Article by Michelle Swan in Diginomica
A great many things keep executives up at night – the stress of quarter end, tense board meetings, lumpy hotel beds, disgruntled employees, the challenge of transitioning from traditional license or product sales to a subscription-based model.
That last item might seem out of place, but many CXOs are losing sleep over this challenge as more and more businesses and consumers chose to rent or buy based on consumption. Call it the subscription economy. Call it the service economy. Call it what you will, it’s a model change that many businesses are trying to embrace because in the end it offers a more predictable revenue stream, a stronger relationship with customers, and the flexibility to adapt pricing and offerings on-demand.
But it’s not easy. Adobe is a great case study for the opportunities and challenges of moving from physical product to cloud-delivered subscription, and much has been written about the company’s journey over the last 5 years. Revenues typically decline during the transition from perpetual license to subscription, which can spook investors. While the new model may appeal to new customers, existing customers may be resistant to change. Many companies, like Adobe, find themselves having to support different products, which can put a strain on internal resources. It also requires a completely different approach to sales compensation, new go-to-market strategies, not to mention the new financial systems and operational processes needed to support all this.
This can all be a huge distraction from business as usual, but the payout is worth it. At Adobe, subscriptions now account for 84% of total revenue. The company has enjoyed its eighth consecutive quarter of double digit growth, and its stock price is 5x higher than it was when it first started its journey in 2011.
The transition is a little easier for smaller, private companies which are typically more nimble and don’t have to worry about the ire of investors in the public market. But the challenges above still hold true. Just ask CEO Isy Goldwasser of Thync, a hot Silicon Valley-based wearable company that is in the midst of its own transition to the subscription economy.
Thync launched its first product two years ago – a small neurostimulation device that taps into a person’s nervous system to reduce anxiety, lower stress and help people sleep better. No pills. No doctor’s note needed. Simply attach a small ‘pod’ to the back of your neck with a set of pads, fire up the app on your phone and relax for 20 minutes. Goldwasser explains:
“It’s breakthrough technology, but it’s also the way we’re bringing it to market. Anyone can buy it. We sell it on our site. It represents a chemical-free way to really change the way you feel, which is something that doesn’t exist today in terms of products.”
Not surprisingly the new product hit a nerve (no pun intended) with stressed-out, sleep-deprived consumers and saw sales spike after a number of high profile reviews.
“We learned we could really drive sales through PR. You would get people who were curious, they wanted to try it because it was something super cool. But we also saw those people don’t have a high need so they’re not going to continue using the product.”
As the company prepared to launch its next generation product, Thync Relax, it needed a different strategy.
“We learned from our first product that it’s not the right strategy to go mass market, but to build specific markets around anxiety and stress or sleep. These are the customers who have a high need. These people are long term users of the product.”
Thync realized reordering the sticky pads that attach to the product and have to be replaced periodically was a barrier for customers – but it was also an opportunity to increase usage. So when the new product was ready to launch, Thync pushed a subscription offering. For a monthly fee, customers get the neurostimulator device, pads shipped to them as needed for daily use, and access to a growing number of neurostimulation programs on the Thync app. There are different plans, including a rent-to-own trial version, or you can buy the product straight out which includes 4-6 months of pads. Thync’s product managers call this the ‘unlocked’ plan.
“I would say only about 5-10% now choose the unlocked version. The rest choose some kind of subscription. We have these sort of extremes and we’re experimenting with different pricing.”
That’s a strong showing after only a year on the market with subscription pricing. When asked about the transition, Goldwasser had this to say:
“The hardest part was dealing with the fact that conversions will drop in the beginning because you are adding an additional cost and obligation. Committing to having a subscription model and targeting the people who need your product and [you can] service the most, that’s the way through it. Once you get through it, it begins to build and you know you made the right choice and you’re building a very good, stable, recurring business.”
Besides stability, Thync has seen a number of other benefits with this model. The biggest is a better connection with the right set of customers.”
“It attracts the people we want, the customers who need us most. It just makes the relationship very easy. There’s a continuing obligation on our behalf to make sure that the customer is able to use our system … and to always support them. It’s a plus from a customer relations point of view because we have constant contact with them.”
Freedom to experiment
Like many in the subscription economy, Thync uses Zuora for billing and subscription management.
“Zuora allows us to experiment with different prices for the product and the service that comes afterwards, as well as the subscription. When you begin to combine a product and service together, which is what we have, there aren’t many solutions that do that well.
We use it to link it to our system for usage so we can actually automate part of what we do, which is pad shipment … We also use it to handle returns, cancellations, and to track cohorts. These are all important aspects of having a product positioned in a service business. If a customer subscribes in May of this year, we can see how they’re doing in terms of overall activity. All of that is done in Zuora.”
That ability to track usage and experiment with pricing gives Thync the flexibility to refine its offerings and identify new ways to serve its target customer. Goldwasser tells an instructive story about how Thync experimented with a trial offer where customers could try the product at home for 30 days at $1 a day. While it generated interest, it attracted the wrong kind of customer, who wasn’t committed enough to the product:
“It’s not surprising, but when you give away something for free you attract people who can’t afford or don’t really need your product. The truth is you do need a filter.
Even for the people who were the right kind of customers, we had probably two and a half times the return rate than we did with other offers. We realized, psychologically, people were not committed. People need to commit. When they do they’ll be more diligent. They’ll be more careful. They’ll learn how to use the system. It leads to greater success and greater retention.”
Case studies like Adobe and Thync corroborate the statistics found in Zuora’s Subscription Economy Index, which state that subscription businesses are growing revenues eight times faster than the average S&P 500 company. When the benefits of making the switch to a subscription relationship seem so obvious, I’m a little surprised more companies – especially startups that don’t carry the same baggage as large public companies – haven’t made the move.
Sure it’s not an easy road, but the growth, stability, engagement and customer insight a business gets when it has to engage in a long-term relationship with its customers appear to make it well worth the pain and effort in the long-run.
Gartner predicts that by 2020, more than 80% of software providers will have followed Adobe’s example and shifted to subscription-based business models. It will be even more interesting to see how many consumer products companies will follow in Thync’s footsteps and figure out a way to capitalize on this shift to what diginomica is calling XaaS – everything as a service.