Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It

by Tien Tzuo

I wrote an article for Fortune advising people not to go to business school. I argued that it was a waste of time, that for the past hundred years, business schools basically taught one idea: The fundamental goal of every business is to create a hit product, and then sell as many units of that product as possible, thereby diluting fixed costs in order to compete on margins. I said that this model was over, that the situation has changed.

Instead, I argued, the goal of business should be to start with the wants and needs of a particular customer base, then create a service that delivers ongoing value to those customers. The idea was to turn customers into subscribers in order to develop recurring revenue. I called the context for this change the Subscription Economy.

Every day I see companies run by bright young MBAs going down in flames trying to chase after magical hit products. They can’t compete because they’re built backward: product first, customer second. That order needs to flip.

Here’s a question: How many of the charges on your last credit card statement were made without you ever having to pull out your credit card?

I think we’re in a pivotal moment in business history, one not seen since the Industrial Revolution. Simply put, the world is moving from products to services. Subscriptions are exploding because billions of digital consumers are increasingly favoring access over ownership, but most companies are still built to sell products.

To an entrepreneur, any business process that is universally hated, hopelessly complex, and massively expensive constitutes a huge opportunity.

If stock valuations are forward-looking predictions, then subscriptions are forward-looking revenue models.

Working out of Marc Benioff’s rented one-bedroom apartment, we knew we wanted to build a new kind of user experience, one that would feel as seamless and intuitive as buying a book on Amazon. But as we got into it, we realized this required us to change our whole way of thinking. We had to reevaluate the whole purpose of a software company, changing the fundamental question from “How many products can I sell?” to “What does my customer want, and how can I deliver that as an intuitive service?”

After all, competitors can steal your product features, but they can’t steal the insights you gain from an active, loyal subscriber base.

And when you finally discover your customers, it changes everything about your company.

more than half of the companies that appeared on the Fortune 500 list in the year 2000 are now gone. Poof. Vanished off the list as a result of mergers, acquisitions, bankruptcies. The life expectancy of a Fortune 500 company in 1975 was seventy-five years—today you have fifteen years to enjoy your time on the list before it’s lights out.

Notice how big manufacturing companies like GE and IBM that were on the first list in 1955—and are still on it today—don’t talk as much about their mainframes and refrigerators and washing machines anymore? They talk about “providing digital solutions,” which is an admittedly jargony way of saying that the hardware is just a means to an end. In other words, these companies now focus on achieving outcomes for their clients, rather than just selling them equipment.

12 percent of the companies on the 1955 Fortune 500 list are still on it today, and most of them have similarly transformed.

The way people buy has changed for good. We have new expectations as consumers. We prefer outcomes over ownership. We prefer customization, not standardization. And we want constant improvement, not planned obsolescence. We want a new way to engage with business. We want services, not products. The one-size-fits-all approach isn’t going to cut it anymore. And to succeed in this new digital world, companies have to transform.

For the past 120 or so years, we’ve been living in a product economy. Companies designed, built, sold, and shipped physical things under an asset transfer model. Business was about inventory, shelving, and cost-plus pricing. The relationship between seller and buyer was based on discrete, often anonymous transactions.

The product was the only governing principle—it organized everything across a perfectly straight line. The actual people involved in making, buying, and selling the product were entirely disposable.

Model Ts came only in black because with one automobile coming off the line every three minutes, that was the only color that would dry fast enough.

Today the glory days of the soulless, all-powerful corporation are long gone. Today’s customers are more informed by an order of magnitude. Most of them have researched, assessed, and categorized you before you can even say

Here’s how Forrester describes the new customer mindset: “The expectation that any desired information or service is available, on any appropriate device, in context, at your moment of need.” Customers have new expectations (and yes, those expectations have certainly been driven by millennials, but at this point, almost everyone shares them). They want the ride, not the car. The milk, not the cow. The new Kanye music, not the new Kanye record.

It was a truth universally acknowledged that new customers were harder to acquire than it was to retain loyal ones, and negative customer experiences traveled much further than positive ones. There was a lot of talk about customer journeys and net promoter scores.

And then a funny thing happened—those digital disrupters like Salesforce and Amazon that I mentioned earlier took the whole customer-first concept a huge step further by actually establishing direct ongoing relationships with their customers. They didn’t have customer segments anymore—they had individual subscribers.

Today businesses are asking themselves a whole new set of questions: What do we need to do to build long-term relationships? What do we need to do to focus on outcomes and not ownership? To invent new business models? To grow our recurring revenue, and to deliver ongoing value?

Today successful companies start with the customer. They recognize that customers spend their time across many channels, and wherever those customers are, that’s where they should be meeting their customers’ needs. And the more information you can learn about the customer, the better you can serve their needs, and the more valuable the relationship becomes. That’s digital transformation: from linear transactional channels to a circular, dynamic relationship with your subscriber.

Big changes are coming. If you don’t find out who your customers are in the next five to ten years, you will fail. Smaller start-ups are taking down huge enterprises simply because they know who they are selling to.

Companies that survive over a long period of time follow their customers; they do not expec...

This shift, from a product-centric to a customer-centric organizational mindset, is a defining characteristic of the Subscription Economy. Today the whole world runs “as a service”: transportation, education, media, health care, connected devices, retail, industry.

So why is this shift happening right now? Because of the way those subscriptions are being delivered—digitally—and the huge amount of data those digital subscriptions are generating. Considering that business is still governed by bookkeeping standards developed in the fifteenth century, the commercial internet is relatively new—roughly only twenty years old.

“It isn’t that retail is dead. Roughly 85–90 percent of retail takes place in brick-and-mortar locations. But bad brick-and-mortar is. These mall-type department stores are faced with many challenges because they aren’t connecting with shoppers in the way they want to be connected with. Consumers already know what to expect when walking into one of these stores.”

According to Michael Wolf’s latest Activate study, the top fifteen ecommerce marketplaces in the world account for more than 60 percent of total sales.

Anything you do on your website, a competitor can steal pretty easily. But you can actually create really cool experiences in stores. Experiences that can’t be found anywhere else.”

As it turns out, stores are still incredibly valuable, and brick and mortar retail is far from dead—traditional retail just needs to flip the script.

But what was the last thing you bought at Walmart? They certainly couldn’t tell you. To Walmart, you’re basically just a vehicle for dispensing inventory. Once you pass the cash register, you vanish off the map.

“We’ve had three big ideas at Amazon that we’ve stuck with over the years,” said Jeff Bezos. “Put the customer first. Invent. And be patient.” Another favorite Bezos quote: “I don’t know about you, but most of my exchanges with cashiers are not that meaningful.” The Amazon versus Walmart battle has been framed as ecommerce versus traditional retail, but that’s always been a false dichotomy. It’s about starting with the customer instead of the product. It’s about establishing ongoing relationships. It’s about flipping the script—starting with the digital experience, and then building the store.

But just imagine what would happen at the next Apple keynote if Tim Cook announced a simple monthly Apple subscription plan that covered everything: network provider charges, automatic hardware upgrades, and add-on options for extra devices, music and video content, specialty software, gaming, etc. Not just an upgrade program, but Apple as a Service.

As each year passes, Apple cares less and less about how many iPhones it ships, and more about its revenue per Apple ID, lifetime value per Apple ID, and efficiency metrics toward growing the base and value of those Apple

says Robbie Kellman Baxter, author of The Membership Economy. “Make it easy for customers to leave if they want to. You can certainly ask them why they’re leaving, or try to win them back, but don’t get in their way—the digital equivalent of blocking the exit with a hulking security guard.”

Do you remember the great “showrooming” scare? Retailers used to be terrified of people coming into their stores, browsing around, then buying cheaper versions from competitors online. After a little market research, of course, they found out that the opposite was true—more people research online first, then head to stores to try out products before they buy them.

Warby Parker is averaging $3,000 per square foot of retail space (slightly under Tiffany’s number) by knowing that 85 percent of their foot traffic has already done extensive browsing online.

Husqvarna subscribers in Stockholm can take advantage of the Battery Box to access all kinds of heavy, battery-powered equipment like hedge trimmers, chainsaws, and leaf blowers. The tools are serviced daily to ensure that they are always in good condition and fully charged before customers take them home. Subscribers pay a flat monthly fee and simply return stuff when they’re done—no storage, no maintenance, no hassle. It’s also a great opportunity for people to try out tools before purchase. “People are already sharing homes and cars. To share products that are only used occasionally, like a hedge trimmer, makes a lot of sense for some users,”

The business model for a new Netflix show is fundamentally more stable. It spends about $50 to $60 million on a new season of GLOW or Godless. So how does Netflix justify its spending on a TV show or movie that it doesn’t “sell”? Again, let’s return to that portfolio effect. Regardless of whether a show is successful or not, investing in sharp new content helps Netflix to both (a) attract new subscribers and (b) extend the lifetime of its current subscribers. Those shows don’t go away! Together, they’re increasing the overall value of the portfolio. They are instrumental in driving down customer acquisition costs (as more subscribers sign up) and increasing subscriber lifetime value (as more subscribers stick around for longer). Netflix knows exactly how long it takes for a subscriber to flip from unprofitable to profitable. Spending tons of money on new shows means Netflix is happy to take a hit on the books in the short term in order to increase their profitability in the long run.

Roughly two-thirds of all Americans now subscribe to a streaming video service. And if it’s not screamingly obvious already, every video content provider on the planet, from the biggest national network to the tiniest cable channel, is transitioning to SVOD, or subscription video on demand.

According to Digital TV Research, SVOD revenues in Canada and the United States will reach $24 billion in 2021, up from $2.6 billion just five years ago. Roughly half of millennials and Gen Xers don’t watch any traditional TV at all.

smart media companies stand to benefit enormously from the shift from coax to ethernet. Why? Once the shift to digital is complete, these businesses will be able to explore entirely new ways of taking advantage of their core assets (infrastructure, pipe, and people) in order to bring new services to their customer base. Stuff we haven’t even thought of yet.

Cable companies still have a direct pipe into our living room, as well as huge infrastructures and employee bases (Comcast, Cox, and Time Warner employ more than two hundred thousand people). Smarter usage-based billing and cloud-based updates will make their video content services more responsive and valuable. They also have the opportunity to become the operating system of connected homes. In a few years we could be using our former “cable company” to upgrade an alarm service, schedule a new refrigerator installation, or discover we have some loose shingles on our roof.

You don’t buy Hyundai’s new hybrid car the Ioniq—you subscribe to it, for $275 a month. It’s a lot like picking a cell phone plan: pick your model online, choose between a twenty-four- or thirty-six-month plan, select your upgrades, then walk into a dealership to pick up your vehicle. No price haggling, no loans, no back-office pitches. “Our goal is to make car ownership as easy as it is to own a mobile device,” says Mike O’Brien, vice president of product planning for Hyundai.

You can subscribe to a Volvo XC40 (their compact SUV) for $600 a month, and that includes concierge services like packages delivered straight to your vehicle. Everything is covered except the gas: insurance, maintenance, wear-and-tear replacements, 24/7 customer care. Volvo’s CEO expects that one out of every five of the company’s vehicles will be delivered via subscription by 2023, and the company is working on its own ridesharing network that will allow users to loan or rent its cars for profit. Jim Nichols, product and technology communications manager at Volvo USA, told Consumer Reports, “Our research has shown that many customers are looking for a hassle-free, fixed-rate experience that mirrors the many subscriptions they currently have, such as Netflix or Apple’s iPhone [upgrade] program.”

isn’t a vehicle subscription just another word for a lease? Well, no. A lease still binds you to a specific vehicle, whereas a subscription can potentially offer you access to a range of vehicles. “Simply flip between vehicles via the app as your needs change,” says Porsche on its website. You’re signing up with the company, not the car. Another difference: With subscriptions, all the potentially annoying aspects of owning a vehicle (registration, insurance, maintenance) simply go away. With leases, you still have to get your own insurance. Also, many car subscriptions give you the option to subscribe on a month-to-month basis. As Christina Bonnington of Slate notes, “You could theoretically not have a car for ten months of the year when you’re working and using public transit and then get a car subscription for two months when you’ll be travelling more often.”

there were massive limitations to Zipcar—you had to live in a city, for example. But we could see that the next revisions of this concept (give me the ride, not the car) were just going to get better and better. That experience let us see a future world where car ownership would not be necessary.

Why can’t I just subscribe to transportation the same way I subscribe to electricity and internet access? But wait, you might say. Uber isn’t a subscription service—there are no monthly fees. I disagree. It sure looks and feels like a digital subscription service to me. Uber has your ID and all your payment particulars, and it employs usage-based pricing so that you pay for only what you use. It knows your usage history (your home, your work, your common destinations) and uses that information to customize its service for you. And thanks to its partnership with Spotify, it even knows your favorite music. Oh, and guess what? Uber does in fact offer monthly subscriptions. Right now Uber is testing a flat-rate subscription service in several cities. Users can pay a monthly fee in exchange for bundles of reduced-rate trips with no surge pricing. In other words, Uber will cut you a deal on rides in exchange for steady business. The company may take a short-term profitability hit, but the goal is to gain long-term customer loyalty in a very young and turbulent market—and this customer loyalty is becoming more and more important as ridesharing becomes a commodity.

Today the accepted Silicon Valley wisdom is that as cars turn into cell phones on wheels, software will inevitably trump hardware, just as Microsoft trumped IBM. As lithium batteries replace combustion engines, automobile hardware will become commodified, and the new growth market will be in information services.