How can a company shift its business model from selling products to providing recurring subscription-based services? This question is at the heart of Tien Tzuo’s new book Subscribed. Such shift breaks the chain of all-to-often episodic transactional business and moves the business towards a more stable subscription model, although the issue of ensuring continued renewal of one’s subscription base (i.e. minimize the so-called churn) remains a challenge. Thus, business success increasingly becomes a matter of moving from products to services, from sales to subscription, focusing on repeat business (i.e. on more stable, long-lasting relationships with one’s customers).
The author, Tien Tzuo, is an expert on subscription business models. He is the founder and CEO of Zuora, a successful subscription management software company headquartered in the Silicon Valley, with more than 800 customers worldwide. He was formerly Chief Strategy Officer at Salesforce – a pioneer in building an entire business on the subscription model.
The first half of the book discusses how this new business model has evolved, and how it works in various business areas. Specifically, an underlying force driving the shift is the speed of change, which calls for increasing flexibility. The old production model, in companies focus predominantly on their margins and on offsetting the strain of fixed costs through increased sales is being replaced by satisfying customer needs through subscriptions. This shift allows to rapidly satisfy customers’ evolving preferences. Speed and flexibility are more critical than ever, as a Fortune 500 firm’s life expectancy dropped from 75 years in 1975 to only 15 years in 2008!
As a result, a critical factor today is to grow and develop a stable, dedicated subscriber base, with less churn. Tzuo discusses how this business model shift works within distinct industries:
Media (subscription services (e.g. Spotify), DVDs and CDs are obsolete), Transportation (car service subscription, ride sharing, train service subscription, electric bike subscription, etc.) News (revenue through direct digital readership rather than through “old” advertising (Financial Times, The Economist and New York Times))
High Tech (from licensing to selling services, with emphasis on the speed of communication)
Manufacturing (a “digital model” to simulate demand in service, focusing on outcome (avoid breakdown) versus solely on product).
The author then further elaborates on how the subscription model is replacing ownership in seven other business areas: government, education, insurance, pet care, utilities, real estate and finance. The key is access through subscription instead of ownership.
The book’s second half deals with how to successfully implement the change to the subscription model in one’s own business. Once again, limiting churn is essential. The firm’s marketing efforts should therefore be focused primarily on improving the rate of renewal. To ensure success of the business mode shift, innovation is fundamental. Yet, innovation must be focused on rapidly changing one’s entire business model, rather than developing separate beta-testing or incremental improvements in one’s value chain.
Beyond this, the author recommends eight strategic action issues:
Work on how to acquire an initial set of customers. This initial customer set is mandatory to bootstrap a growing customer base for subscription-based services.
Reduce the churn rate. As discussed above, this could be achieved when marketing is focused on subscription renewal and the business is focused on innovation activities that improve the attractiveness of its service offering in the eyes of customers who are about to renew.
Expand one’s sales team. It takes personal efforts to convince customers that a service contract is better than owning!
Increase value through up-sell and cross-sell. This has to do with developing a package of related services, where new elements in this package have higher value.
Go into new market segments.
Go international.
Make acquisitions that enhance growth in one’s subscription model.
Optimize pricing and packaging. It is often meaningful to price an initial service relatively low and then increase the price for add-on elements in the service package offering. The “packaging” must of course be conducive to the service-driven value proposition at hand.
While financial reporting should focus on churn, the company’s IT system should focus on better understanding the subscriber base:
Who are the subscribers?
Are there subscribers ready to accept more aggressive pricing?
What is the “renew button”?
Why can one not sell one’s service package to everyone?
Is the financial viability being maintained – avoid the “trap” of offering too much without fundamentally enhancing the service value to the consumer.
The final chapter of the book offers the so-called PADRE set of operating principles for building a strong subscription model and culture:
Position – web/social media; PR; events; …
Acquire – sales team; recruiting; training; …
Develop – implementation through customer training; drive customer-centric innovations; …
Run – account management; other success measures; …
Expand – upsell; cross-sell; …
The PADRE model represents a good summary on how to develop a subscription-based strategy.
In conclusion, let me cite what Marc Benioff, CEO of Salesforce, said about this book: “(Subscribe is the) definite playbook for anyone navigating the most important business model shift of our time. The subscription model is exploding everywhere, and nobody knows how to steer through this shift better than Tien”.
There was an incident I witnessed some two decades ago that gave signal to what was to come. The scene took place at the Scandinavian Airline System’s (SAS) corporate headquarters in Stockholm, when Giovanni Agnelli, the former CEO of the Fiat group, visited SAS’s then CEO, Jon Carlzon. Carlzon told Agnelli that “we are in the same business, namely transportation. Customers in the not so distant future will pay with one credit card, not own anything, but pick up and leave the various means of transportation at the point where their journey starts and ends – cars, bikes, and so on – as well as simply board planes, trains, etc. as needed, with no tickets. So, we are in the same business, Mr. Agnelli.” Carlzon saw that the shift towards subscription was coming.
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