Subscription Economy: Between Fears and Desires

24 January 2020

Transforming every industry, one monthly payment at a time

We normally relate subscriptions to that of magazine subscriptions, such as the Harvard Business Review many of us may have signed up for. But, what was once limited to a specific type of industry, media, has now become a popular business model that is touching literally every industry: from groceries to cosmetics, from toiletries to toys, from mobility services to retail, from video streaming to music and last but not least, heavy machinery and financial services. To comprehend the dimension of this phenomenon, consider this number: 89% of Brits are subscribed to at least one subscription service and that doesn’t include utility providers[1]. 

Traditional businesses have been challenged by the rise of the subscription economy. Stories of Dollar Shave Club, Netflix or Spotify have already made it onto the business case studies shortlist for MBA students after creating significant pain for the executive board of their longstanding competitors.

 

“The reality is ownership is dead; now it’s really about access as the new imperative.”

Tien Tzuo - CEO & Co-Founder of Zuora, a platform for the subscription economy.

 

Why consumers love subscriptions

People don't actually like subscriptions, but they do like a fulfilling end-to-end experience. Add to that, greater personalisation and a more meaningful set of benefits, and the subscription model starts to stand out as the better option in the consumer's perspective.

 

As the world of commerce is continuously changing, companies cannot afford to stand still. Thus, a great shopping experience becomes a must-have, not a nice-to-have, and in the subscription economy this can be achieved by offering consumers continuous value, memorable experiences, accessibility anytime and anywhere, instant fulfilment and, above all, a personalised service.

 

Top reasons why consumers love subscriptions
 

  1. Convenience. Take the example of Amazon Subscribe & Save – consumers can schedule regular deliveries of everyday 'shopping list' products, from nappies to toothpaste to dog treats – direct to the door when they need them.
  2. Customisation. Trunk Club, for example, pairs each customer with their own personalised expert stylist for a trunk of clothes matched to each customer's individual style.
  3. Variety. Spotify provides a good example of this with, among other things, access to an almost 'unlimited' library of music.
  4. Simplicity. Dollar Shave Club shows how a clean, simple and explanatory 'How To' website page is key to making consumers feel in control of starting, stopping and amending their subscription at any time, in a simple way. And, a website with real images and down-to-earth product descriptions provides a simple, stress-free answer to trudging endlessly through fancy named products with jargon laden labels.
  5. Surprise and Delight. Nature Box is a snack subscription company, adding new and exciting snacks to their range every month.
  6. Value for Money. Take Netflix which, among many other benefits, offers a huge film library for a fraction of the price than if purchased collectively.
  7. Sense of Community. Spotify allows members to see, share and follow their activity with friends.

 

Fears that immobilise managers from making the subscription shift

 

Mastering the subscription model

Vying for consumer's attention is the ultimate difficulty, as a 2018 McKinsey study highlights, with only 53% of consumers being aware of just one of the top subscription services mentioned in the report. The percentage doesn't improve much for conversion, with only 55% of those who consider a service ultimately subscribing, and this probably relates to our human culture of reluctance to sign-up for long-term commitment.

 

However, the bigger challenge facing subscription eCommerce companies, as McKinsey points out, is churn, nearly 40% of eCommerce subscribers have cancelled their subscriptions at a given point. "Businesses depend on their long-term relationships to provide predictable revenue growth and deep insights into customer behavior to personalize the experience. Churn can dramatically undermine their viability, since the cost of replacing lost subscribers could not only make it difficult to meet their growth objectives but also quickly drain their cash reserves."

 

The equation to solve - what are the new KPIs

The subscription eCommerce market continues to grow quickly. Business managers must concentrate on developing great experiences, not just great subscriptions, if they are to avoid churn rates and accelerate business growth and profitability. New software tools are essential to create, manage and track subscription performance. But, what are the specific KPIs a true business leader must follow to achieve success? Based on the advice of Tien Tzuo, CEO & Co-Founder of Zuora and the person who coined the term 'The Subscription Economy', the following metrics must be tracked:

 

  • Subscriber Health (growth and change)
  • Business Velocity (annual contract value vs. total contract value)
  • Subscriber Engagement (payments and declines)
  • Subscription Finance (monthly and annual recurring revenue)
  • Relationship Retention (renewals, upsells and churn)

 

Actions that managers can take to start exploring subscriptions

 

A subscription mindset

As a first step, managers must adopt a subscription mindset, they must put the consumer experience first in everything they do, analysing the core consumer needs and meeting these in the most effective and efficient way. This is the cornerstone of the subscription economy if businesses are to ensure continued success in their industries.

 

Moreover, managers should be prepared that transformation is a timely process and business results will only start to show after a period of time, therefore, patience and perseverance are important characteristics to have as part of the mindset needed to drive the change.

 

Understanding the areas of change

Shifting to a subscription offering will require major key areas[3] of transformation throughout businesses, management must embrace and champion the changes, both physical and mindset:

 

  • Technology – New software tools are essential for subscription business models. CRM and ERP systems were designed for traditional product purchases and do not possess the level of control required for the subscriber lifecycle.
  • Subscriber Data – As with the old technology systems, the basic customer data records of name, address and email will now be insufficient. Now, the subscriber identity records need to act as the fingerprint of each customer, including: detailed purchase, payment and refund history; local pricing and promotions; renewals; product swaps and much more.
  • Subscriber Journey – This is where companies can start to build on personalising the consumer's experience and building that all important long-term relationship using customised offers, upgrades, events and value-added services, etc.
  • Subscriber Culture – Everything about the business, every single person and every single process that is involved in the subscription experience must be wholly focussed on the subscriber relationship – the culture has to go beyond seeing customers as simply traditional customers.

 

In conclusion

The subscription eCommerce market is growing fast, recent years showing a growth of more than 100% year on year. Every day, we see the evidence that more and more industries are being transformed by the subscription economy. A business model that was once accustomed only to media has now become a reality spreading across the entire business world, and growing almost daily. We cannot deny the importance of the subscription economy and its effect on the business of tomorrow.

 

In the words of Tien Tzuo: “If you’re not shifting to this business model now, chances are that in a few years you might not have any business left to shift."[4]

 

 

This article was created and written by Luigi Matrone - CEO & Founder of the eBusiness Institute. It was originally published on the eBusiness Institute Blog on May 20.

 

 

Sources

 

[1] https://www.zuora.com/vision/subscription-economy/

[2]https://www.mckinsey.com/industries/high-tech/our-insights/thinking-inside-the-subscription-box-new-research-on-ecommerce-consumers

[3] https://medium.com/@tientzuo/the-subscription-economy-a-business-transformation-83d6fb24a2f9

[4] https://www.gsb.stanford.edu/insights/why-every-business-will-soon-be-subscription-business

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