Why Your Product Company Needs A Subscription Model

By Aarthi Rayapura February 29, 2020

By Amy Konary, Zuora’s VP of Customer Business Innovation and Chair of the Subscribed Institute

It’s not 1999. Then, why do many product companies still run their business like it is?

Take the recent news about Under Armor for example. Under Armor decided to pull its UA Record app from the app store and said that the company would no longer provide customer support or bug fixes for the software, which will stop working on March 31. This sparked a series of negative headlines such as “Some Under Armour fitness devices lose their smarts on March 31st and “You Don’t Own What You’ve Bought: Under Armour Smart Hardware Gets Lobotomized.”

Under Armor is not the first manufacturing company to not have holistically embraced its software initiatives, and it certainly won’t be the last. The challenge for most manufacturing and hardware companies is their business models which assumes that customer value is created through ownership of a product, not usage. In addition, the software that makes their products “smart” is not leveraged in their monetization strategy, missing a key opportunity. Today’s economy rewards companies who create value through flexible usership, not rigid ownership.

What do I mean by that?

Usership, Not Ownership
The last century was dominated by the product economy. People spent discretionary income on the conspicuous consumption of more, newer, better products. Businesses were trained to think this way too– drive margins down, push new units out, and sell more.

We don’t live in that world anymore. The way that people buy has changed for good. We want outcomes, not mere product ownership. We want constant improvement and ongoing value, not just another product to buy that becomes a paperweight too soon.

The results of an international survey conducted by The Harris Poll found that 57% of the people surveyed wished they could own less. That’s 6 out of every 10 people around the world who don’t want to own things anymore. The poll also found that 70% of people believe that subscriptions free them from the burden of ownership.

We now live in a Subscription Economy. And it’s time for product companies to make a fundamental business model shift to subscription services.

A new business model
This shift requires companies to leverage the software inside their smart products to enable subscription-based services where the focus moves from units and profit margins to customers and recurring revenue. Customer relationships stop being one-off transactions and become ongoing, long-term exchanges. And innovation changes from a one-hit approach to one where never-ending products deliver increasing value over time.

The move to subscriptions is advantageous to businesses as well. Product companies are under constant pressure to drive down prices to fend off competition; innovation takes years and new products are often out of sync with market needs. On the other hand, the predictability inherent in the subscription model allows businesses to plan better for development and growth. The direct relationship with customers offers data and insights which in turn inform innovation so companies can continue to deliver ongoing and personalized services.

The Subscription Economy is a win-win for customers and businesses alike. If you’re at the helm of a product company today, ask yourself these three questions:

  • What are our customers really trying to achieve through the use of our product?
  • How can our product become a conduit for valuable, software-enabled services?
  • How can our customers, and our business, benefit by a shift to subscriptions?

For more, check out our guide 4 Reasons to shift your business from Products to Services.