Why it is time to become a subscription business.
Consumer habits have changed in the last decade. Instead of buying CDs and DVDs, we have become accustomed to using streaming services. We can access any song or movie in seconds. All from the convenience of our phones. Who does not use Netflix or Disney Plus these days? As the world grapples with technological evolution, companies are trending in the same direction. Subscription-based consumption models focus on the outcome, value, and experience, as opposed to earlier times when the product and delivery mechanism were paramount. As such models make their way into the business world, the transaction is gaining traction across most industries.
It is estimated that over 90% of technology companies already support subscription or consumption-based business models (Ernst & Young Global Limited, 2020). Despite the fact that COVID-19 has hurt the overall economy, the subscription business has remained strong and, in many cases, even expanded. Industry data shows that subscription-based businesses continue to perform significantly better than those that are product-based. A leading index shows that revenue growth is about six times faster. You may be wondering, what are the reasons for this? Let me explain.
Customers are at the heart of the subscription-based business model. Their preferences are taken into account to personalize their buying experience, whether it's booking a trip or buying a piece of clothing. As a result, customer loyalty becomes more fragile. If they read negative reviews or have unpleasant experiences, they may change their preferences more quickly.
“Consumers are quick to cancel services that don’t deliver a superior experience — for example, because of poor product quality, dissatisfaction with the assortment or a lack of perceived value.” — McKinsey
B2B customers also expect a consistently high quality of experience. When demand changes, it impacts strategy, operations, and culture for many companies. Let's take a look at the software industry. Cloud software has changed the way the industry operates. The process used to look like this: Vendors developed, sold, and delivered their software, then kept in touch sporadically to see if the customer was ready to upgrade or replace the software. Now software vendors are moving their platforms to the cloud and developing pricing models that would justify the value of the provided services.
In the case of physical products, the complication occurs in the transition phase of the manufacturing process. Technologies such as Industry 4.0 and the Internet of Things enable manufacturers to serve the "segment of one" by delivering highly customized products and services. This process is based on usage and performance data. Information on behavior allows patterns in customer decision-making to be found and predicted. This provides the opportunity to more accurately model pricing for consumption-based and value-based subscription models.
Subscription-based model allows for the prediction of revenue and enables greater resilience by moving from CAPEX to OPEX. The shift from capital expenditures to operating expenditures allows for less vulnerability to cutbacks during times of economic uncertainty.
For businesses moving from a one-time product sale to service subscription is all about developing a business model that allows meeting customer needs and justifying service value throughout the entire customer lifecycle. The change that has taken place in most industries is that companies now need to monetize the relationship rather than the product. This means that the relationship must be constantly evolving to ensure that the contract is renewed. As a result, it creates a predictable and reliable recurring revenue stream and allows businesses to focus on delivering the best products and services, increasing lifetime value for customers, and achieving customer loyalty.