Editor’s note: Looking towards 2014, Lean back revisits an earlier look at the future, from earlier in the year.
In the 21st century, changing consumption habits are changing the global business landscape, perhaps forever. There is a massive shift underway in the way we—as both consumers and businesses—are looking to consume goods and services. In particular, we now value the convenience and flexibility of subscribing to services rather than buying products outright.
Today, we subscribe to streaming music on-the-go, rather than build up bulky CD collections. We subscribe to services like Zipcar and avoid the need to buy cars. In business, we prefer to use subscription-based services like Salesforce.com for CRM, or FireHost for cloud hosting. Why invest in storage when we can use a subscription service like Box?
At Zuora, we call this the onset of the Subscription Economy. This means the rules of businesses have had to be rewritten from the bottom up. This provides significant opportunities, as well as new challenges.
Indeed, a recent survey of 293 business executives in the US, UK and Australia, conducted by the Economist Intelligence Unit and sponsored by Zuora, demonstrates the extent of this shift in the global landscape. Four out of every five businesses surveyed are currently seeing changes in how their customers prefer to access their services.
As a result, 51% are integrating new pricing and delivery models such as subscriptions, sharing and rental goods and services, rather than selling products outright. Of those, subscription-based models have emerged as the primary means to do so, with 40% of these companies implementing subscription services as part of their core business.
The survey also makes it clear that it is not just consumer and business demand for more flexible and tailored services which is driving this phenomenon. Businesses are also recognising the significant long-term economic benefits that subscription business models make possible. 12% of respondents say these already represent more than half of their revenue. Critically, this number is expected to grow rapidly, as 84% anticipate that this share of revenue will increase somewhat or significantly over the next two years.
However for this to be realised, significant business transformation will be required. Success is no longer gauged by counting how many product units have been sold. Rather, success derives building valuable customer relationships, which only come from gaining greater customer insight and using this to build mutually beneficial two-way relationships. You need to be measuring how many customers are using your service on a recurring basis and how successfully you are monetising those recurring relationships.
Businesses will be measured on the forward-looking revenue potential of their customer base, rather than backward-looking revenue generated from shipped products. Subscription-based companies operate on recurring revenue and recurring expenses and therefore care about recurring profit, not operating profit, and familiar financial measures will have to change to accommodate.
It also means that the legacy systems that businesses once ran on must be re-thought. Enterprise resource planning (ERP) suites in particular were designed for the 20th century manufacturing era rather than the 21st century services-based world we now live in. ERP systems don’t help you price recurring services, don’t support a model where customers are amending their services, and don’t provide key metrics such as churn or renewal rates.
The Subscription Economy opens up a worldwide market opportunity conservatively estimated at $500 billion. However, it requires new models of thinking, and new flexible systems which allow you to understand your customers and tailor and price your services to them specifically. This change won’t be easy but, in today’s transformed business climate, success depends on it.
How are you adapting to the subscription economy? Share your thoughts in the comments below.