The Shift to a Subscription Economy, Part 1

Why buy when you can lease? That’s a question businesses are asking both externally, as they offer products ranging from software to food, and internally, as they look at billing, ERP and other operations.

The upshot is that corporations are moving toward a subscription-based business model both inside and out.

IDC is observing vendors of all types considering migration toward subscription if they aren’t there already,” Amy Konary, a research vice president at IDC, told TechNewsWorld.

Some are hoping to attract new customers and keep the ones they have, while others are hoping to drive more predictable, linear revenues and differentiate themselves from competitors, she explained.

“Many vendors cite the desire to respond to customer demands for more flexible delivery and pricing options as a key reason for migrating to a new approach,” Konary continued.

For example, Microsoft offers a US$99 Xbox console package with a monthly subscription; Apple is reportedly planning to offer its AppleCare services as a subscription; Adobe has made the Creative Cloud subscription-based; and the Dollar Shave Club sends shavers to customers for a buck a month.

Meanwhile, companies like Zuora, Leeyo and Avangate are automating various aspects of clients’ billing and accounting functions for a fee.

“From the software vendor perspective, selling licenses via subscription increases the predictability of software revenues,” Konary said.” Customers like the low upfront cost of the subscription model, as well as the enhanced ability to build a relationship with the software provider that they pay on an ongoing basis.”

The tough economy is helping to boost the subscription model.

Companies typically use operational expenditures for the day-to-day running of their organization, while capital expenditures are used for the purchase of assets that have a relatively long life, Konary explained.

“Many businesses are cautious about making capital investments in purchases such as enterprise software,” she pointed out. Subscription allows customers to shift software spending from capital to operating budgets.

Drivers for the Subscription-Based Model

“Reducing Capex costs looks good on a company’s balance sheet and leaves more cash on the books to deal with potential or unknown problems,” Charles King, principal analyst at Pund-IT, told TechNewsWorld.

“Additionally, customers typically have the right to adjust their subscriptions to reflect a lower or higher headcount or changes in application requirements,” he continued. “Not being locked into a fixed situation is something many businesses prefer.”

The subscription-based model is a fundamental change in consumer behavior, Tien Tzuo, CEO of Zuora, told TechNewsWorld in an earlier interview. “Business models are changing, and new systems are needed to support those business models.”

The subscription revenue model “is not a new concept, although the speed at which [enterprises] are having to build new business models with new customer segments, channels and partners, as well as revenue models, is forcing [them] to rethink their whole commerce solution,” commented Carl Theobald, CEO of Avangate.

The subscription model for business has been around at least since the advent of newspapers and magazines.

IDC does not have an aggregated forecast for all subscription-based goods and services, Konary said, but it expects the worldwide market for subscription-based software to be US$90 billion in 2015.

This does not include other markets that might offer subscription models and require a billing system, such as media and telecommunications.

Flowing Deep and Wide

Software as a Service is one aspect of the subscription economy — but the subscription model has been adopted by a startling variety of enterprises in different fields.

There are discovery commerce sites such as Birchbox, which offers lifestyle, beauty and grooming products to subscribers.

Walmart has launched Goodies, a service that charges $7 a month to deliver five to eight snacks to subscribers. Another player in this space is startup Nature Box. Yet another startup, Blue Apron, delivers fresh ingredients and recipes for meals weekly to subscribers’ homes for $10 per person per meal.

Then there’s Quarterly Co., which lets subscribers get gifts from celebrities of their choice. The celebrities include VC firm True Ventures and musician Pharrell Williams.

Then, of course, there are the giants in the field — Amazon, Netflix, Spotify and Zipcar.

What Works

“Products and services that are well suited to subscription include those that are updated on a frequent basis and for which the ultimate value of the product or service is not recognized unless these updates are applied,” IDC’s Konary said. “A product or service that isn’t frequently updated, or one for which the updates aren’t meaningful to most customers, is not as good a candidate for subscription.”

However, a customer situation may dictate that a subscription model is the preferred approach, even if the product or service is not well-suited for this, noted Konary.

The Flaws in Pay-as-You-Go

Subscriptions alone will not be enough to help companies go global, Avangate’s Theobald cautioned.

“There’s nothing wrong with the subscription model itself, except that it’s a feature — one which Avangate fully supports — not a complete product,” he told TechNewsWorld.

For example, some countries, like Germany, resist the subscription model and prefer the pay-up-front model, while in Japan cash on delivery is still the major business model, Theobald explained.

“If a company depended solely on subscriptions to the exclusion of other models, they would probably not be alive in four years,” he suggested. “Subscriptions are just one revenue model, and have to coexist within what is quickly becoming a multi-business model imperative.”

New Services

The rise of the subscription-based economy has created demand for a host of automated services that include billing, revenue recognition — and in Avangate’s case, a complete customer-centric commerce solution that includes subscription management and billing, as well as full front- and back-office services.

“Having a complete, customer-centric commerce solution is increasingly critical, as today’s buyers are changing dramatically across all industries and across both B2B and B2C companies,” Theobald explained.

“Buyers are displaying individualistic behavior with smaller-sized transactions, insisting on freemiums and trials and pay-as-you-go models — a trend we call B2i (business to individual),” he elaborated.

“Furthermore, buyers expect to be able to transact at any touch point in a consistent way, both through direct and indirect channels, and in a local context [whether that be] language or currency or payment methods.”

The Shift to a Subscription Economy, Part 2

Richard Adhikari

Richard Adhikari has written about high-tech for leading industry publications since the 1990s and wonders where it's all leading to. Will implanted RFID chips in humans be the Mark of the Beast? Will nanotech solve our coming food crisis? Does Sturgeon's Law still hold true?

1 Comment

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