A Business Model for 2020 and Beyond
It’s a bright Sunday morning when you wake up with that leisurely gleam in your eyes and a relaxed brow. A steaming hot cuppa—nothing but Blue Tokai for you—and your newspaper in hand, you settle on your favourite lounge chair. The milkman arrives to drop a couple of cartons of milk. There’s a ping on your phone—just Netflix saying hi.
Notice something unique in the way you just started your day? Yes, the steaming hot cuppa Blue Tokai, the newspaper, the milk, your phone, movies, even the lounge chair—they are all on a subscription plan. A decade earlier, just your phone and newspaper would have been subscribed.
But today you can subscribe to cars, books, groceries, games, insurance plans, investment plans, health check-ups, beer, holiday homes, and even astrological advice!
The generational shift from Baby Boomers to Millennials to now Gen Alpha has also brought with it changes in the way convenience is perceived. Filling up space with new hardware has become a thing of the past. Customers care more for the experience and flexibility, rather than having to deal with transactions and product maintenance.
The subscription business model relies on the fee paid by customers at regular intervals in exchange for services given by the company, usually tailored to the needs of the user. The model focuses on a continued relationship with customers for they will be willing to pay as long as they are given enough value in return.
The subscription economy is gaining greater momentum as we speak. Zuora, a leading cloud-based subscription management platform provider, releases a bi-annual report featuring the Subscription Economy Index (SEI).
In the latest edition, it was seen that over the past 7 years, the companies featured in this index saw a massive leap of 300% in their sales. Gartner, on the other hand, predicted that by 2023, 75% of organisations selling direct to consumer will offer subscription services.
Another survey carried out by them showed that 70% of surveyed organisations had deployed or were considering deploying a subscription-based business model.
Tien Tzuo, the founder of Zuora, writes about this very shift in his book, Subscribed. Tzuo emphasizes that the traditional business model is obsolete and companies must focus on developing a subscription-based model.
Customers are no longer looking for products, but are searching for services that will take care of their daily needs without requiring their effort or supervision. To prove this point, the author gives the example of companies such as IBM who now focus on selling their digital solutions instead of their hardware.
He says this is one of the major reasons IBM is still in the Fortune 500 list, contrary to some of its previous competitors.
Tzuo goes on to highlight the changing consumer preferences. He says it’s about access, not ownership; about customization, not generalization; about constant improvement, not planned obsolescence; about responsive, not perfect.
Traditional brick and mortar stores focus on selling a product and getting paid for it but never follow up with the customer. It’s the product that comes first and the customer that comes second.
The subscription economy reverses this priority list. The focus is on the consumer and building solutions for him or her. A product tag line that reflects it’s multiple parts and buttons will not sell anymore. What will sell is a tagline that talks about creating a seamless user experience, one that solves customer pain points the way they want it.
It is all about customer retention and constant interaction with them.
Tzuo also explains how a company can shift its model and align it with the principles of the subscription economy.
The primary task is to collect data about the customer. Since the end goal is to create something that has on-going value, it requires extensive research about what the customer needs, the hurdles he faces and his expectations.
Focus on easing their everyday struggles and saving time.
Secondly, focus on moving beyond just a product. The service is what will attract buyers, not the product alone. Taking the example of Uber, the world’s largest taxi company, Tzuo says that it doesn’t own a single car.
Uber’s aim is to provide the comfort of travel without the user having to worry about driving and parking. The user need not worry about the car itself.
Thirdly, you need to start treating customers differently. Initially, business models focussed on selling more units of a product, increasing prices after gaining momentum while also reducing production costs.
Now, companies need to acquire more customers, increase the value of those customers and also have those customers for a longer time. It’s about growing relationships, not transactions.
Additionally, in order to shift to a subscription model, the churn rate needs to be lowered, i.e, the percentage of people who do not pay you again.
If the churn rate exceeds 30%, you need to prioritise investment into new packaging, improved customer service, personalised interactions and newer, distinguishing features.
The hype around subscription-based models has been recently created in India with the expansion of Amazon Prime, Netflix, Hotstar and Spotify.
Further, with digital payments taking the forefront, the time was ripe for subscription businesses to lead the way. India’s masses were also increasingly equipped with good data services, adding to this boom.
A report by Pixights states that Indians spend an average of INR 295 per month on OTTs (over-the-top media services), such as the ones previously stated. Additionally, 62% of Indians have subscribed to 3 or more such platforms. Bet you won’t be surprised once you count all of yours!
Lastly, it is important to note that it is not just consumers benefiting from a subscription economy but companies too. Businesses have predictable revenues stream that they can count on, mitigating some of their risks. Additionally, these streams are not one-time payments, but recurring in nature, thus, becoming a constant source of income.
With an increased base of repeat customers, the customer acquisition cost that is borne by companies also reduces significantly. The dedicated effort towards a personalised and seamless experience boosts customer loyalty and makes the business attractive in the eyes of an investor.
To sum it up, it’s a win-win situation for both the customer and the business owner. In a world that is constantly evolving, it is true that only the ones willing to change will survive.
As Tien Tzuo puts it, “It’s a new world—you need to be forever in beta and learn early and often from your first customers. You’ll want your sales team to stay very close to that first cohort, rather than bagging a quick commission and moving on to the next hunt.”
