According to Me, The Series: “Subscribed” by Tien Tzuo
This book makes a convincing arguments of why businesses had moved or should move to subscription-based model and participate in the subscription economy albeit in the interest of the author’s founded company Zuora.
The way companies just design product to be released every year or so and hope it would be a hit is fading away. These days, ubiquitous Internet connection allows as-a-service to become possible. Coupled with the demand of “now”, with people not wanting to have an ownership of physical things, services where customers and their experiences take center stage, rather than product, become a new business model. Subscription model allows service to evolve over time all the time, with customers data pouring in and enabling technology like AI and data analytic. Instead of 1-year cycle of product iteration, the service can keep improving according to customers and market feedback. The real distinction between successful and failed business in the next decades is not online versus bricks-and-mortar, but more about who is being customer-centric (data-centric, customisation, flexible and multi-channel) which is now possible with subscription model versus old traditional ways of selling products.
Case in point being NY Times. With the onset of printed matters decline, NY Times was predicted to be doomed. However, after a successful execution of subscription service, its stock recovered from the nadir and skyrocketed ten-fold. Compared to ad-based business model that some digital news media follow like Buzzfeed or Mashable, NY Times created contents that customers find enough value to pay for (10% of customers are paying customers) and use the platform to expand internationally.
One attractive aspect of the subscription model is that it can give predictive revenue. Once you learn about and minimise your churn rate (rate at which your paying customers leave your service), you can predict with great certainty of what your revenue will look like next month from the base of your paying customers. New paying customers acquired will then add to this base revenue. This helps with planning and scaling operations much more easily instead of having a big hit or product or project but can never be sure of what will come next until the next product rolls out or next project’s contract signed. We are now talking about Customer Lifetime Value rather than one-off sale. Typically, subscription model loses money the first two years, but beyond that it is pure profit. But in order to reach that point, customer needs to be satisfied enough that they continue to subscribe and pay for the service. Investors also tend to value this predictability too, giving higher multiples to stock of SaaS companies than traditional ones.
Interestingly, many businesses that most may think cannot fit subscription economy by definitions actually have done it. The simple example being Apple’s iPhone. The smartphone market has come to the point of saturation. Consumers replace their phone with a new one at a longer cycle period. Innovation is also hard to come by to make one smartphone significantly better than the previous version. This is why Apple is now growing their services at a faster rate than their iPhone’s growth. These services are just leveraging on the ubiquity of iPhone products which now act as a conduit for consumers to experience Apple’s services like iCloud, iPhoto, Apple Music (which turned from 99 cent a song to unlimited number of song streaming with a flat subscription) etc.
More intriguing examples are guitar maker, Fender, whose sale of guitars declined. However, they started a subscription services to guitar lessons which helped drive people to want to buy their guitars more and stop people who bought their guitar from quitting. This is a good example of how a company can keep relationship, learn from their paying customers, even after the sale of a product. Caterpillar has already provided service of hauling dirt after using drones to make estimate of the area then charge by volume.
How to move from traditional model to subscription model is another topic discussed at length in this book. The case study is Adobe who moved their Creative Suite from one-off buying to a subscription model over 3 years. Inevitably, there were a number of quarters where revenue shrank significantly due to how subscription model pushes forward revenue that is yet to be realised in the future. They overly communicated to all stakeholders and did not force customers to switch immediately. They also had to rewrite financial models to factor in annual recurring revenue. This has become a blueprint for businesses who want to move from traditional to subscription model.
On the IT buyer side, the book suggested that OpEx is now preferred over CapEx. While CapEx allows companies to take advantage of amortisation and depreciation of the lump sum investment, OpEx requires less initial upfront investment and is more flexible. Not sure if that is widely accepted in Thailand but I believe this will also eventually happen. In my opinion, with OpEx that is lower than CapEx, companies keep the cash on hands which is definitely better than saying it is still on the book as “investment” or “asset” to be amortised over time whereas actual cash has already left the company’s bank account.
In order to be successful at Subscription model, the book suggests quite a few things. One that is stuck with me is about staying in beta forever. With the concept of Beta meaning it is still not a finished product, we should let it constantly evolve. The other is on IT. With subscription, the architecture of IT system should put a customer ID at the center stage with pricing, data and everything related connected to the ID rather than siloed into different departments (obviously, Zuora comes in nicely here to solve the problem).
In all, the book made quite a convincing argument of why and how to follow subscription model.
