Why the Subscription Model is Our Future

By Aarthi Rayapura March 2, 2020

This article by Damon Brown (@browndamon) was first published on The Forecast by Nutanix

Companies are adapting to the ownerless age, and it’s changing the way they do business.

The business world is waking up to a new reality: People want to rent rather than own.

The massive success of ride-sharing, home-sharing and office-sharing is proof there’s a growing desire for services. This is directly affecting car ownership, home purchasing and business building construction, forcing them to shift their focus from selling things to delivering services people use occasionally or regularly.

In a recent report, Goldman Sachs called millennials – people born between the early 1980s and mid-1990s – “The Renter Generation.”

“It is the end of ownership,” said Amy Konary, chairman of the Subscribed Institute, at a roundtable discussion during the 2020 Consumer Electronics Show.

“Ownership is about stuff,” she said. “Usership is actually about using products for services. And products are a conduit of valuable services.”’

The Subscribed Institute is a think tank created by Zuora. The cloud-based subscription management company helps businesses across different industries build models for the growing Subscription Economy. In this new economy, people and businesses subscribe to outcomes they want instead of buying a product that comes with burdens of ownership.

Zuora’s End of Ownership Report shows 79% of U.S. adults have a subscription service right now, and 76% believe that in the future people will subscribe to more services and own fewer physical goods.

Joining Konary on stage was Sara Carlson, Partner of IBM’s Industrial Sector Connected Car GTM, and Matt Vernardi, Toyota Kinto’s General Manager. One by one, each explored how companies need to adapt to the new subscription economy.

Konary pointed to a 2019 joint survey with Harris International that found six out of 10 people want to own less stuff. Rather than products, people prefer services that are delivered via products. For example, people don’t want smartphones just to carry around in their pockets…they want the communication capabilities and access to content delivered by these devices.

“You have to think about it from a human-centered experience,” Carlson said. “It’s not just driving the car someplace, but capturing the needs of the specific drive and the individual needs of everyone in the car.”

Zuora founder Tien Tzuo saw this change coming years ago. In his book, Subscribed, the subscription business model expert explains how companies need to pivot into service and away from just making widgets. The book describes how more and more consumers expect their purchases to follow their lead and adapt as they grow.

“They need choice and freedom,” Konary said, describing today’s consumer and client. “You need to provide a flexible enough business model to provide them both.”

A growing number of companies such as Adobe, Autodesk, Rent the Runway and Chegg see the subscription model as the best way forward. In fact, shifting to a subscription model has proven to be very profitable for these companies. It’s leading them to report more predictable quarterly revenues and reshape their customer relationships to be less transactional and more service-oriented.

According to Zuora, there were $5.5 billion in subscription transactions in 2014. In 2019, there were an estimated $35 billion. The company’s Subscription Economy Index reveals that subscription businesses grew revenues about 5x faster than S&P 500 company revenues and U.S. retail sales from January 1, 2012, to June 30, 2019.

As Nutanix evolved from an IT hardware and software company to focus on software in 2018, company leaders also moved the company from traditional software licensing to a subscription business model. Shifting from hardware to software then subscriptions has been challenging but necessary to meet the changing needs of customers, according to Dheeraj Pandy, CEO of Nutanix.

Pandey sees subscription business models becoming the norm across the enterprise software industry, especially as more companies rely on a mix of owning and renting computing technologies. Subscription business offer customers convenience and agility required to meet changing needs.

“Beyond the IT industry, we expect zero companies with anything other than a subscription business model will go public in 2020 and beyond,” Pandey told VMBlog.

Acquire Experiences, Not Things

Zuora points to two things driving the end of the ownership era: Breakneck tech innovation, spanning the Internet of Things to computer downsizing, and intense competition from a leveling playing field that allows new businesses to disrupt established ones.

At the roundtable discussion, IBM’s Carlson said that now isn’t about pushing a good, but considering, monitoring and adjusting the ecosystem surrounding the good.

“It is the age of experience,” Carlson said. “It has to be frictionless and easy. If not, they’re ready to jump to something else.”

For some big companies, that means big changes. Big data is today’s buzz, but legacy systems are often not equipped to give unbiased information. Toyota recognized the issue from the top down, beginning with the leadership.

“[President] Aikio Toyota said that we are now not an automotive company but a mobility company,” Vernardi said.

That starts with the car-buying process. For a century, Toyota and other manufacturers have been dependent on the dealer not only to take care of the customer, but to relay customer needs back to them.

“We need to know our customers better,” Vernardi said. “That used to be left to the dealers. Now, we have a lot more information coming in.”

Vernardi’s offshoot Kinto has gotten creative like bundling insurance and maintenance with the car lease, since dealerships make steady money on car maintenance. Or letting dealers offer car rentals for a few hours to customers, which opens up more revenue opportunities for cars that are sitting on the lot.

“In these cases, the dealers are getting traffic to their dealership and getting paid for doing regular vehicle maintenance,” Vernardi said. “Could be a win-win.”

But these are just dreams without an agile technological backbone.

“The challenge is our legacy systems,” Vernardi said. “They are not flexible, from billing on up.”

Agility, Carlson said, is the key for organizations growing into the experience economy.

“It’s like the early days of the web,” she said. “You build it and see what works. It may not be what you think.”

For more on shifting to a subscription model, check out Zuora CEO Tien Tzuo’s bestselling book Subscribed: Why the Subscription Model Will Be Your Company’s Future – and What to Do About It.