It’s a subscription economy, and you’re just living in it
You’ve heard of the sharing economy? How about the subscription economy?
It’s actually not that new: Businesses have been selling monthly subscriptions for all sorts of goods and services for years—magazines like Fortune come to mind. But more recently, all sorts of unexpected industries have started dabbling in subscription-based business models, offering anything from online software to toothbrushes to genome sequencing for a flat monthly fee.
One of the companies leading this charge is Zuora, a Foster City, Calif.-based startup founded by former WebEx and Salesforce.com (CRM) executives. The company sells software that helps other firms move towards a subscription-based revenue business model, including tools for billing, accounting and analytics. This week, Zuora unveiled the latest version of what it calls “relationship business management” software—a suite that lets companies transition and maintain a shift from a traditional to a subscription-based revenue model. (And yes, Zuora sells its product on a subscription basis.)
“[Relationship business management solutions] are an emerging class of software focused on building, managing and optimizing the ongoing customer relationships that are the lifeblood of a subscription businesses,” the company says in a recent press release.
But the real news is that more and more industries are dipping their toes—a rare few even jumping in head-first—to a subscription-based, recurring revenue model. At an event hosted by Zuora this week, several of these companies came together to discuss the shifting landscape and its opportunities and challenges. At the obvious top of the subscription-based model list are cloud software companies like Salesforce.com and Box, which have always charged a monthly per-user fee for their online enterprise products. But this week’s event was also attended by a telecom firm, an online toothbrush seller and a biotechnology company, among others. Their reasoning? People today would rather subscribe to services than pony up the cash to own products.
Innovators like Netflix (NFLX), Zipcar (CAR) and Spotify have certainly proven that subscriptions can work for more than just software. Should all industries make the switch?
The answer is complicated. Subscriptions should certainly be an option for consumers, regardless of the product type. Consumer behavior, especially among younger people, is changing, and the need to own and house goods—from music to cars to physical documents—is waning. While Wall Street grapples with how to evaluate some of the subscription-only companies (à la Box), it has clearly worked up an appetite for a recurring revenue model that gives companies all sorts of new ways to engage with old and new customers. But transitioning isn’t easy, and each company needs to evaluate the needs of its customer base—and how subscriptions could potentially open the door to new users.
Case in point: Last year, Adobe Systems (ADBE) decided to transition its software suite for creatives to the cloud. The move was far from flawless—a recent hours-long outage irked users—but the results have mostly been positive. The company says 20% of customers that are purchasing the updated online tools weren’t Adobe customers before the switch. And now that the software is cloud-based, Adobe can better track how customers are using it and constantly push updates to individual users.
“We were really trapped inside the box that we shipped—both literally and figuratively,” David Wadhwani, SVP and GM of Adobe’s digital media division, said at this week’s event. (Adobe is not a Zuora customer.)
Other companies who have made the switch have found they’re able to attract a broader customer base by offering a subscription-based model, which has a much lower upfront cost to consumers. But the transition is sometimes easier on the customer than on the company, where the transformation to a new business model can be incredibly disruptive to the way sales and marketing is run. (Incentivizing and commissioning salespeople with this model is particularly challenging).
“It is an organizational issue,” says Mark Field, CTO and VP of software services at LifeTech, a biotech company owned by Thermo Fisher Scientific (TMO). “Our processes were set up to support selling instruments.”
Zuora and its investors are, of course, extremely bullish on the growth of the subscription economy, and believe there are lots of untapped industries that will also jump on the bandwagon, from manufacturing to legal services to education. And even if you’re not buying your toothbrush via a monthly subscription service, chances are you’re already part of the subscription economy yourself. The way we consume movies, listen to music, or even drive around in cars, is changing. Zuora hopes the trend will continue.