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 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.

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."

The 5 books every business strategist should read (Updated 2024)

I often get asked about training for new strategists. Or if I could recommend books for new strategists to read.

That got me thinking. What 5 books I would recommend every new business strategist should read?

So here they are:

1. On Competition, by Michael Porter.
   
   Porter's work is often criticised. Many other authors claim to have improved on it. But let us not forget that Porter remains the benchmark they are trying to beat. His style is, unfortunately, not the most gripping. But the insights he offers are essential grounding for any strategist.
   
   
2. The Balanced Scorecard, by Robert Kaplan and David Norton.
   
   Porter lays out the grounding for strategy analysis. Kaplan and Norton set the benchmark for articulating strategy. The Balanced Scorecard will help you to eliminate ambiguity. This will ensure your strategy can get delivered.
   
   Once you've read The Balanced Scorecard, consider also its sequel. The Strategy-Focused Organisation is by the same authors.
   
   You can also learn more about The Balanced Scorecard Framework here.
   
   
3. Business Model Generation, by Alex Osterwalder.
   
   Oswerwalder's book will help you to design your business model. This will help you to create an organisation which can deliver your strategy. Business Model Generation is a practical text which is elegant in its simplicity.
   
   If you're looking for more after reading this, consider also Operating Model Canvas by Andrew Campbell, Mikel Gutierrez and Mark Lancelott.
   
   
4. Good Strategy, Bad Strategy, by Richard Rumelt.
   
   Rumelt provides many practical examples of what good strategy looks like. But he also spells out the mistakes organisations typically make. And he describes the consequences of these mistakes. A strategist needs to know what they should do. But they also need to know how to avoid these common mistakes.
   
   
5. The Emergent Approach to Strategy: Adaptive Design and Execution, by Peter Compo
   
   The most recent book on the list takes a deep dive into the subject and why such high rates of failure persist. Peter argues that at the root of the problem is a planned view of the world. He then proposes that strategy instead emerges as part of a broader framework within organisations through the elimination of alternatives.

There, are, of course, many other good books on strategy. I have reviewed many of these elsewhere in this blog. A strategist should remain a permanent student, and read as widely as possible. However, if you're just getting started, these four books should provide you with the grounding you need.

Don't forget, of course, that there is also this blog. And I also offer a free ebook about strategy development and execution.

Please let me know, in the comments below:

• your thoughts on any of these books, or
• which other books you think I should have included on this list.

For a longer list of recommendations, see my bookshelf.

And finally, if you're daunted by the prospect of all that reading, consider: The problem with books about strategy.

Everybody Lies: The evolution of market research

"Everybody Lies" by Seth Stephens-Davidowitz, is one of the most fascinating books I have read in a long while.

Stephens-Davidowitz documents and evidences in page-turning style a view I have held for some years now:

1. We can now observe how people actually behave, especially when they don't think anyone is looking, in ways which were previously not possible.
2. What we observe is often very different from:
1. what they say they do or will do, and
2. how they behave when they think someone is looking.

I would guess that Stephens-Davidowitz borrowed the title of his book, whether knowingly or not, from the byline of the TV series "House M.D.". The lead character says "It's a basic truth of the human condition that everybody lies. The only variable is about what."

Reading the book has given me pause to reflect on the evolution of market research. My personal experience suggests at least 3 waves of development.

Market Research 1.0

The first wave of market research consists of asking people for the views, preferences, intentions, wants and needs, etc. This can be:

• quantitative, for example, in the form of a survey, or
• qualitative, for example, in the form of a focus group, etc.

The obvious problem with this is, of course, that people have many reasons to lie, and few reasons not to. Reasons to lie can be very simple. For example, we may want to appear intelligent, or virtuous, or be liked or admired by the questioner.

Often, people won't even be aware that they are lying. As humans, we are excellent post-rationalisers. Cognitive Dissonance Theory suggests that when faced with a question we can't or don't want to answer, our brains simply fill in the blanks. We make up a story. We may not even be consciously aware of it. (Note: I'm using the word 'lie' here throughout, even when subjects are doing it unintentionally and unknowingly.)

Another problem is that people find it difficult to answer questions about subjects outside of their existing frames of reference. For this reason, market research 1.0 is even less helpful when developing novel ideas. As Henry Ford apocryphally said: "If I had asked people what they wanted, they would have said a faster horse."

Market Research 2.0

Market Research 2.0 attempts to build on Market Research 1.0 by showing customers examples of what future products or services might look like. Often, more than one version is shown. Subjects may be asked to interact with them, compare them and indicate their preferences.

This can go a long way to alleviate subjects inability to imagine a different future. And if all options are attractive and presented positively, this will also reduce some of their incentive to lie.

Market Research 2.0 requires more work than Market Research 1.0. It usually means that you first need to develop some ideas to test. If you're innovative in the development of those ideas, that helps. But the innovation is likely coming from the development of the ideas, rather than from the market research.

However, a number of examples illustrate the difficulties still inherent in the approach:

1. Subjects reportedly overwhelmingly rejected the idea of ever withdrawing cash from a hole in the wall, as opposed to from a bank teller. But today, 94% of UK adults use cash machines.
2. In market research, 68% of US customers said they liked the taste of New Coke. But 6 months after launch it was removed from the shelves, and the old formula relaunched. (Reference)
3. Research conducted between the announcement and launch of the iPhone found high demand in emerging economies like Mexico and India, but not in developed countries. It concluded that: “There is no real need for a convergent product in the US, Germany and Japan”. (Reference)

As I write, I can think of at least two factors which might contribute to this problem. I am sure there are countless more:

1. The Hawthorne Effect (also known as the Observer Effect). This is named after experiments conducted from 1924-32 in which it was shown that subjects' behaviour is altered by virtue of the fact that they know they are being observed.
2. Research subjects typically have no 'skin in the game'. For example, it is a lot easier to say you'd be happy to pay, say, £100 for an item than it is to forego the other enjoyments you'd have to give up in order to do so. This is probably exacerbated where they are positively incentivised to take part in the study.

Market Research 3.0

Market Research 3.0 observes:

• how real prospects and customers behave with and use products and services,
• in the normal course of their lives, and
• when they don't think they are being watched.

As technology evolves it is increasingly possible to track:

• how customers move through a store,
• what items they buy, and 
• how they engage with and dispose of those products.

This involves developing and launching a product before market testing it. But with increasing software content in products and services (think the Internet of Things) and advances in technologies such as 3D printing, it is become ever cheaper to develop and pilot smaller batches of products or to mass-customise products and services.

Sample Application

I use these techniques to great effect in the development of StratNavApp.com in three ways. It is important to stress, however, that all three techniques are based on statistical analysis. They don't involve anyone ever looking at users' data or strategies. And they don't attributing the results to any specific individuals or companies.

Here are some common ways we measure and

• Website analytics: using even a simple (and free) tool like Google Analytics, it is possible to understand

• how users find the service,
• which parts of it they visit most frequently and in what order,
• how long they engage, and 
• from where they leave.

Using this insight, we can prioritise our development efforts to those areas and features users find most valuable. So, for example, we know that our SWOT analysis tool has been 24% more popular than our Strategy Canvas tool and 33% more popular than our Business Model Canvas tool (confirming our views on the continuing popularity of the SWOT).

• AB Testing: almost all new features are first introduced to a randomly selected subset of users (the "A" group"). At the same time, the remaining users (the "B" group) continue to see the site unaltered. We can then measure whether the A group engages more positively (against our own defined Critical Success Factors) than the B group or not. If they do, then the feature is released to the remaining users. And if they do not, then the new feature is rolled back or adjusted and retested. Either way, the results are analysed to enhance our picture of how users use the service, and how we can further improve it.
  
  By way of a very simple example, StratNavApp.com's byline "Collaborative strategy development and execution" was the winner from among a number of AB Tested alternatives considered.
  
  
• Content Analysis: StratNavApp.com provides a unique insight into how users develop and execute strategies. By way of a very simple example, we know that the word 'Market' is used almost twice as frequently as the word 'Customer' when describing strategic insights. We may not know why that is. And we may not know if it is a good thing or not. But we can certainly use it to enhance our product. We can analyse word counts, numbers and lengths, etc. of all elements used in StratNavApp.com with a view to optimising users' experiences of the tool.

Privacy and Ethics

This is not intended to be a post on privacy and ethics. However, it goes without saying that privacy and ethics have always been a key consideration in market research. And it is right that there is ongoing debate and development of this subject as it evolves.

Conclusion

We've always known that market research is both invaluable and limited. As new technologies evolve, we are able to increase the value it adds whilst simultaneously reducing its limitations. Those organisations that explore and utilise these new approaches will be at a distinct advantage over those that do not.

Addendum

Watch Seth Stephens-Davidowitz talking about his book at the RSA:

Other resources:

• The psychology of deceit

Introducing the Enhanced Business Model Canvas

The Enhanced Business Model Canvas combines the Business Model Canvas with the Operating Model Canvas.

The Operating Model Canvas was proposed by Andrew Campbell, Mikel Gutierrez and Mark Lancelott in their recent book by the same name. (See to the right). The Business Model Canvas was proposed by Alexander Osterwalder and Yves Pigneur in their book "Business Model Generation". I previously blogged about it here.

In suggesting this combination, Campbell, et al, argue that it provides a more operational perspective to the left-hand side of original Business Model Canvas. This directly addresses "important issues such as people, organization structure, location and information systems that are critical to the operating model, but often given too little attention when thinking about the business model."

Here is an example of what an Enhanced Business Model canvas for Uber might look like.

(Please note: I have constructed this canvas by way of example only. I used publicly available information without any privileged knowledge of Uber. As such, I cannot vouch for its accuracy. If you do disagree with anything in this example, this will only serve to demonstrate the usefulness of the tool in fostering understanding.)

I drew the example above in StratNavApp.com. StratNavApp.com is the collaborative online tool for business strategy development and execution.

The  Enhanced Business Model Canvas provides more context and granularity than the original Business Model Canvas does. For starters, it considers 11 elements of the business model, compared to the original 9. And some elements have been altered. The changes are:

1. Locations and Organisation have been added. These are both welcome additions.
1. Location: Michael Porter's work on the strategic importance of location should be enough to convince you. If not, just think of the importance of, for example, Silicon Valley to the tech sector.
2. Organisation: Please see my previous blog about why Structure follows Strategy.
2. Key Partners and Resources have been removed. I would argue that they have, in fact, been replaced with Suppliers and Information respectively. In both cases, the new category appears to be slightly narrower than the original.
1. In the case of suppliers, the greater specificity is probably a good thing. Distributors, for example, may be a Key Partner, but they fit more logically on the right side of the model, which focuses on customers, under Channels.
2. The addition of Information is very welcome in today's data-intensive, big data-driven world. Some other Resources, such as a preferential Location, now have a home of their own. Others, such as patents or exclusive contracts may struggle to find a home in the enhanced model.
3. Key Activities have been renamed as Processes. They are also placed within a horizontal chevron shape, instead of the non-descript blocks in which the other elements reside. I am neutral regarding the name change. Arguably, the shape and orientation of the category make absolutely no difference to the analytical process. However, I can't help but feel that the change highlights the active nature of the Key Processes. It also serves to make the model more distinctive.

Only time will tell whether the Enhanced Business Model Canvas will achieve the popularity of the original. For now, StratNavApp.com offers the ability to use either. Undoubtedly, it does add something to the debate on how best to understand, represent and analyse operating and business models. And I'd certainly be interested to hear your thoughts in the comments below.

Strategic Learning: A practical guide to strategy development and execution

Regular readers of this blog will know just what a complex and multifaceted subject business strategy can be. For those without the time to study the subject in all its guises, actually getting on with the job of developing and executing business strategy can be a daunting task.

That is why I wrote my first eBook:

Strategic Learning: A practical guide to strategy development and execution

In it, I distil what I believe are the absolutely essential steps and considerations for developing and executing a business strategy which creates real value, rather that one that sits on the shelf collecting dust.

You can download your free copy now.

I'd love to know what you think. Please feel free to leave your feedback in the comments below.

Book Review: The Black Swan, by Nassim Taleb

The central premise of the Black Swan, by Nassim Taleb, is that rare outlying events have a greater influence on the world than do statistically predictable ones, but whilst our planning and analysis systems deal with the latter reasonably well, they are completely inadequate for the former.

Examples of rare outlying events that have had a significant event on our world include 9/11, the 2008/9 stock market crash, and, more recently, the UK #Brexit referendum.

Taleb does a reasonably good job of pointing out the flaws in what he terms the Gaussian model (most notably the normal distribution). He also does a good job in demonstrating our tendency to want to try to describe everything in these terms, regardless of whether or not it is appropriate, and therefore to tend to ignore everything that falls outside of this model.

However, he does err towards throwing the baby out with the bath water. The normal distribution (and indeed the other distributions he criticises) are useful in many applications. And that should be the real measure of any theory. All theories have limitations and domains beyond which they should be used, and yet remain useful if appropriately applied, and statistical distributions are not different in this regard.

He also fails to present any useful alternatives, and so does not really take us forward in any meaningful way. Thinking about it from my own perspective, scenario planning does provide one useful alternative which can help us to escape the confines and flaws of the so-called Gaussian model.

The Black Swan is a fascinating and eclectic read which may challenge many of our assumptions about the world and the way we analyse it. However, if you're looking for practical alternative solutions, you may be disappointed.

Books that have changed my outlook on life

As strategists we should always be looking out for new and better ways to see and understand the world around us. There are lots of different ways of doing this, but most come down to talking and listening to people, the radio or podcasts, travel, reading books, magazines and blogs, or watching films and documentaries on as diverse and challenging topics as you can find.

With that in mind, I've decided to share this list of 11 books that have transformed the way I see the world, starting from the more practical and progressing through the more philosophical to the more esoteric:

1. The Balanced Scorecard - Robert S. Kaplan and David P. Norton
2. On Competition - Michael Porter
3. The 5th Discipline - Peter Senge
4. The Goal - Eliyahu Goldratt & Jeff Cox
5. The Art of War - Sun Tzu
6. The Tao Te Ching - Lao Tzu
7. Zen and the Art of Motorcycle Maintenance - Robert M. Pirsig
8. One - Richard Bach
9. The Dancing Wu Li Masters - Gary Zukav
10. The Tibetan Book of Living and Dying - Sogyal Rinpoche
11. Open Secret - Wei Wu Wei

I've put the Amazon links below, in case you're intrigued enough to pick one up. They're not always the exact same editions as I have, but that shouldn't matter. The exception to this is with The Art of War and The Tao Te Ching, where the translation can make a huge difference - for these two I've been careful to select translations that have worked well for me.

"Flow" by Mihaly Csikszentmihalyi

I've just finished reading "Flow" by Mihaly Csikszentmihalyi, which deals with the subject of how to achieve happiness and enjoyment from work.

The fundamental thesis is that people most enjoy activities in which the goals are clear, the are opportunities for action towards those goals and feedback is immediate.   Mihaly delves at length into the concept of an "autotelic personality" - that is, a person who is able to:
1.   set their own goals, balancing both long term high level goals with shorter term more immediate goals, and
2.   create opportunities for action (rather than feeling like a passive observer or even a victim).

Mihaly also goes into great depth about the difference between people who rely on external goals, such as greater wealth, more fame, etc., and those who are more focused on more intrinsic goals such as developing their personal skills and cognitive abilities.   Unsurprisingly, he suggests that latter are more resilient to environmental difficulties, and therefore more likely to sustain a sense of well-being regardless of what is happening around them.

When all of these conditions are present, it is said that you will be in a state of "flow".   Your concentration will become focused, and your daily stresses will recede from consciousness.   This, suggests Mihaly, is the key to sustained happiness,

It's a fascinating and well researched book, with numerous anecdotes to demonstrate the theory.   I can highly recommend it to almost everyone.