CIO Viewpoint: What's Required to Succeed in the Subscription Economy?
Enabling a subscription business model is not as easy as putting a “subscribe now” button on your website. To successfully run a business model, businesses must be “always on” in every sense.
As an analogy: in baseball, the best performances from players come in years when their contract is up for renewal. They hit .300+, slug 40 home runs, and are Gold Gloves in the field. The reward is a long-term contract for tens of millions of dollars. Then, two years into that contract, they are a shell of their former selves. The general manager of the team is fired, the team misses the playoffs, the fans boo the player, and everyone is sour.
A similar scenario could be said to have historically happened with multi-year service contracts, product purchases, or purchases of software that would not be upgraded for several years. But that’s all changed with “as-a-service” recurring revenue models.
Harry Moseley, the CIO for Zoom, explains, “Software as a Service is about speed to value. Land and expand if you are delivering more value. Get fired if you’re not showing your value, reliability, and scalability every single day. You can’t have a slip—if you do, there is viral push back.
There are five major differences in a subscription model as compared to a traditional product model that all technology leaders need to understand:
1. Constant innovation “as a service” over planned obsolescence
There’s no question some single-sale products perform exceedingly well (see: iPhone), but there are as many examples that did not (see: Pontiac Aztek). Rather than big-bang product releases, contracts that force lock-in, or forced upgrades, customer retention can be driven through a constant pace of new value delivery.
R&D functions have to partner closely with go-to-market teams to ensure timely delivery of new value that wards off competitors. The nature of a subscription is that a customer can cancel at any time, so businesses must have the organizational agility to sustainably innovate.
2. Outcome management over order management
Tien Tzuo, CEO of Zuora, says businesses have to shift from selling products to selling outcomes.” In practical terms, a company still needs to be able to effectively leverage a product or service catalog, bundle, quote, establish an order and entitlements, fulfill licenses or deliver orders, and then collect cash. However, products and services should be thought of “as a service”, so that a company stays as close as possible to solving the core customer problem.
For example, the industrial company Caterpillar, Tzuo explained, provides “earth moving” services. By adopting this mindset, companies will be able to assemble an offering that is structured to fit customers’ needs, whether it is enabling suspend and resume capabilities or changes to growth and subscription length terms.
3. Sustainable pricing over opportunistic pricing
It may not be sexy, but the stop-the-trains moment of scaling a subscription business model is in the quote-to-cash process.
First, there has to be a well thought out product or service catalog.
Second, the pricing must be profitable for the company and sustainable for the customer.
Zuora finds that while companies see an 8% increase in growth after the first year of usage-based pricing, the “sweet spot” is really when only 1-50% of revenue is usage-based. Tzuo encourages companies to establish value pricing rather than unit-pricing with an emphasis on customer lifetime value rather than unit margins.
Third, with a subscription, the expectation is that companies will actually increase value without raising the price, so getting the first price right is important.
For example, Harry Moseley, CIO for Zoom Video Communications, says that “we believe you need to deliver more value without increasing price. If you buy a Tesla and drive it for 45,000 miles over three years, you actually have a car with enhanced functionality. Elon Musk doesn’t go to you and tell you the car will cost more money. So why should software?”
4. Self-service speed over bureaucracy
One of the fundamental shifts with subscriptions is the shift of power to customers to allow them the flexibility to adapt subscriptions to meet their needs. Not being able to do so can make a customer feel extorted or cause havoc on back-end processes.
The pace of this behavior is only accelerating, with the number of changes per subscriptions doubling from 0.3 to 0.6 since 2016. In response to these increasing and constant changes, systems, processes, and policies must be prepared to evolve.
Whether it is spinning up a new AWS virtual machine, or adjusting a dog food repeat delivery at Petco, the power has to be in the hands of the buyer without bureaucracy.
Symantec’s CIO Sheila Jordan explains that “‘In a world of instant gratification, we have a desire to be easier and simpler to do business worth. We have to enable enterprises to try, start, and validate that our product is the right fit for them.”
5. Customer success over customer service
While self-service enables scale, burying a 1-800 number in a Contact Us form doesn’t cut it. Support organizations have to shift from reactive firefighters towards change adoption experts.
Customer Success teams have to monitor usage metrics, provide education, and pre-emptively offer help to drive adoption so that a customer does not become a jaded flight risk.
Subscription Economy: Win-Win-Win
The Subscription Economy is a potential win-win-win for customers, businesses, and investors — which is why technology leaders need to take charge of business model innovation to ensure that businesses have the right infrastructure to support subscriptions.
While subscription business models are not new (e.g, newspapers, cable, or car leases), business model innovations and technology are enabling companies to continuously evolve the product or service rapidly enough to meet customers’ needs before losing them.
Customers win with subscriptions because:
- Subscription freedom: Subscribers can change their mind at any time to upgrade, downgrade, add on products/services, pause their subscriptions, and even unsubscribe if they are unsatisfied.
- Immediate access to innovation: Companies push new features to retain customers faster so the time-distance to innovation is eliminated.
- Investment risk mitigation: Subscribers avoid up-front capital expenditure and instead pay as they go.
Businesses win with subscriptions because:
- Lower acquisition cost: A base of subscribed customers lowers overall total acquisition costs, freeing up capital to invest in innovation
- Free R&D: Subscribed customers engage in active feedback and provide free R&D
- (Exponential) scale: Nearly all subscription-based businesses are structured on platforms that can scale up or down with demand
Investors also gravitate towards subscription business models because of this scalable speed to growth and the stability of predictable recurring revenue. According to the Subscription Economy Index, companies with a subscription model grew sales 18.1% year over year, or 5 times as fast as the S&P 500 and U.S. retail sales, with much of that growth attributed to new customer acquisition.
These new business models are fundamentally changing the way that businesses operate. And it’s the responsibility of every tech leader to get on board with this shift.