How to succeed in the subscriptions business

When Tien Tzuo joined Salesforce in 1999 as the then startup’s 11th employee, he witnessed “the dawn of SaaS,” or software as a service. Offering on-demand software to customers on a subscription basis was founder Marc Benioff’s grand business innovation—and his golden ticket to unfathomable riches.

Instead of just selling a one-off software product, as Oracle, Benioff’s former workplace, did at the time, Salesforce would create a more intimate relationship with customers. “Our big realization was we actually can see how our customers are using our product, and we can understand that, and we can actually deliver more to them,” said Tzuo, now CEO and cofounder of Zuora, a subscriptions management firm. Tzuo spoke told an audience of business executives at a virtual event hosted jointly by the Fortune CEO Initiative and Fortune Global Forum on Tuesday.

In other words, Salesforce would hook subscribers, collect data on people’s habits and desires, and then continually update the product. The speed of the feedback loop and the emphasis on experimentation are what separated Salesforce’s approach from the calcified subscription business models of yore—from print magazines to insurance companies.

By now, the virtues of subscription-based businesses are well known. They provide recurring revenue, resiliency in the face of crises (like the coronavirus pandemic), and they inspire loyalty with ever-improving products. When done properly, subscription-based businesses create a flywheel effect that can propel growth.

“With every physical product now connected to the Internet—washing machines, cars, everything—every engineer, every designer, every single product is going to go through that same experience” of iterating based on instant feedback, Tzuo said.

Look no further than today’s biggest tech titans for proof. Salesforce is a juggernaut. Amazon is riding high on Amazon Prime memberships. Apple is minting money with its fast-growing software and services unit. There is no shortage of startups shipping personalized boxes of goods—razors, clothes, meals, you name it—to consumers. Even many media companies are pivoting, broadly, back to subscriptions after failing to compete with Google and Facebook in digital advertising.

The trick is to keep people coming back for more. “The real quest for us is, how do you turn this episodic engagement into an ongoing engagement, and something even like turning it into a lifelong engagement,” said Shravan Goli, chief product officer and head of consumer revenue at Coursera, the online learning company, who spoke alongside Tzuo at the Fortune event.

Bob Lord, a senior VP at IBM, provided an example of product iteration in action. “Starbucks started this way back. All of a sudden you’re a rewards member on your card. The next thing you know, they’re wishing me happy birthday, they’re sending me free drinks,” he said.

“You get direct feedback back from your consumer almost instantaneously. Because, if that free drink didn’t work, I’m not going to do it again. I’m going to find something else to do,” Lord continued.

Of course, the Starbucks loyalty program isn’t a true subscription service, but it incorporates many of the same principles. One could actually consider it a reverse subscription, since people receive rewards for their patronage.

Sarah Bond, corporate VP of gaming ecosystem at Microsoft, another speaker, offered some advice for businesses exploring subscription business models: Start with curation, then lean into personalization. When Microsoft released its Xbox Game Pass, a cloud-based gaming service, it focused on simplifying the experience for people in that order, she said.

“A lot of what we were solving for people was there’s thousands and thousands and thousands of games out there, which ones do I want to play?” Bond said. “That someone went and curated something for you and figured something out is really key to the value exchange.”

If there’s a shared trait that could be considered the key to a successful digital subscription business, it is this: Never sit still. “The most important thing is to get something out there and then go through this process of experiment and learning,” Tzuo said.

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