By: Carl Gold, Chief Data Scientist, Zuora. Originally published by Retail Touch Points.
Amazon just released a children’s book subscription box that prime members can subscribe to – and book publishers are all – haven’t we been through enough? We’re on the verge of a major macroeconomic shift – where people are shunning ownership of things for access to services. We call this The End of Ownership. You can subscribe to service to read books, listen to music, drive a car. You can get your clothes or dog toys or razor blades delivered monthly. And yes — Amazon is very very good at getting these services into the hands of its billions of Prime members. It is consistently buying up more businesses to deliver even greater value to its subscribers, and it could be gunning for your business, too. But here’s the thing – Amazon doesn’t have to eat your retail business. Even children’s book sellers can survive. In fact, Goldilocks, a storied children’s book is actually a great analogy. The tools to compete with Amazon are available and cost competitive. But first- think about your customer and how to offer your services on a subscription basis. Businesses that offer subscriptions outperform businesses that don’t. Where can you deliver ongoing value that will improve your relationship with customers and your revenue outlook, too? And when you commit to that subscription offering, there’s lots you can do. You can customize your offerings, deliver flexible options and pricing and cement those prime-like relationships that keep customers excited and engaged just like Amazon. You just need to move quickly, and use what you know about customers to your advantage.
1. Getting pricing ‘just right’
Giving subscribers too many options is overwhelming. Giving them too few options is unattractive to customers who demand choices and value. But there’s a just right sweet spot based on understanding how your customer values your offering that leads them over time to sign up for more. A case in point lies in how you charge subscribers for usage with a pay-as-you-go component to your billing plan: without usage billing, subscribers may feel that a one-size-fits-all plan is charging them for more product than they use. But if you charge primarily based on usage, subscribers feel like you’re looking over their shoulder and charging them for everything they do.
Our research shows that churn is lower and companies grow faster when there is a usage component to pricing: 6% lower churn and 8% faster annual growth for companies where there is a usage component to pricing. But fastest growth happens when the usage component is less than 50% of the bill: An additional 4% annual growth compared to companies where usage is the main mode of billing.
A great example of this is Ford’s new subscription service Canvas: for most customers, most of the fee is a simple recurring fee based on your car choice, but you also pick a mileage package and pay by the actual miles driven. On a typical month a customer is paying mostly for the service, but they still won’t feel like they are paying for mileage they don’t use.
2. Goldilocks’ return
Allowing customers to opt into and out of accounts — or let’s say to exit when the bears come home but come back later when they’re gone — leads to better revenue and lower churn. Those companies where every subscriber makes changes to accounts grow at three times the rate (28% faster) of companies whose subscribers don’t make changes to their subscription accounts and they reduce churn by 25%. Customers know they can be choosy about which subscriptions they have, those that offer flexibility of opting in and out will set themselves up for the long haul.
A well known company that does this well is Dollar Shave Club: they let customers pause accounts for up to six months or easily cancel and resubscribe without any penalties. Subscription services in other industries like SaaS and Media should take a page from this playbook: It is common practice to “let sleeping dogs lie” when a subscriber seems to forget they have a service by continuing to pay when they never login. But that ultimately ends badly and the subscriber may feel tricked or taken advantage of – a clean suspension would make them more likely to come back. California’s new subscription law is pushing more companies in this direction which requires online cancellation options for subscriptions purchased online. Why not give those subscribers cancelling on-line an easy suspend option?
3. Be the bear
Don’t just fall asleep while others are out there eating up your long-term viability. You alone know what your customers want and you have the ability to personalize your offerings and deliver them exactly what they’ll want next on a recurring basis. We know that subscription companies have grown revenue 5 times faster than U.S. retail sales over the past 6.5 years. That means that offering the right subscriptions is a way to gain an edge over competitors and grow your business, too.
Many, many companies from traditionally non-subscription industries are taking the plunge and discovering the power and predictability of recurring revenue! People think of Caterpillar Inc. as the quintessential industrial company whose machinery is ubiquitous at construction sites around the world. But Caterpillar is also reinventing itself with a new game: they are analyzing data gathered from sensors on its fleet of half a million construction machines around the world. This allows Caterpillar to offer customers a subscription data service that provides guidance on how to improve the operations of their building and mining projects. And Caterpillar isn’t alone. Car companies like Ford have started offering subscriptions (to help combat the trend towards ride sharing) as well as other traditional makers of capital goods like Schneider Electric, the global leader in energy management and industrial automation…
The Ending Has Yet to Be Written
Despite the massive change we have already witnessed, it’s still early days for the Subscription Economy! But even if early movers have taken the lead in your industry, it still possible to learn from their experiences and missteps and ultimately catch up and even win the race. Just remember what Goldilocks can teach us…