People don’t want more stuff, they want more experiences. Access to more content, more music, more videos, more fun rides but without having to think about where to store all of this. In Subscribed, Tien Tzuo, the founder of Zuora, software for subscription-based businesses, explains how the world is shifting from products to services and why you should adjust your business model to a subscription-based one.
The Core Idea:
We want the ride, not the car. The milk, not the cow. The music, not the physical record collecting dust somewhere in our apartment. That’s reason number one subscription companies are growing nine times faster than all the other on the Fortune 500 list. Reason number two? Because unlike product companies, subscription companies know their customers. They offer ongoing value which leads to recurring revenue.
The traditional business model is obsolete. You need to focus on creating a subscription-based business.
The world is moving from products to services and people no longer want to own stuff, they want the outcomes the products offer.
To reduce your churn rate you need to deliver ongoing value.
Lesson #1: Traditional Business Models Are Obsolete. We’re In The Era Of Subscription Economy
More than half of the companies that appeared on the Fortune 500 list in the year 2000 are now gone. As Tien Tzuo says in the book, “The life expectancy of a Fortune 500 company in 1975 was seventy-five years—today you have fifteen years to enjoy your time on the list before it’s lights out.” Why? Well, there are three main reasons: mergers, acquisitions, bankruptcies. As you can imagine, the main reason is the last one.
But instead of digging graves to check why these companies no longer exist, the author prompts us to take a look at the companies that have stayed.
Big companies like GE and IBM that are still on the Fortune 500 list no longer talk about their hardware – mainframes, chips, etc. They obsess about their digital solutions. Focus on achieving certain outcomes for their clients, not just selling them equipment. The core of their business switched from hardware to providing services.
Why the shift?
People nowadays prefer outcomes over ownership. They want the ride, not the car. They don’t want to deal with the maintenance of the car. Besides, subscription-based businesses enjoy fresh income and they don’t have to advertise like crazy to earn a buck.
Lesson #2: The World is Moving From Products to Services
Subscription companies like Netflix and Spotify are exploding because billions of digital consumers are increasingly favoring access over ownership. You all know that already. I mean, owning CD’s or downloading songs is so old school that even your grandpa is not doing it. Hell, people are not even buying cars. They just Uber or Lyft – apparently these two are verbs now.
Although it’s quite difficult to set up a Netflix-like business, we do have a chance to create something that will bring recurring revenue. As the author explains in the book, most companies are still built to sell products. They focus on selling only once, making only one transaction. In contrast, subscription-based companies built a solid relationship with their potential clients and eventually offer a service, or even a physical product, that will lead to a long-lasting relationship.
And since old brick and mortar establishments refuse to believe that people don’t want to buy stuff and are more keen on leaving the maintenance of the product to the company, we have a chance to shine.
A chance to build an audience and create a service that delivers ongoing value to a certain group of people.
Lesson #3: Deliver Ongoing Value
You’re going to be out of business in less than 15 years if you’re not doing subscription services. How to do it? Start with the customer in mind.
Gather as much information as possible about your future customers. Spend your time where they spend it – forums, social media groups, blogs, Reddit. Use the collected observations to create a service that offers ongoing value, something that will satisfy your customer’s needs. Something that will save them time. Ease their everyday life. Something that will make them scream for more.
Of course, the best way to deliver your product is digitally. People are already used to paying for online services – as long as they offer value.
Lesson #4: Deliver the Value That Sits Behind the Product.
Think about companies like Spotify or Netflix for a moment. Do they produce content? No. Well, now Netflix is investing heavily on their own series but the core of their product is access to all TV shows, most of them not produced by them. It’s similar to Uber, Airbnb, Facebook. Uber, the world’s largest taxi company, owns no vehicles.
Tien Tzuo gives us a really good example in the book: If you get regular deliveries of fresh, cold food, you won’t need a refrigerator. Or, you can simply subscribe to a local restaurant and receive freshly cooked meals 3 times a day.
A great story of a company that switched from a product company to a service company is Husqvarna. You no longer need to own heavy, battery-powered equipment like hedge trimmers, chainsaws, and leaf blowers, you can just subscribe to Husqvarna Battery Box. It’s a blue storage shed that’s located in parking lots of popular shopping centers. Subscribers pay a flat monthly fee and simply return stuff when they’re done – no storage, no maintenance, no hassle.
The benefits are clear: you don’t have to invest a lot of money upfront to have all the equipment you need; you don’t have to figure out where to store all the heavy machinery; you don’t have to repair, you just plug and play. Once you’re done, you return the goods.
If you can package and deliver the value a certain product offers (e.g. the knowledge of the book not the actual book), or a group of products, at a lower rate, you’ll create a competitive product which people will want.
Lesson #5: Ownership is Dead. Convenient Access is the Right Future Approach
Media and software subscription services are obvious mentions for a subscription-based company. We’ve all heard them and its kind of hard to compete against them currently. What about the other industries?
According to the research mentioned in the book, there are still a lot of old business models that desperately need an upgrade.
Health care: Currently the health care experience is a joke: You visit a doctor, who might send you to a lab for tests, or see another specialist, or a pharmacy to pick up some medication. There are forms to fill out at every stop, not to mention the traffic and the amount of time you spent riding the roller coaster.
Government: In the US, activities like paying taxes, registering a business, getting a driver’s license are a pain. Even though we’re living in a highly connected world, we still need to do mundane tasks daily, only because no one figured out a way to convince the government that they need to change how the handle some necessary things.
Education: Many of us are working in positions that didn’t exist a few years ago. Why then keep the same school system going? In the ever-changing world, staying in high-school for only four years is surely not enough to stay competitive. We need fresh doses of wisdom. So, instead of few years of doing coursework, we can get personalized training online featuring the latest available research on a topic of interest.
Insurance: Sixty-five percent of drivers overpay on insurance in order to subsidize high-mileage drivers. What if someone offers pay-per-mile insurance? You just plug a device in your car’s OBD II port and you pay what you use, not what the industry demands.
Pet care: Retail pet food companies are turning into digital pet health services. You just need to create a profile and based on your pet’s age and breed you can receive the right kind of food + other essential things for your darling – nutrition, health, and grooming equipment.
Utilities: Before, big electric, gas, and water companies spend millions to build a giant utility plant. Today we can do things differently. Companies like SolarCity are enabling solar-powered homes to sell electricity back into the grid. As mentioned in the book, “Lots of people aren’t getting electricity bills anymore – they’re getting electricity checks.”
Real estate: Ask a baby boomer and he’ll immediately tell you that buying a flat should be your life’s mission. But since remote jobs are on the rise, that’s no longer the case. Youngsters want more flexibility (read freedom). They don’t expect to live in the same place for more than a couple of months. That’s why they don’t buy, they rent. And That’s why companies like WeWork and Airbnb are crushing the market.
But that’s not all. Every sector on the planet has the potential to become a recurring revenue business. You just need to give customers the outcome they want, without the involved pain from owning the physical asset.
Lesson #6: Subscriptions Leads to Growth
Companies that are only interested in sealing one deal will soon be obsolete. They got their sale and they don’t care who you are. But that’s their biggest mistake.
Selling is about growth – you’re selling a service in order to help your company grow, and your customer is buying a service in order to help themselves grow. So why not grow together?
Back in the old days, companies could grow by only doing these three things:
Sell more units
Increase their prices
Decrease the cost required to make those units.
Nowadays it’s a bit different. To grow, you need to enter into a relationship. To be transparent. To care. To be prepared for a solid partnership. But all of that is worth it. When your business is based on recurring revenue, you no longer have to worry about the next quarter. You can measure your income down to the cent.
So, your main focus points when running a subscription-based business should be the following three:
Acquire more customers
Increase the value of those customers
Hold on to those customers for longer
Lesson #7: Lower the Churn Rate by Investing Back in Your Business
Churn basically means the percentage of people who stop paying you during a given time period. If the churn rate is high, you’re offering is probably not good enough.
Even though churn can result from a lot of different reasons, here are the main ones:
Weak customer service
A poorly upgraded product
A better offer from the competition
People no longer interested in what you do or they simply found a better alternative
Weak relationship between the brand and the end customer
Churn rates between 20 and 30 percent are considered normal. But you should do whatever it takes to lower this. How?
Invest back in your business.
Invest in high-quality services, packaging
Add new features that can reinforce your main product
Offer top-notch customer service
Build a relationship with your customers. You can do this by regularly sending them personalized emails
Find your WTF moment: With the subscription model, you have that constant flow of revenue. You no longer think about big releases every two years, you do them regularly. None of this stuff is easy though. You need to figure out a way to provide recurring value to your customers which basically means shifting your whole strategy. Think of a way to cut your product into pieces and give your clients a piece per month – that’s your massive WTF moment.
Increase your value: The best way to maintain growth is to increase the value you get from your customers. As the famous saying goes, “It’s cheaper to retain a current customer than to acquire a new one.” Your goal when creating a subscription business is to add new services, features, and functionalities to get more value out of the current users. Yet, you don’t always have to think about selling them stuff. By adding more features you’ll increase the value of your offering, thus convince more people to renew.
Go international: Why wait to sell in other countries? Yeah, there are surely some obstacles along the way like language, bureaucracy, shipping, but in today’s world it’s not that hard to sell stuff in Africa even if your business is based somewhere in the northern hemisphere. The main thing you need to consider is setting up the right alternative payment methods.
Optimize your pricing: Most business owners spend less than an hour to plan their pricing. Kind of nuts, right? Especially considering the huge impact pricing has on their end results. Cheap is not better. Don’t strive to be the cheapest out there. Your business can be sitting on vast amounts of unrealized value. Test different pricing strategies and make it easy to change your pricing. The price you ask should reflect your real worth and demonstrate value.
Reduce your churn rate: Besides offering fantastic customer support, you need to do a bit more to lower the number of people abandoning ship. How? By asking yourself some hard questions: Are there customers I don’t want? What features people are mostly using? Could I design or package my service in a different way? What’s the main reason people don’t renew? Do people know how to work with the product I’m offering? Once you get your answers, make the needed adjustments.
Commentary And My Personal Takeaway
Learn about the origins of subscription-based businesses, how they are different from the other models, and why you should focus on creating your own recurring revenue organization.
Subscribed by Tien Tzuo is a must-read if you have a business or you’re going to build one. Mr. Tzuo, the founder of Zuora, gives us some really valuable insights from the current successful businesses that are subscription-based. Along with that, some cool ideas that will help us rethink the way we should sell stuff. Though mostly informational, there are some practical tips on building a subscription business – most mentioned above.
Key finding? The world is shifting from one-time purchases to subscription-based businesses. The only way to stay competitive is to establish ongoing relationships with your customers.
GE, Amazon, or Uber, they are all succeeding because they recognized that we now live in a digital world, and in this new world, customers are different. The way people buy has changed for good. We have new expectations as consumers. We prefer outcomes over ownership. We prefer customization, not standardization. And we want constant improvement, not planned obsolescence. We want a new way to engage with business. We want services, not products. The one-size-fits-all approach isn’t going to cut it anymore. And to succeed in this new digital world, companies have to transform.”
We need to stop thinking of ourselves as a bookseller, or even as a provider of content. We need to start with our customers. What are they really paying us for? What kind of value are we providing them? What do we mean to people? We’re going to shift from just focusing on content to focusing on the user experience—become a one-stop shop for our customers’ needs, focus on automating their workflows.”
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.”
There’s a common expression: It’s way easier to sell to customers than to prospects. I hate that expression because it speaks to a product mindset: you sold them one product, and now you’re going to sell them another one. If you’re doing it right, expansion—that is, gaining more revenue from dedicated subscribers over time—should happen naturally.”