4 Reasons to Shift Your Business from Products to Services

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At Subscribed (Zuora’s annual user conference), Zuora Founder CEO Tien Tzuo discussed the global and cross-generational economic shift that’s impacting how individuals consume and how business operate, in every industry, from music to manufacturing. He calls this shift, “The End of Ownership.” Here Tien provides the 4 reasons why every company needs to face the shift from products to services.

Ownership vs Usership

These days people just aren’t as interested in filling up their lives with possessions. We used to equate success with materialism—a fancy car, a big house, nice clothes. Today we’re all chasing after experiences instead.

But here’s the thing—while ownership is in decline, usership is on the rise. What do I mean by that? Something fascinating is happening in the global economy right now. In industry after industry, unit sales are down, but consumption is up. And what’s more, those industries are healthy and growing.

Take a look at music—sales of CDs and song downloads continue to sink, but the music industry is on a tear. The industry is on its fifth year of consecutive growth. Music subscriptions now account for 62% of total music sales revenues, crossing the $10B mark for the first time ever.

Or how about cars—global sales are down 2.8% from 2017. Millennials are about 29% less likely than those in Gen X to purchase a car. And after 20 years of booming sales in China, individual auto sales actually declined last year. That’s right—car sales are slowing in China! But according to the U.S Department of Energy, overall miles driven continues to rise. Uber and Lyft certainly seem to be doing fine.

The list goes on. We’re not buying as many newspapers (around 30M copies last year, roughly on par with numbers from the 1940s), but digital news consumption is up 20% over last year. Movie sales are down, but video streaming is up. According to the MPAA, the number of subscriptions to online video services like Netflix reached 613M last year—a 27% annual increase. And we’re obviously buying fewer shrink-wrapped video games, but engagement with platforms like Fortnite (which made $3B last year!) is through the roof.

A New Economic Model

The Harris Group, a company that’s known for its insights on consumer sentiment, recently surveyed more than 13,000 adults in 12 countries around the world. And they discovered some fascinating trends.

Nearly three-quarters of adults believe that in the future, people will subscribe to more services and own fewer physical products. More than 70% of adults have subscription services, up from roughly 50% five years ago. And overall, a third of adults (34%) believe they will be using even more subscription services two years from now.

Product ownership is increasingly seen as a thing of the past. Over 70% of international adults believe that a person’s status is no longer defined by what they own. The same number agree that subscribing to services frees them from the hassles of maintenance. And more than half of the people they surveyed wished that they could own less stuff.

It makes sense. If you’re not interested in care and upkeep, preferring access to ownership is way more reasonable. The bigger picture here is that the dominant economic model of the last 150 years is coming to a close, and it’s about damn time.

“A new economic model built around services is catching fire across every industry on the planet, because of access, sustainability, discovery, and growth.”

The 4 Benefits of Usership

Ever since the rise of industrial production, we’ve operated under a straightforward asset transfer model. Companies built and sold products to the market. The fundamental goal was to create a hit product. Once that was achieved, then a company could spread its fixed costs over as many units as possible, so it could compete on the margin. Of course, this entire system was predicated on planned obsolescence.

Instead, let me give you four reasons why I’m looking forward to a world based around usership:

1. Usership Benefits Consumers

For starters, usership benefits us as consumers, because we get to directly access the services that sit behind the products we use on a daily basis: music from records, mobility from cars, software from servers. Are you interested in the care and maintenance of your refrigerator, dishwasher, or lawnmower? If so, great, but most of us just want fresh food and clean clothes and a decent-looking yard.

2. Usership Encourages Sustainability.

In this new model, the margin incentive shifts from “units” to “utilization.” If manufacturers don’t make sure that their equipment lasts as long as possible, and that the materials used to build that equipment are recycled or repurposed effectively, they will lose out to their competitors. It’s that simple. Ikea just launched a new furniture subscription program based on this principle.

3. Running a Service Makes Your Company More Efficient

With services, notice how you never have to deal with customer service calls or some ridiculous five-hour “service window” to have someone come fix your Netflix! When your revenue is tied to usage, you can’t afford any downtime.

4. Services Bring Growth

Services don’t just bring growth; they bring sustainable growth. We’ve found from our own data that over the past seven years, subscription companies have grown more than 300% in the past seven years. What’s more, they are growing revenues about 5 times faster than S&P 500 company revenues and U.S. retail sales.

Business Implications of the Shift from Ownership (Products) to Usership (Services)

So what are the implications for your company? Well, it means you’re in the service industry now. Today, all companies are service companies (even if some of them don’t realize it yet!). They need to prioritize usage and consumption over strict unit sales.

But don’t just take it from me. In fact, we’ve found from our own internal data that subscription
companies that take advantage of usage-based business models grow 1.5 times faster than companies that just rely on straightforward recurring payments.

In other words, you need to think in terms of miles driven, not cars sold. Imagine if today’s automobile companies based their revenue models on daily distance traveled. Think about all the consumption that’s happening in ride-sharing services right now. Their revenues would be going up, not down.

How to Make the Shift from Products to Services

But to make this shift requires a fundamental transformation. You need to change your mindset. You need to be agile. And you need a whole new set of tools. Because in successful service businesses, even minor customer interactions can trigger any number of adjacent operations: activations, suspensions, revenue adjustments.

Keep in mind—those are good things! They are indicators that customers are finding value from your service. A new economic model built around services is catching fire across every industry on the planet, because of access, sustainability, discovery, and growth. It’s a fundamental commercial shift that focuses on usership, not ownership. And it’s happening right now.