The Subscription Economy - The only business model for the future?

Having been used to working in product companies I was in for a surprise when I first joined a service provider company in 2006 whose entire business model was based on customer acquisition and their retention based on monthly subscriptions for the service provided.

Rejo Francis

The world economy as we know it, has always been a product driven economy. We bought a house to live in, got a car to move around, stayed at hotels when we travelled and what not. But today, we find it more comfortable taking an Uber to commute and we find almost every product that we use slowly moving into a subscription-based model.

The subscription economy (Representative image)

There are even some radical products like the cement industry that have adopted this model. Assuming you are buying cement to make the floor of the house, there are subscription models available today which take care of your floors for a monthly subscription ... totally unimaginable a few years ago.

Or let's look at Dollar Shave club...

Dollar Shave Club is an American company that delivers razors and other personal grooming products to customers by mail. It delivers razor blades on a monthly basis and offers additional grooming products for home delivery. The company has been now acquired by Unilever for a billion dollars. A service that one would never imagine being delivered via subscriptions and also becoming so successful at it!

So what is a subscription business model?

The subscription-based business model is a business model that charges customers a recurring fee, typically monthly or yearly, to access a product or service. This drive for being in the subscription business is leading to two types of players emerging:

New companies that started off as a subscription service only like Netflix, Amazon or a Surf Air and existing companies like Adobe and Caterpillar which were traditionally product companies and have disrupted themselves successfully by adopting the subscription business model.

Let's take a look at the key factors which are driving success in this new economy.

1. Belonging and Being Known

Two persistent problems with subscription marketing which haven't changed in the evolution from the old to the new model is the need to find new customers and keep them once you have them. In the old world, subscriptions were largely transactional businesses that were maintained with "hard" relationships. Companies made it difficult for customers to cancel.

Today, subscription programs must have a much softer relationship with customers. It depends on understanding each and every customer and meeting their individual needs.

2. Anticipation and Surprise

Every time a customer opens a subscription package, he or she is opening a gift, not just finding another box tossed on the doorstep. Each package needs to include something interesting and even more engaging than the last shipment to inspire and delight.

3. Curation, Exclusivity and Discovery

People today are overwhelmed by an abundance of choice. One of the essential values in subscription services is its ability to curate the experience with product selection based on the specific needs and interests of the customer. A subscription plan can be a convenient way for customers to discover wonderful things that make their lives more interesting, more fun and more fulfilling.

4. Portioning and Cadence

Providing products in the right proportions and at the right time is important for all subscription plans, but even more so in consumables like vitamins and many beauty and skincare products. Getting the combination of correctly portioned products in the right cadence - that is, timing between shipments - is essential for ideal results. For example, Care/Of offers a monthly program to provide personalised daily packets of vitamin and nutritional supplements customised to the individual's needs - based on a personal online quiz.

5. Value, Convenience and Replenishment

Successful programs combine convenience with the confidence of a ready supply of products to replenish what has been consumed. A box of products, including a surprise, purchased for fair price arriving at your doorstep just when you need it, is the ultimate convenience. That explains the explosive growth of Amazon's Subscribe and Save service.

6. Competitive Pricing Models

Pricing is the most crucial factor which aids acquisitions. It's absolutely critical to price the subscription with certain buffer to account for this subscriber churn. Whether it be meals, transport, furniture, or even apparel, there's now a litany of different options available for the subscription savvy consumer. In these particular scenarios, it's typically the competitive pricing that lures the customer. Companies offer multiple subscription offerings that are priced based on different usage patterns.

7. Innovative Subscription Models

Flexible tenures (as short as weekly) are one powerful tool to hook the individual, but it's oftentimes the intangibles offered alongside that can win the day. In many instances, companies are bundling their core offering with other companies' products to provide a 1+1 value. In certain cases, companies also throw in different value propositions from their own service portfolio, which aren't related to the core subscription offering. These strategies help convince the prospective subscriber and help build a deeper emotional connect. Moreover, the perceived value becomes much higher, thereby building a stronger trust quotient with the customer.

8. Customer-To-Revenue Ratio

Companies look to roll out subscriptions for two primary reasons: increase the life-time value (LTV) of a customer or introduce more predictability into future cash flows to drive higher long-term profitability.

Now let's look at 3 companies which have adopted the subscription model in 3 different ways

I. Adobe: One of the first companies to move from product to subscription

Ever since the first Photoshop was released in 1988, Adobe customers had become accustomed to a certain business model: larger and larger downloads (or more disks, CDs, or DVDs) for ever-increasing amounts of money.

The last non-Creative Cloud version of Photoshop cost $999 for over a gigabyte of photo-editing goodness.

Yet, this revenue model led to a big challenge for Adobe: it was only a one-off monetisation opportunity. Yes, Adobe could get a hefty $999 from users, but only a single time for a perpetual license. Once that sum was paid, Adobe had no way to get further revenue from that individual customer unless that customer saw the new version of Photoshop as a big enough upgrade to make another purchase. If they didn't see this value, the customers were free to use the product for work and memes until the End of Days.

Adobe got around this through versioning. Every year, the updates of Adobe products would get drastically better. There would be something new that digital artists had to have that would push them to update. To make the switch, Adobe took the plunge by offering Photoshop for $9.99 per month. This is 100X less than the cost of the perpetual license, but Adobe can make this up in two ways; more customers and longer lifetime.

II. Surf Air...The Uber of Aviation

Surf Air was launched in 2013 and offers unlimited flight services for a fixed monthly subscription. Surf Air was launched in 2013 with one route and three aircraft. In just two years, it has grown to nine aircraft (with 65 on order), flies to nine destinations and even has a waitlist for membership. What began as business travel has expanded to include pleasure travel (special events, weekend getaways, etc).

A real disruptor in the aviation industry, Surf Air is often called the 'Netflix of Aviation' and the 'Uber of the Skies'. It's no surprise that Forbes named it one of 'America's 100 Most Promising Companies' for 2015. This is an example of a company that started out with only the subscription model.

III. Caterpillar

Caterpillar is the best example of companies selling "non-recurring" products which are also providing subscription opportunities in innovative ways. Caterpillar, for example, offers subscription services that provide data and analytics around their equipment. Customers do not subscribe to the assets themselves, but rather to complementary data services that optimise their use of the underlying asset.

Caterpillar rents and sells equipment and all new machines are connected, letting customers choose data services to subscribe to. The company is also working to retrofit older machinery with sensors and analytics technology.

For example, a mining company might want to avoid downtime of essential machines like wheel loaders, which put rock and dirt into trucks that haul it away. A construction firm might want to work more efficiently during daylight hours so crews don't have to work in dangerous dusk hours with lower visibility. Proprietary algorithms let Caterpillar predict performance and recommend interventions.

A mining customer recently spent $650,000 to repair and rebuild a key machine that failed unexpectedly, resulting in 900 hours of downtime. Caterpillar plugged relevant variables, such as usage history and performance metrics, into its proprietary algorithms to demonstrate how the data could have warned the miner before problems occurred. The situation could have been a $12,000 repair with 24 hours of downtime.

Besides the above three examples, the subscription e-commerce market has grown by more than 100 per cent a year over the past five years, with the largest retailers generating more than $2.6 billion in sales in 2016, up from $57 million in 2011. Fifteen per cent of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis.

Amazon Subscribe & Save, Dollar Shave Club, Ipsy, Blue Apron and Birchbox are the five most popular subscription sites in 2018.

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To conclude, there is no doubt today that the subscription model resonates with customers. It provides greater flexibility, adaptability, efficiency and accountability on the enterprise side while allowing for greater convenience, novelty and affordability on the consumer side. The good news is that the Subscription Economy is in the early stages and the mega trend is likely to last for decades and the rewards are likely to be transformative.

Every part of our daily routine is steadily moving into a subscription-based model and the faster companies evolve and rethink their business models around the same, the more likely they are to succeed in the coming world.

The author is Circle Head, Zee Entertainment Enterprises