Understanding the New Subscription Economy
The book Subscribed: Why the Subscription Model Will Be Your Company's Future – and What to Do About It, challenges the assumptions we make about business in the 21st century. You may be too busy running your company or department to read the entire book, so your friends at BluSynergy are lending a hand and providing you with a book synopsis in two blog posts!
The two premises of the book are:
- “Ready or not, here it comes”
- “Adapt or die”
This first blog post helps you understand the new subscription economy (here it comes or, more appropriately, here it is). The next blog post will provide critical information about how to succeed in this new economy (adapt or die).
You may be skeptical that the subscription economy is here to stay. You may be skeptical that you need to pay attention to it, especially if you run a B2B company. Ask yourself, when your credit card bill comes, or you look at your bank statement, how many charges are automatic — Netflix, Hulu, Spotify, BarkBox, Blue Apron, Dollar Shave Club, Amazon Pantry? When you review expenses for your company, what shows up as automatic charges:
- Adobe
- Salesforce
- Staples
- Uber Ride Pass
- Nespresso
- SnackNation
The End of an Era
Today, the average life of a Fortune 500 company is 15 years, down 500% since 1975!
The companies that have been on the list for decades—GE, IBM, and McGraw-Hill—have all changed their business models and gone digital. The new superstars—Google, Amazon, and Facebook—all operate in the digital space. And, their business is driven by subscription services and the ability to collect big data. If you are curious about why big data matters, check out our blog post, Big Data, Who Needs It? (You Do).
The biggest shift in business is the change in focus from products to customers. In the old business model (think WalMart), products are sold through channels to customers. The new business model (think Amazon) focuses on customers who want services and experiences that they seek out through channels. It flips the selling script.
It’s not a battle of brick-and-mortar versus e-commerce. It’s a battle of product-focus versus customer-focus. Fender no longer sells guitars, it creates musicians. Peleton doesn’t just sell bicycles, it creates immersive, in-home cardio experiences. See the difference? Fleet management companies don’t lease fleet vehicles, they provide fleet management and transportation solutions w
Why is this happening? Because we’re going digital. Subscription services are powered by the digital space, which creates a positive reinforcement loop. The more B2C and B2B customers subscribe, the more data they gather; the more data companies have to analyze, the more they can tailor their products and services to their customers. The more customers are offered products and services tailored specifically to them, the more customers buy through upselling, cross-selling, and bundling.
And the Birth of a New One
Before the digital revolution, movie studies would make a movie and put it in theaters. They made money, or not; eventually, the movie was eventually archived. With the advent of video tapes, Blockbuster allowed the consumer to borrow or buy movies in brick-and-mortar stores and through the mail. Today, Netflix invests money in movies and TV series. The constant influx of new content attracts new customers and retains current subscribers; old content builds their portfolio of content. Customers still consume movies, but how they consume them is determined by the customer not the movie studio. And, as customers use platforms like Netflix, the platform gathers data on customer preferences; it makes “recommendations” personalized to the customer, which support customer retention. If you want to better understand personalization, check out our blog on the Three Tiers of Personalization.
And, it’s not just consumer services. Car companies are beginning to offer a monthly subscription for some of their automobiles; the packages include maintenance, insurance, taxes, and registration. The big three automakers are increasingly focusing on transportation solutions, “mobility as a service,” and fleet management driven by big data. Surf Air is offering subscription business travel in the western U.S. and Europe. Zipcar, Uber, and Lyft may make vehicle ownership obsolete; car companies are planning ahead in the B2C and B2B space.
Competition in the digital and subscription space is also moving from vertical to horizontal. For example, B2B delivery solutions include traditional options like commercial trucking, FedEx, and courier services. The competition used to be between FedEx and UPS. Now, FedEx and UPS compete with delivery services through Uber and Lyft. Amazon Logistics is a growing force; it’s Amazon’s new delivery service provided by former employees who start independent delivery businesses (with Amazon’s help). And, futurist predict that drones will be part of our near-term future.
Swallowing the Fish
“Swallowing the fish” is a term coined by Thomas Lah and J. B. Wood in their book Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business. It refers to a business process where companies heavily invest in a subscription model that eventually eliminates costs and delays, internally and for their customers. These companies take a short-term hit in revenue in order to generate long-term growth in sales, revenue, and market share.
The iconic example is Adobe’s 2012 launch of its Creative Cloud, which gave consumers the option to purchase a monthly subscription fee to access Adobe Creative Suite, rather than purchasing in-the-box software and periodic upgrades. This helped Adobe to reach new customers worldwide and drive consistent monthly revenue by cross-selling and upselling.
Their long-term growth came with significant financial pain. Adobe didn’t transition in Creative Cloud, while continuing to sell boxed software. They “flipped the switch” from boxes to the cloud. Revenues declined. A lot. Adobe white-knuckled it, retaining staff and providing detailed financials to their investors. In 2018, Adobe saw growth of 24% attributable to its Creative Cloud subscription-service.
Why swallowing the fish? Initially, Adobes costs increased significantly while revenue decreased significantly. But, over time, these metrics reversed, causing a fish-like graph of costs to revenue.
Photo Credit: Stanford University
The Internet of Things (IOT)
With the emergence of the Internet of Things (IOT), business is moving from products to outcomes. This is especially true for B2B businesses. Companies no longer just rent fleet vehicles; they want smart vehicles that alert drivers to maintenance issues so that businesses can minimize unexpected down time. Energy companies are expected to provide consumers, residential and commercial, with detailed usage analysis so that they can minimize energy costs. Elevators now track usage, so that they can be programmed to divert to high usage floors (express elevators). This not only creates convenience for customers, it reduces wear-and-tear and informs maintenance schedules.
The IOT is becoming a critical business tool. It not only allows better internal process management, it leads to improved personalization and sales. If you know how to leverage it. Read our blog on leveraging the IOT.
The Role of Access
Finally, the rise of subscriptions mean the end of ownership as we currently understand it. The name of the game is access. Drugstore chain CVS is increasingly offering urgent care in-store. You can handle a wide variety of business needs online, from registering your business to paying taxes. Online education is making it easy for employers to support their employees in furthering their education and improving skillsets, Lynda.com is a good example of this. Fleet vehicles are rented by subscription, not leased or purchased.
Rolls-Royce’s Total Care Program rents jet engines, charging a fixed dollar-per-flying-hour fee. MTailor uses consumers’ smartphones to take measurements for custom shirts, pants, and suits.
Ready or not, subscription businesses are here to stay. You have two choices, adapt or die. Hopefully, you have a better understanding of the 21st century business environment, dominated by the subscription economy. Be sure to read our next blog post on how to succeed in this new economy.
At BluSynergy, we love to help businesses become more profitable by adapting to the subscription economy. Whether you’re in the B2C or B2B space, we can help you design a subscription sales strategy that integrates seamlessly into your current business model. We believe there is always room to grow!
Give one of our BluSynergy sales consultants a call today at 731-INVOICE (731-468-6423).
Photo Credit: https://www.pexels.com/photo/top-view-of-man-holding-android-smartphone-near-macbook-and-newspaper-938965/