flexible and omnichannel retail on the one hand, and product-orientated retail on the other. (tweet this)

They conclude that:
"If you're still selling your product off shelves to strangers in five years, there's a good chance you're not going to make it to ten." (tweet this)

Changing consumer preferences


The book then goes on to talk about consumers changing preferences for services rather than products, for outcomes rather than ownership, and for constant improvement rather than planned obsolescence.

The authors describe how customers now "want the ride, not the car; the milk, not the cow." (I think this description is slightly misplaced as buying milk still represents the old manufacturing to sale model, rather than the move to a subscription-based model.)

This broad societal change is nicely summed up in the final chapter:
Once upon a time, we used to know the people we bought from—the butcher, the baker, the blacksmith, the farmer. We used to know the people we sold to, the neighbors in our village. All that knowledge got lost a long time ago, when the Industrial Revolution ushered in the product era. But it’s coming back in a big way.
I suspect this trend is fueled and reinforced by a growing awareness of the environmental consequences of mass consumption over the last century.

An added advantage of doing so is, of course, that company's doing so can learn by watching how their customers use their products and services. In the traditional product model, once the customer received the product, the manufacturer typically has little, if any idea, of how the customer used it or even if they used it at all.

With a subscription service, providers can gather data on an ongoing basis, analyse that data, and use that analysis to continually improve the product or service. Existing customers can benefit from those improvements immediately, often without needing to pay for a new version or upgrade.

So, even where businesses stick with a traditional product-based model, there is an increasing drive to package these with value-added services. For example, Fender now sells a subscription-based online video service called Fender Play, which teaches customers how to play their guitars. Not only does this create an additional revenue stream, but it also creates a more intimate relationship between the company and its customers and reduced the rate at which customers give trying to learn to play.

Apparently, International Data Corporate predicts that by 2020, 50% of the world's largest enterprises will see the majority of their business depend on the ability to create digitally enhanced products, services and experiences.

Market research needs no longer to rely on what focus groups and survey respondents say they want but can draw real-time data generated by what real customers actually do. (See also: Everybody Lies, the evolution of market research.)

The new economics


The authors argue that traditional businesses rely on advertising to sell individual products to strangers while subscription businesses rely on customer relationships to continue to provide services and upsell new services to loyal customers.

They devote a number of pages in the book to describing a challenge that traditional businesses face when making this switch, and which they call "eating the fish" (for reasons which escape me). By way of example, they describe a software business moving from selling on-premise software installations to SaaS solutions in the cloud. The economics change, they argue, from a large purchase and installation revenue followed by upgrade every few years to a smaller, recurring monthly fee, with the difficulty being that this means that revenues actually decrease in the first few years after making the change.

The long-term advantage, however, is that instead of starting each year with zero sales on the books, subscription businesses start each year with a stable recurring revenue stream.
"You're talking about shifting from an asset transfer model to a long-term relationship."
The authors contrast the old imperative as being to sell more units, increase the price of those units, or decrease the cost required to make them, whilst the new model is driven by the imperatives to acquire more customers, increase the value of those customers and hold on to them longer. (I think they slightly miss the opportunity to serve those customers at a lower cost, but their point is well made.)

Crucially, this requires a shift from a sales mentality - make the sale and move on - to a service mentality - win the customer and then stay as close to them as you can.

More subtly, current accounting practices do not distinguish between historic sales and recurring revenues. The traditional manufacturing and sales model is very transaction and backwards-looking, whilst the subscription model is more relational and forward-looking.

As an aside, I would note that the insurance industry has been grappling with this for years, and insurance accounting allows for the recognition of anticipated revenues in the form of 'embedded value'.

However, this change in thinking could be a double-edged sword. I half suspect that it is part of what allows so many startups to burn through so much cash acquiring new customers in the hope that they will stay long enough to become profitable. Sadly, as we've have seen, if this does not come to pass, the investors may be left with little to show for it.

Churn rates


The aforementioned addendum included some annual churn rates which, if I am honest came as a bit of a surprise to me. These were:
  1. B2B: 27%
  2. B2C 30%
  3. B2A 26%
  4. Corporate Services 37%
  5. Telecommunications 26%
  6. SaaS 24%
  7. Media 33% 
For all the aforementioned benefits of the subscription economy, these seemed high. I was left wondering if customers who simply buy products might not stick with them for longer, on average, than that. Or perhaps, as we move towards this new business model, we're discovering just how poor many companies are at keeping their customers satisfied.

Conclusions


Subscribed is packed with analysis and examples of industries and companies grappling with this fundamental and far-reaching change in business model.

I would highly recommend it to anyone with an interest in business models. If you're still in any doubt, I will leave you with the authors' conclusion that a subscription business is...
"...also a much happier business. Why? Because subscriptions are the only business model that is entirely based on the happiness of your customers."

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