Over the past hundred years, business schools have transmitted practically one idea: the fundamental objective of each business is to create a successful product and then sell as many units as possible in order to dilute the fixed costs and increase margins.
This model is finished. Today the goal of a business is to start from the desires and needs of a particular customer base, then create a service that meets those needs by providing continuous value to those customers. The idea is to turn customers into subscribers in order to develop recurring revenue. We will call this new Subscription Economy business model.
We are at a crucial moment in the history of business, in simple words: the world is moving from products to services. Subscriptions are exploding because billions of digital consumers are increasingly preferring access over possession. And this means that everything in your company will have to change.
The end of an era and the birth of a new consumer
More than half of the companies that were on the “Fortune 500” lists in 2000 are no longer there, they disappeared from the list due to mergers, acquisitions, bankruptcies.
The big companies like General Electrics or IBM that were on the list in 1955 and are still there have transformed, focusing on achieving results for their customers rather than selling equipment. New entries on the list like Amazon, Google, Facebook, Apple, Netflix have never thought of themselves as product companies.
The brand new ones like Uber, Spotify and Box have invented new markets, new services, new business models and new technologies and platforms. All these companies have understood that we live in a digital world and in the digital age the customers are different: they prefer results over ownership, personalization over standardization, they want constant improvement, not controlled obsolescence, non-produced services.
Consumers today have the ability to evaluate, criticize and buy anytime, anywhere. They expect any desired information or service to be available on any appropriate device, in the context and time of need. They want the passage, not the car, the milk, not the cow, the music, not the record.
Change your vision to stay on the market
In the United States, a record was broken in 2017: more than 7000 stores have closed. E-commerce is clearly the future. Today it represents more than 13% of the retail market with a growth of 15% every year.
In the United States, Amazon today has approximately 90 million Prime members, yet 85% of retail sales are still in physical stores. An interesting phenomenon has recently been observed: numerous online brands are opening physical stores and several companies are removing some products from their ecommerce sites to increase traffic in their stores (for example, today you can no longer buy coffee on Sturbuck.com ).
The reason is that while online you cannot differentiate yourself from your competitors (whatever you do on your site can be easily replicated) in the shops you can create truly unique and interesting experiences.
Traditional stores are not dead, they just have to change their script: to start from the customer instead of from the product. The difference is not between “online” and “physical” sales, the real division is between a data-driven, app-centric, flexible, multi-channel sale on the one hand and an old and stale sale on the other.
The new golden age for streaming services
Today we are in a new golden age for the media. Freed from a blockbuster mentality, new streaming services don’t have to worry about advertisements or chasing a least common denominator of entertainment.
They can take risks on smarter and sharper projects. Netflix today spends $ 8 billion a year on original content. Investing in brilliant new content helps Netflix both attract new subscribers and extend the duration of existing subscriptions.
Every video content provider on the planet, from the large national network to the small cable channel, is switching to the SVOD (Subscription Video On Demand) model, that is, an on-demand subscription. Another fast growing sector is live streaming, just think of the success of a site like Twich which attracts around one million visitors every month.
Mobility is changing to focus on the customer
Car manufacturers are responding to a radical change in consumer preferences for services but also to another disruptive phenomenon: Uber.
Today more than 60 million drivers use Uber and Lyft. These ridesharing services have inaugurated a new set of priorities for consumers: why buy a car if to go from point A to point B all you have to do is take out the phone?
If machines are turning into phones with wheels, software will inevitably beat hardware. The big car manufacturers will have to reinvent themselves, think of themselves not only as car manufacturers, but as transportation solutions.
Recognizing “mobility as a service” means taking advantage of all means of transport, not just driving, and seeing it as a great opportunity. Ford has understood that it is necessary to remedy the fragmentation of the customer experience in the automotive sector and has created an app thanks to which you can heat the passenger compartment, reserve parking spaces, make appointments for the various maintenance services, find the nearest petrol stations and make payments via mobile.
Similar changes are also taking place in the airline industry. Surf Air for example offers unlimited flights to frequent travelers for a monthly fee.
Competition in the transport sector has gone from vertical to horizontal: light rails compete with ridesharing which in turn competes with low-cost airlines.
The profound transformation of the publishing industry
There has been talk of the death of the newspaper industry. In fact, a recent study found that 169 million adults in the United States read newspapers (on paper, online or on a mobile device) every month. It is almost 70% of the adult population. The percentage of young people between 18 and 24 who pay for online news has increased from 4% in 2016 to 18% in 2017.
Digital subscriptions are profoundly transforming the publishing industry and a new generation of reader-supported publications is enjoying new popularity. Many intelligent publishing groups are rapidly transforming into what Ken Doctor has called “companies formerly known as newspapers”, they are expert media who combine their basic intellectual resources with complementary services to create new experiences for their readers thanks to small benefits (a Spotiy account, free book downloads, seminars, conferences).
The New York Times has managed to reverse the relationship between subscription revenue and advertising in favor of the first term. Quality journalism will continue to have solid support from committed readers, interested in having in-depth information, readers happy to pay for it anywhere and anytime.
What determines the transition from a traditional model to a subscription model
Today the technology industry is a 3 trillion dollar giant, with a growth of 4%, in 2017 84 billion dollars were invested in technology with a 100% increase compared to 2007.
Today it is clear to everyone that the dominant business model for technology is subscriptions, it is expected that in 2020 more than 80% of software providers will move towards a subscription business model.
The authors of the Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business have defined the transition from a traditional to a subscription model as “swallowing fish” because during this transition the temporary revenue curve drops below the curve. of operating expenses, before going up again. For a software company this can be a big fish to swallow.
The IOT ecosystem and how our daily life is changing
Is it possible to switch to a subscription business model also for the “heavy” sector? The answer lies in finding the service behind the product. Instead of the refrigerator it is the guarantee of fresh food that you have to offer, instead of a digger it is the removal of a certain amount of soil.
Over the past 5 years thousands of manufacturing activities in the world have invested large sums of money in sensors and connectivity, have put sensors in everything they have produced: doors, chairs, pipes, tiles, lights, sidewalks, shoes, bottles, tires, etc. .
In 2020 we will have one billion smart meters, 100 million connected bulbs, 150 million cars connected in 4G, and so on. But what do the sensors do? They collect and transmit data, a lot of data. All of these products will redirect information to centralized servers, so companies can start using analytical platforms to search for models and ways to constantly improve efficiency and productivity.
This ecosystem is known as IoT (Internet of Things). IoT is the digitization of the physical world through sensors and connectivity. All objects manufactured on the planet will be able to receive and transmit data and will be able to offer remote monitoring or preventive maintenance services.
Staying forever in beta: the key to success for companies
When you start to see what your customers are doing, everything changes: the way you make decisions, allocate resources and build new services.
Gmail has remained a beta product for five years. It only finished testing in 2009. A beta version allows you to get the product out before it’s ready, to gather a lot of feedback from customers and then incorporate these inputs before finally freezing the product and shipping it.
A key aspect of the development of an agile product is the participation of customers in the process before the final product comes out, in order to anticipate anomalous scenarios and help ensure quality assurance.
The Gmail team has gone further, why not enroll your customers as an innovation partner and stay in the beta mentality (listen and interact) forever?
This is why Netflix does not need to create pilot episodes, with all the data it continuously collects it already knows what its audience will like. When you manage a subscription service all the insights you need are already in your system.
How to review the 4 P’s of Marketing
Today you communicate your brand through an experience not through advertising. A subscription is a one-on-one relationship. If you are in marketing you need to collect information about your customer and rethink the 4 P’s: product, price, promotion, place.
When the first P (product) turns into an S (service) you have to look at the other three in a different way.
Place : let’s start from the distribution channels. It is not necessary to eliminate the dealers but to involve them more, through courses and seminars that teach them to manage a relationship that develops over time.
Promotion : How to attract people into an experience? Today most commercial transactions are mediated by social media. Storytelling has come to the fore. You need the history of the product (the how) the history of the market (the who) but above all a general history that places your service and the user within a broader social narrative (why).
Pricing (and packaging): for a subscription business, it is one of the most powerful growth levers. The price is the cash value that you assign to your service. Packaging refers to the decisions you need to make when associating a specific set of functions with a particular rate plan. In a subscription model, you don’t price an object but a result.
8 strategies to maintain a constant growth rate
With the subscription model, we are witnessing the transition from a resource transfer model to a long-term relationship.
In the old world you had three imperatives: sell more units, increase the price of those units, decrease production costs; in the new world you have three new imperatives: acquire more customers, increase the value of those customers, keep those customers as long as possible.
Maintaining a steady growth rate is an imperative. The solution is to embrace multiple growth strategies, the essential ones are 8:
- acquire your initial group of customers;
- reduce the dropout rate;
- expand your sales team,
- increase the value through upsells (offer the consumer something of greater value than his initial purchase choice) and cross-sells (increase the value of the exchange by making available products or services connected with the initial purchase choice, making it more complete )
- launch a new segment;
- become international;
- maximize the growth opportunities of your acquisitions;
- optimize pricing and packaging.
How to evaluate the profitability of a business
The basic premise of the double entry is that the credits must correspond to the debts. This system may have worked in the old business model but no longer works in the Subscription Economy for three reasons:
1) does not take into account the difference between recurring and non-recurring revenue.
2) marketing is considered an irrecoverable cost, while in the new model, marketing costs are to be understood in a strategic way as they are intended to incentivize future business.
3) it is a system anchored to the past (the expenses made, the money earned), the subscription activities instead are projected towards the future, what you are interested in is knowing how much money you can count in the next twelve months so you can plan to accordingly.
Each subscription business focuses on ARR (Annual Recurring Revenue) i.e. the amount of revenue you expect your subscribers to pay each year. The churn rate, called churn is a decrease in ARR. ARR minus churn is the amount of money you can count on.
The recurring profit margin is the difference between your recurring revenue and your recurring costs. This number gives you the profitability of your business.