Subscribed - Book Summary

Dive deep into the heart of subscription-based commerce.

The world of commerce is ever-evolving, and business revolutions have continuously shaped our society's progress. We've progressed from the industry-altering concept of division of labor as advocated by Adam Smith, through to the pivotal impact of the assembly line brought forth by Henry Ford.

Today, we're on the brink of a new transformative era in business. The vision of the future, perhaps, is displayed on your smartphone screen or reflected in your web browsing habits. Powerhouses like Amazon, Spotify, Netflix, are leading the charge into this new era — the era of subscription-based business.

The fundamental idea? People are gradually moving away from ownership. What they crave are services. As eloquently put by Tien Tzuo, customers are not interested in the cow; they want the milk.

This groundbreaking shift in consumer preference is not just profitable; it's radically reshaping our everyday lives — how we eat, commute, shop, watch films, listen to music, and, if you're a part of our listener community, how we learn and grow.

Understanding this new commercial terrain is invaluable, and we're fortunate to have a guide who has dedicated his career to helping businesses traverse this relatively uncharted landscape.

In this captivating discussion, you'll discover:

— The pivotal role data revolution plays in fueling the subscription economy;

— How the Internet of Things (IoT) is set to revolutionize manufacturing, and;

— The essential steps to smoothly transition your organization to a subscription-based model.

Companies are swiftly shifting to subscription models to cater to evolving consumer needs.

Back in 2015, Tien Tzuo took a controversial stand in a Fortune article, suggesting that business school education might be past its prime. The argument? Traditional business education still revolved around one archaic idea: create a blockbuster product and sell as many units as possible.

But the world has evolved, and so has the modern consumer. This evolution is exemplified by the rise of subscription-based business models.

What makes these subscription models so appealing? Two key elements stand out – accessibility and service.

In today's world, owning products isn't the primary goal for most consumers. Instead, they want to have the freedom to use them. Innovative companies are no longer pushing to sell tangible products like CDs or cars. Instead, they're offering customers access to music or transportation.

Consider global giants like Spotify, Uber or Netflix. What customers are buying isn't ownership of albums, cars, or movies; instead, they pay a regular fee for the ability to access these services whenever they want.

For most individuals, services hold more value than physical products. The joy of music isn't tied to the physical disc it's stored on, just as reaching your destination is more important than owning the hefty piece of machinery that gets you there.

Companies that can hone in on what their customers truly want and need can customize their offerings accordingly, enhancing the quality of service.

However, this isn't just about leveraging evolving consumer preferences for a competitive edge. For companies, shifting towards a customer-centric subscription model is increasingly becoming a question of survival.

Only a mere 12 percent of the companies featured in the 1955 Fortune 500 list — a catalogue of the 500 most successful companies in the United States — retained their place on the list in the present day. The ones that managed to stay are barely recognizable, having undergone drastic transformations.

Take General Electric, for instance. Ranked fourth in 1955 and thirteenth in 2017, it's no longer known as a light bulb manufacturer. Today, a significant part of its revenue comes from digital subscription services, like data services.

IBM followed a similar route. Its ranking improved from sixty-first in 1955 to thirty-second in 2017. The key to this ascent? The company evolved from selling commercial scales and measuring equipment to providing IT and business subscription services.

The sobering reality is that the other 88 percent of companies couldn't make it into the updated Fortune 500. They failed to adapt to the rapidly changing landscape, and their inability to keep pace led to their downfall.

The world of video, music, and retail is increasingly ruled by subscription services.

In today's digital age, it's almost impossible to envision life without the likes of Netflix, Spotify, and Amazon. You most likely have an account with at least one of these services. So, how did they become such integral parts of our lives?

The growth of subscription-based access to music and video services over the past few years offers a clue.

This boom, which began with the advent of the internet and the rise of file-sharing sites like Napster around the dawn of the new millennium, left traditional film studios and record labels on the brink of panic.

Fearful of losing ground to these budding competitors, these media titans turned to legal action, aiming to shut down the upstarts. In the process, they failed to recognize the massive potential that this emerging market held.

The new breed of start-ups, on the other hand, was quicker to see the bigger picture. They understood that if they could carve out a niche in this burgeoning market, they could challenge and potentially outpace the entrenched industry players.

And their gamble paid off. Take Netflix, which launched its streaming service in 2007. Within a decade, it ballooned from no subscribers to a whopping 100 million! Fast forward to today, and two-thirds of all Americans subscribe to some form of video streaming service.

Similarly, Spotify skyrocketed from zero to 500 million subscribers in less than nine years. Now, it commands about 20 percent of the worldwide music industry revenue.

Notably, traditional corporations overlooked an intriguing consequence of the streaming revolution — the ability to access niche music increased retail sales, ending a 15-year downward spiral!

The subscription model also revolutionized the retail landscape, thanks to ecommerce — a sector expanding at an estimated annual rate of 15 percent. Today, ecommerce makes up about 13 percent of the total retail market.

In stark contrast, physical stores are witnessing a meager three percent annual growth, with around 7,000 U.S. stores shuttering in 2017 alone.

The trend is clear: commerce is increasingly going digital. Just consider Amazon — it boasts over 90 million U.S. Prime members. That's nearly half of all American households, translating into nine billion dollars in subscription fees and 117 billion dollars in sales each year!

A crucial factor underpinning this success is the data retention capabilities of companies like Amazon. Because they track their customers' purchases, they can predict other products the consumer might find appealing.

This allows them to personalize their service for individual shoppers, transforming shopping into a much more tailored experience.

Shifting gears: The reinvention of the travel and news sectors

The industries now undergoing seismic shifts were once dominated by executives traveling in planes and trains, clutching newspapers. In this section, we delve into how travel and news — two sectors deeply ingrained in our daily lives — are being reshaped by subscription-based models.

Starting with transportation — an industry already in the midst of a transformation.

The leading players heralding this change are ride-hailing services such as Uber and Lyft.

Their meteoric rise has already benefited over 60 million riders, significantly reducing the need for many Americans to own a personal vehicle.

In fact, between 1983 and 2014, the proportion of Americans aged 20 to 24 with a driver's license plummeted from 92 percent to 77 percent!

Even those who prefer to drive themselves are leaning towards high-end car manufacturers like Porsche, which offers access to a range of vehicles for a monthly fee of around two thousand dollars.

Then there's Surf Air, which is shaking up the aviation sector. For a monthly subscription, members enjoy unlimited flights on private jets — a practice that not only saves time spent waiting in airports but also offers unprecedented flexibility.

From the company's perspective, this business model is lucrative as it allows for predictive revenue — knowing in advance how much they'll earn each month aids in more intelligent scheduling.

But what about the world of newspapers?

The digital revolution in this realm is in full swing.

Initial concerns that the internet would herald the end of traditional media outlets were misplaced. A recent study revealed that over 169 million Americans still read a newspaper every month, representing nearly 70 percent of the adult population!

Moreover, young adults are increasingly subscribing to online news services. The proportion of American subscribers aged between 20 and 24 rose dramatically from 4 percent in 2016 to 18 percent in 2017.

The continued success of newspapers in the digital era boils down to one simple reason. While free content is appealing, audiences tire of the relentless flood of clickbait churned out by advertising-centric platforms like BuzzFeed.

On the other hand, newspapers continue to command reader loyalty, just as they have done for years. In fact, newspapers were the pioneers of the subscription model, and the philosophy that quality is worth paying for still holds true today.

Newspapers have also harnessed the flexibility that digital platforms offer.

A notable instance is the Financial Times' strategic decision to remove its paywall during the Brexit referendum weekend while simultaneously advertising its subscription deals. This move resulted in a staggering 600 percent increase in digital subscription sales!

Navigating the subscription shift: Surviving the initial slump and embracing the Internet of Things

Switching to a subscription-based model comes with significant benefits, but it's not an instantaneous success story. The transformation can be painful and might even require companies to "swallow the fish", just like Adobe did.

But what does swallowing the fish mean? Let's turn back the clock to 2011 for an explanation.

In 2011, Adobe chose to stop marketing its software as a physical product and pivot towards an online "Software-as-a-Service" or SaaS model.

Despite opening up an entirely new digital marketplace, this switch came with a hitch. The transformation necessitated a period of financial decline since subscription revenues were deferred for at least a year.

This phase of increased costs and declining revenues is known as "the fish". If visualized on a graph, the increasing costs and decreasing income curves resemble a fish — the revenue curve dips below the cost curve before eventually rising again.

As anticipated by Adobe, their stocks initially took a hit but gradually rebounded. The longer-term gains were immense — Adobe successfully "swallowed the fish".

By 2014, Adobe Creative Cloud had undergone a complete metamorphosis. Initially almost exclusively sold as a physical product, it had become a product primarily bought as subscriptions.

Adobe's balance sheets today reflect this successful transition. Adobe stocks, valued at 25 dollars in 2011, stand at 195 dollars at the time of writing and continue to grow at an astounding rate of 25 percent every year!

Tech companies spearheaded the transition to these innovative business models, and now it's manufacturing's turn.

However, this shift can seem daunting. Manufacturing industries are naturally reluctant to embrace any change that might further stunt their growth.

Still, manufacturing remains a mammoth industry. If the American manufacturing sector were a country, it would rank as the ninth-largest economy in the world!

So, what does this impending revolution look like in the manufacturing arena?

Enter the Internet of Things, or IoT. Numerous manufacturers have already integrated their products with the internet by installing sensors and connectivity features.

Predictions for 2020 suggested that billions of smart cars, smart watches, and even smart clothes would be capable of digitally tracking performance and efficiency and managing information flows.

This wealth of data can be analyzed and utilized to offer subscription-based enhancements to customers.

Essentially, the IoT holds the potential to revolutionize the "as-a-service" business concept, with suppliers continuously monitoring and updating their products in real-time!

Innovation reimagined: Customizing services to meet customers' needs

We've looked at how markets are adopting subscription services so far. Now, let's shift our focus onto how this new business model influences companies, especially in terms of innovation.

Traditional innovation follows a linear path, beginning with research, proceeding through design, and culminating in manufacturing.

In this model, the innovation responsibility is shared by product managers, manufacturers, designers, and engineers, who collectively create new products and launch them into the market.

The product journey, in this case, is a direct progression from an initial idea to its ultimate market introduction. After that, the market governs its fate. If it's well-received, it sells; if it doesn't, it's discarded. Once the product is shipped from the factory, it ceases to evolve.

Subscription-based models, however, completely revolutionize this process. In these models, innovation revolves around continuous growth and iteration. As far as companies using this model are concerned, a "finished" product is a myth.

This innovation approach is often referred to as "agile development".

The term was first introduced in 2001, when a team of developers authored the "Manifesto for Agile Software Development".

This manifesto emphasized enhanced customer collaboration, functional software, prioritization of customer requirements over inflexible IT procedures, and a focus on responding to changes rather than strict adherence to plans.

Essentially, these principles underscore that a product should evolve alongside a customer's needs. This level of adaptability is enabled by the continuous stream of customer data supplied by subscription models.

Consider Google's Gmail service as an example. Even five years after its 2004 launch, the term "beta" was a part of its logo, signifying the product's ongoing improvement.

This was Google's way of stating that its product would never be truly "finished" because its users' needs are constantly changing.

Musician Kanye West added an intriguing twist to this concept in 2016, with his album "The Life of Pablo".

Although officially launched on February 14, West continued to tweak the track arrangement and even modified some lyrics based on his fans' feedback.

This approach might have seemed bewildering and perhaps irritating to some rap aficionados. However, it was undeniably innovative — with "The Life of Pablo", West essentially created the first Software-as-a-Service album in history!

Reimagining marketing's traditional framework in the era of subscription models

When we hear the term "marketing", images of characters like Don Draper from Mad Men, catchy jingles, and colossal billboards often spring to mind. But, how does marketing fit into the realm of subscription-based models?

To answer that, we first need to understand the nature of traditional marketing, which is based on the four Ps — product, price, promotion, and place — as well as the push and pull factors.

To break it down, the four Ps essentially involve creating a product that people desire, pricing it competitively while ensuring profitability, promoting it effectively, and selling it in the right places.

The concepts of pushing and pulling come into play while understanding promotion and place.

Pushing a product through various channels to outdo competitors involves tactics such as paid product placements and sales commissions.

On the other hand, successful advertising aims at pulling customers in. When executed proficiently, customers seek out your product, often disregarding alternatives.

However, this classic framework undergoes a transformation when "subscriptions" replace "product", leading to changes in the remaining three Ps as well.

Starting with place, this typically refers to a third-party retailer, causing a disconnect between the producer and the customer.

But in a subscription model, customer service is pivotal, making it necessary to bridge this gap. Autodesk, the engineering software company, managed to do this by enabling their retailers to offer an annual maintenance plan based on customer data collected by the firm.

Regarding promotion in a subscription model, it's less about direct advertising and more about narrating compelling stories.

The author's company, Zuora, illustrates this by focusing on a 'how', a 'who', and a 'why' — the product, its audience, and its reason for existence. Zuora aids companies in transitioning to a subscription model, catering to any business seeking to do so, driven by the growing inclination towards subscription economies.

Finally, the pricing strategy in a subscription model doesn't aim to maximize profits by reducing manufacturing costs. Instead, it introduces a multi-tiered system, with prices increasing according to the level of service provided.

Companies like Dropbox and Spotify implement this approach by charging users more for additional storage or premium service upgrades.

Embracing a new sales paradigm: Building enduring connections with subscribers

Sales teams sometimes suffer a negative reputation due to their perceived focus on pushing products rather than nurturing a customer's experience. This mindset can backfire, leading to a trail of unhappy customers left with dysfunctional products and no one to assist them because the company has already secured what it needed — their money.

Subscription-based businesses, however, operate on a fundamentally different ethos. At the core of their operations is a focus on forging and sustaining strong relationships with their subscribers.

This revolves around promoting continual growth and improvement. The fundamental idea is to instil in customers the belief that they are entering a contract that guarantees the delivery of a service that only gets better over time.

After all, it's impossible to grab the money and walk away once you've committed to a contract with subscribers! The key to preserving your business lies in ensuring your customers' satisfaction.

Zuora has developed a range of astute sales strategies that aim at nurturing long-lasting bonds with subscribers. These strategies encompass acquiring the initial customers, minimizing the churn rate, enhancing value via upselling and cross-selling, and branching out internationally.

Let's delve into these strategies a little more.

First customers are critical — they set the benchmark against which future subscribers will evaluate you. Securing the right people at the outset vastly increases the odds of conquering the market segment you are targeting.

Churn rate refers to the pace at which a company loses its subscribers. The most effective way to keep this rate low is by targeting the right type of users, rather than ensnaring people into lengthy contracts for services they scarcely require.

Upselling is a strategy aimed at promoting more expensive, high-end services. Cross-selling, on the other hand, focuses on offering improved solutions to existing users' problems, thereby retaining them.

"Going international" is rather self-explanatory. In today's interconnected world, it's not only more feasible, but it's also essential. Failing to quickly tap into a new market often leads to another company swooping in and capturing your potential subscribers.

It's critical to note that it's unlikely you can chase all these strategies at once. However, a thriving company will consistently be pursuing at least two or three of these strategies to maintain its growth trajectory.

The traditional accounting system falls short in capturing the real value of subscription services

The author recalls an incident early in the inception of Zuora where he was greeted with a lukewarm response after a vibrant presentation of his company's annual growth forecast. The audience argued that the projected profits were not sufficiently impressive.

The fault, however, didn't lie with the company's figures but with the antiquated accounting practices being used.

Traditional bookkeeping methods operate on the principle of balancing debits against credits. But, this method proves ineffective when it comes to calculating revenues that are projected into the future.

The age-old double-entry bookkeeping technique revolves around the idea of maintaining a corresponding credit for every debit. The belief is that this would result in a straightforward snapshot of revenue, expenditures, and remaining bank balance.

However, applying this technique to subscription services can lead to misleading outcomes. Since such services primarily rely on recurring and future income, traditional methods may paint a picture of a healthy company spending substantially more than it earns.

To address this misrepresentation, the author and his CFO designed a new system to provide a more accurate representation of Zuora's financial situation. This was based on the concept of annual recurring revenue, commonly referred to as ARR.

Here's how it functions. Start with the annual income generated from subscriptions, termed as your gross ARR, and subtract your churn — losses resulting from cancelled subscriptions. The resulting figure is your net ARR.

The next step involves deducting recurring expenses, like administrative charges and various overheads. This provides you with your recurring profit.

At this point, the concept gets slightly intricate.

While sales and marketing costs are subtracted from the recurring profit, they're also added to future revenues. The rationale behind this is that these costs are allocated towards growth, thus contributing towards the increase in ARR for the forthcoming period. In essence, within this model, these expenses are considered direct future income.

By adding this amount to your net ARR, you get the gross ARR for the upcoming period.

Since a significant portion of the recurring profit is utilized for growth, it might seem like most subscription companies have little to no profit. However, as the ARR escalates, so does the budget. It's crucial to remember that for subscription companies, growth is the ultimate goal!

Traditional IT solutions fall short in the era of subscription services

Historically, businesses have viewed their IT departments as the gears of a well-oiled machine, ensuring smooth operational flow, improving efficiency, and maintaining a consistent rhythm.

However, the status quo is shifting. The conventional engines no longer seem apt for today's needs.

There was a time when most IT departments managed to adapt to the widespread transition to cloud-based and external services. They leveraged marketing, management, and filing applications from other software providers to remain afloat.

But such makeshift solutions are designed to count production units, from factory to customer, rather than subscribers who can't be confined within a single system.

And therein lies the root of major challenges.

Altering a subscriber's experience, for instance, turns into a significant hurdle since it necessitates the rewriting of multiple systems to accommodate a wide range of potential demands. This often results in a haphazard maze of quick fixes and shortcuts.

Moreover, IT departments find it nearly impossible to extract meaningful insights about the business in its entirety. This isn't surprising considering the fact that they'd have to gather vast amounts of data from disparate systems not designed for interoperability.

Subscription services demand far more flexible data systems to match their inherent dynamism. A subscription-based business model is continuously cycling through renewals, suspensions, upgrades, and downgrades, and therefore requires a system capable of managing all these aspects simultaneously.

For example, if a customer reaches a usage limit, a mechanism should be in place that automatically triggers a usage audit and then encourages the customer to upgrade to a higher tier.

The same principle applies if a subscriber is overseas — the system needs to recognize this and activate roaming services and associated charges.

In short, IT departments need to broaden their scope beyond merely tracking the number of products sold. They need to monitor a variety of subscriber behaviors and respond effectively and efficiently.

The PADRE system: A roadmap to transform your business into a successful customer-centric subscription service

You might be pondering how to steer your business towards becoming a thriving customer-centric subscription service. Zuora, recognizing the complexity of putting the idea into practice, designed a system to facilitate the transition — PADRE.

PADRE serves as a blueprint for envisioning your business with a consistent focus on customer experience. It is an acronym for Pipeline, Acquire, Deploy, Run, and Expand. Let's delve into what each component entails.

The journey starts with the Pipeline. It's about generating awareness about your brand and transforming it into demand through effective marketing of your product.

Following the pipeline is Acquire. This stage maps the customer's journey to subscribing to your service. Your primary goal here should be to comprehend your customers' needs to ensure they follow through with the transaction.

The next step is Deploy. This phase is about swiftly and efficiently integrating your service with the customer. A prolonged setup process can lead to potential customers veering away from your business.

Run is the subsequent stage, focusing on the everyday operation of your service and rapidly responding to changes in subscribers' usage patterns.

Finally, Expand comes into play. This step revolves around innovation — retaining subscribers through the progression and enhancement of your service's functionality. Subscribers value innovative additions, like UberPool, or Spotify's compatibility with Sonos speakers.

Beyond the PADRE model, three other elements demand your attention: People, Product, and Money, conveniently summarized as PPM.

Satisfying your customers and driving growth requires employing exceptional talent. That accounts for the first P.

The second P is straightforward. Your product must continually evolve to best cater to your customers' needs.

And of course, like any business, efficient and effective resource allocation is critical. That's the M.

The successful implementation of PADRE demands cross-functional cooperation. Each individual needs to contribute towards a unified goal. When put into action, PADRE enhances coordination, as departments understand how their work contributes to the system. This is a boon for problem-solving.

Issues in one area can be resolved by delegating the problem-solving task to other departments, since everyone communicates in the shared language of PADRE. For instance, when Zuora encountered an issue with "deployment" taking longer than anticipated, multiple departments were able to contribute to the solution. Sales realized they were over-promising, engineering started refining the deployment processes, and customer support began collecting customer feedback to continue enhancing the experience.

Concluding thoughts

The central theme of this narrative:

Digital transformation is altering the way individuals interact with companies and utilize products. Subscription-based business models are reshaping almost every sector. If you wish to adapt to a subscription-based model, it's imperative to acknowledge the limitations of conventional innovation, marketing, sales, finance, and IT strategies. Accomplishing that, along with applying strategies akin to the ones used by the author's company, paves the way for success.