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Why subscriptions are the future of all businesses
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We had written about it in Mint but here is a summary of why subscriptions are far more powerful than other business models.
Every Company is a Subscription Company
Talking about issues plaguing the Indian automobile sector, Finance Minister Nirmala Sitharaman ascribed part of the problem to millennials subscribing to Ubers and Olas instead of buying cars. Few days after her comment, Mahindra launched a subscription-based car ownership model, just like its global counterparts Ford, Volvo, Hyundai and Porche.
Essentially cars are smartphones with wheels. Why can’t we subscribe to transportation just the way we subscribe to water, internet and electricity? It is time car manufacturers reimagine themselves as transportation solution providers. At the “Subscribed” conference in San Francisco, Ford’s Director of Connectivity Jamie Allison said that his company’s new charter is to make the “bed-to-bed” journey as simple as possible. Thankfully companies are waking up to the fact that they can’t solve for mobility simply by selling more cars. Hopefully governments will also realize this and abandon short-term measures that don’t truly address the problem.
In the digital age, we prefer outcomes to ownership and customization to standardization. That is why subscription is the future of business and every company is doing its best to become a subscription company as soon as possible. This trend goes beyond business.
American Rapper Kanye West is popularly called the first SaaS (software-as-a-service) musician. In 2016, he launched The Life of Pablo, an unfinished album where he kept tweaking the lyrics based on feedback from his fans and constantly changed the order of songs. In techspeak, he launched an MVP (minimal viable product) and reimagined his customers into subscribers and creative participants.
Why Subscription Works
Companies that run on subscription models grow their revenue more than 9 times faster than S&P 500. There are three reasons why subscriptions work for businesses in the digital age. First, they expand optionality for the customer. If customers aren’t satisfied, switching to another service provider is straight forward.
Second, subscriptions transform transactions into meaningful relationships. Instead of focusing on one-time sales, entrepreneurs need to provide value over an extended period of time. This is a win-win scenario. Entrepreneurs work hard to understand unmet customer needs and figure out innovative means to provide services that that go beyond the expectations of the underlying contract. This makes the service provider better and enhances customer surplus.
Lastly, subscriptions ease out the financial burden of customers. Instead of committing a sizable chunk of their savings to acquiring assets, they can avail the desired services for a fraction of the cost. Let’s see this in action. Cars are depreciating assets. The moment we drive them out of the showroom, their value drops by almost 50%. That is why subscription services like Porche Passport appeals to millennials. They can drive the latest Porche models for as long as they want without having to deal with the headaches of ownership. All this at a cost that is both affordable and attractive.
Building a Subscription Culture
Every MBA student learns about the four Ps in Marketing 101: product, price, promotion and place. Today, product ownership is dead. Hence the first of four Ps is better understood as service. With that in mind, we can repivot the entire business to focus on customer satisfaction.
Tien Tzuo (CEO, Zuora) offers a great framework to visualize any company as an integrated organization of subsystems tied to what the customer truly wants. He suggests that organizations need to incentivize radical collaboration across organizational silos and constantly evolve to delight customers. This might be chaotic in the short-term, but it brings organizations closer to what they intend to achieve.
Today, the whole world runs as a service: education, transportation, media, healthcare and even government. While subscriptions are not entirely a new idea, ubiquitous internet connectivity coupled with decreasing infrastructure cost and high levels of customer awareness have made subscriptions the perfect complements to businesses in the digital age.
In 2002, commenting on the decline of iTunes-style downloads, Steve Jobs said that the subscription model was bankrupt and destined to fail. The same year song-writer and actor David Bowie made a far more prescient statement: “Music subscriptions are going to become like running water of electricity.”
While Jobs got most things right, he underestimated the power of subscriptions, the heart and soul of businesses in the digital age. Perhaps Bowie saw what Jobs couldn’t.
In the meantime, tell your friends!