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

by Tien Tzuo

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.

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.

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?

That’s digital transformation: from linear transactional channels to a circular, dynamic relationship with your subscriber.

This shift, from a product-centric to a customer-centric organizational mindset, is a defining characteristic of the Subscription Economy.

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.

simply reducing his abandonment rate by 10 percent, he could double the size of his market. That’s a really compelling example of someone applying a service-oriented mindset to an ostensibly “static” product.

“Leo Fender actually never played guitar,” said Mooney. “But he listened to artists. At Fender we still believe in listening to our customers.”

The new winners are using their physical stores as extensions of their online experiences, not the other way around. They’re flipping the script.

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.

Speaking of the decline of iTunes-style downloads, while Steve Jobs got most things right, he famously got it wrong about streaming services. “The subscription model of buying music is bankrupt,” he told Rolling Stone in 2002. “I think you could make available the Second Coming in a subscription model and it might not be successful.” That same year David Bowie made a much more prescient statement: “Music is going to become like running water, or electricity.” Bowie was an early pioneer of connecting directly to fans through digital subscription services—he gave his fans exclusive tracks, photographs, videos, as well as Web space and email addresses through his own ISP service, BowieNet. Another artist who saw the changes coming? Prince.

The question was how do we make them feel more like members, and less like customers?”

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.

At some point, the data and services associated with a vehicle may be worth more than the vehicle itself (much like a cell phone!). GM’s

OnStar, for example, which started in 1996 as a concierge service, is now in more than 12 million vehicles and hosted more than 1.5 billion customer interactions last year.

Wrong. As it turns out, it is really hard to build a safe, great car at scale. Just ask Elon Musk. Or Apple. Or Google.

“We are seeing an evolution toward services rather than physical transactions,” Allison said at our conference. “There’s been a fragmentation of the customer experience. When you bought a car, or you leased a car, that was one interaction. Then as you went and needed service for your car, there’d be a different interaction at the dealership. And for all these years, the cars weren’t connected, so we really didn’t have a view of the journey that you’re on.”

Henry Ford had a famous quote: “If I had asked people what they wanted, they would have said a faster horse.” Today Ford understands that it can’t solve for mobility just by selling more cars.

“From a business perspective, we all know that airlines have struggled for years,” says Mac Kern, former vice president of commercial planning at Surf Air. “It’s a very capital intensive business, not to mention commodity-based. Prices get driven downward. It’s very competitive. The subscription model gives us predictive revenue—that’s something that no commercial carriers have. They don’t know if a flight is going to be profitable until the door on the airplane closes (and they still have to fly at that point!). Because of subscriptions, we know exactly how much revenue we’re going to generate at the beginning of every month. So we can scale our operation effectively, because we know exactly how much flying we’re able to execute. That kind of insight is basically magic in the aviation industry. No one has been able to do that before.”

“Young people want more freedom, they like to travel, but they decide on things late and tend not to book in advance for cheaper rates. So the idea was: Why don’t we use online subscriptions in order to adapt to these new modes of consumption and travel habits? Why not give them unlimited rides?”

THE DECLINE AND FALL OF AD-SUPPORTED JOURNALISM

Of the thousands of potential reasons why advertising is terrible, let me offer you three. First, people don’t like it.

Second, digital ads also don’t make much sense from a business perspective.

Finally, ads have all sorts of other insidious effects, like turning content providers into clickbait factories.

As Jessica Lessin of The Information says: “I still believe it’s much safer to build a business that doesn’t need any advertising to survive. Doing so forces you to focus 100% on your value to your readers. It’s the only way to make sure that what the news publishers deliver to readers in the future is smarter, more informed and more relevant than in the past.”

Remember when paywalls used to be a controversial idea? Today the behavioral insights that come with membership plans and smart paywalls are helping publishers move away from empty-calorie metrics like CPMs and slide-show clicks toward more valuable engagement metrics like the amount of time spent on a site.

Subscriptions make advertisements more relevant, and therefore more valuable.

“Making advertising a secondary—though still vital—revenue source is the most important strategic go...

“Reader revenue, if backed by sufficient high-quality content and good digital products, proves far more stable than advertising.”

Americans who already pay for streaming media services are five times more likely to pay for online news than people who don’t pay for online media.

FT also has a simple but brilliant formula for gauging reader engagement. Borrowing from the retail sector, they score every one of their readers on the multiple of three factors: recency (when did they last visit?), frequency (how often do they visit?), and volume (how many articles have they read?). Low scores indicate churn risks that their promotions group can approach with discount offers.

“We know what it takes to build a healthy subscription business and that’s building a relationship with readers. To do that, you need to have a direct connection with them.

This is the same reason many publishers rightly rejected Apple’s 30 percent “iTunes Tax”—they weren’t happy about the size of the revenue cut, but they were livid about Cupertino keeping all the payment and demographic data. That’s giving away the store.

standard Silicon Valley best practices: subscription revenue, international expansion efforts, multitiered service offerings, freemium offers, customer behavior insights, and a significant TAM, or total addressable market.

The fish is what happens when a traditional company starts to shift its revenue mix from an asset purchase model to a subscription model. In this scenario, the company experiences a string of quarters where top-line revenues shrink as revenues from large, pay-up-front deals are replaced by recurring subscriptions without the big up-front payment. At the same time as revenues dip, the company must make investments in many of the new capabilities and structures that are required for profitable XaaS. The traditionally profitable and stable mix of more revenue than costs on the left side of the chart is replaced with a tumultuous period of costs exceeding revenue. So, a fish:

In three years, Adobe Creative Cloud went from almost no subscription revenue to a virtually 100 percent subscription model.

business is getting exactly what it pays for, but it’s also a strategy for freeing up cash to drive growth, and a way for large enterprises to be nimble rather than locked into expensive IT infrastructure that lacks flexibility

tease out the service-level agreement that sits behind the product. It works for everything. So instead of a refrigerator, it’s the guarantee of fresh, cold food.

Service-level agreements are replacing bills of sale.

What these companies are realizing is that IoT enables them to view their products as whole systems, as opposed to individual units that are sold to strangers.

The FDA approves an EKG sensor for the Apple Watch that will help push health care toward remote monitoring rather than periodic testing, potentially saving billions of dollars in health care costs.

Schneider Electric (founded in 1836) tracks and monitors elevator usage patterns so that elevators can “default” to busier floors, saving people waiting time.

The Internet of Things will enable—and in some cases force—new business models. For example, with the ability to monitor machines that are in use at customer sites, makers of industrial equipment can shift from selling capital goods to selling their products as services. Sensor data will tell the manufacturer how much the machinery is used, enabling the manufacturer to charge by usage. Service and maintenance could be bundled into the hourly rate, or all services could be provided under an annual contract. Performance from the machinery can inform the design of new models and help the manufacturer cross-sell additional products and services. This “as-a-service” approach can give the supplier a more intimate tie with customers that competitors would find difficult to disrupt.

what if business school consisted of ten months of campus coursework, followed by a lifetime of personalized, instantly accessible online courses featuring the latest available research?

Sixty-five percent of drivers overpay on insurance premiums in order to subsidize high-mileage drivers—Metromile fixes that by offering people “pay-per-mile insurance”

“Marketing is no longer just about getting to the sale. To keep subscription customers renewing and re-engaging, you have to provide real value and solve problems.”

The real reason was that big Fortune 500 companies that were used to buying Lotus Notes or Microsoft Exchange wanted to buy Gmail for their companies, but their procurement offices wouldn’t let them buy a beta product! Google’s response? Just update the logo.

One more thing—for those who still like the look of “beta,” we’ve made it easy to re-enable the beta label for Gmail from the Labs tab under Settings.

The Manifesto for Agile Software Development was put together by a group of developers at a ski resort in Utah in 2001. It contains four simple but powerful value comparisons: individuals and interactions over processes and tools, working software over comprehensive documentation, customer collaboration over contract negotiation, and responding to change over following a plan.

GRAZE: THE AGILE FACTORY