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

Cover of the book Subscribed

We don't have to look too far to see the impact that 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, we no longer pay a lump sum upfront to own or use something forever. Instead, 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 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. With these, we 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 trade it in for a new car on a new PCP arrangement and keep paying.

I do most of my consulting in the financial services industry. This 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 pay a monthly 'usage-based' fee based on the value of your assets.

So, I am quite familiar with many of the challenges that subscription-based business models bring. 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. These include sales and marketing, distribution and onboarding) 
  • How to reduce the churn rate. This is 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 their impacts.

The subscription economy is customer-centric

The book sets the scene with some bold claims. For example, it claims 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. It draws most of these 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. All of the data company collects about them is mapped to this unique identifier. I am a little tempted to point out that they may be conflating two separate issues. Those being: 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, Amazon was a runaway success long before it introduced it's Amazon Prime subscription model. It succeeded on the basis that it exploited customer-centric data using unique customer identifiers right from the start.

Amazon, Google, Facebook, Apple and Netflix are all examples of digitally native customer-centric businesses. They 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. They do a great job of managing operational efficiency, raw materials, inventory, purchase orders, sales, shipping and payroll. But they do a lousy job of managing customer relationships and experiences.

The book does not discuss Customer Relationship Management (CRM) systems. 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. It is 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. 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.

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 that companies 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. They can analyse that data in realtime. And they can use that analysis to continually improve the product or service. Existing customers can benefit from those improvements immediately. Often they don't even need to pay for a new version or upgrade.

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. This teaches customers how to play their guitars. It also creates an additional revenue stream. More than that, it creates a more intimate relationship between the company and its customers. And it reduced the rate at which customers give up 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. Subscription businesses, on the other hand, 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. They call this challenge "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 from a large purchase and installation revenue followed by upgrade every few years to a smaller, recurring monthly fee. The difficulty in this is 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 two models. The old imperative is to:

  • sell more units,
  • increase the price of those units, or
  • decrease the cost required to make them.
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 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. 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. 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 seen, if this does not come to pass, the investors may be left with little to show for it.

Churn rates

The addendum also included some annual churn rates. If I am honest, these 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 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.


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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