A Vernacular report: 2:00 PM Tuesday 14 November 2014. Welcome to the subscription economy. Tien Tzuo, founder and CEO of Zuora – a provider of software that gears up businesses to sell products and services on a subscription basis – shared his story with 50 execs gathered in a conference room on the first floor of Auckland’s Hilton Hotel.
Here’s what you missed –
Consumer preferences are changing. And we’re not just talking about free-range chickens over their forlorn battery farmed counterparts, or electric cars over petrol power.
The way people want to experience products and services is moving beyond simple ‘transference’ to highly-personalised relationships. Remember the dark days of CDs. Now think about Spotify’s personalised music experience.
In the subscription economy, consumers want all the benefits without outright ownership and a product experience that is personal, immediate and promises ongoing value.
According to Tzuo, in the past year alone this so-called new economy generated $24 billion worth of invoices from 20 million payments and captured 5.5 billion pieces of customer data.
Why is this happening? Because, says Tzuo, we’re in the midst of a broad shift from a manufacturing economy, characterised by companies that sell products to strangers (“isolated transactions”), to a subscription economy in which businesses must focus on nurturing relationships with more expectant consumers.
Forrester Research, who tracks roughly 85% of global GDP, agrees, saying that we’re at the beginning of a 20-year shift to “the age of the customer”. Think device-toting millennials with the tools to price, critique and purchase anytime, anywhere.
Subscription goes much deeper than the slightly worn idea of “digital disruption” attributed to bricks and mortar businesses moving online. iTunes disrupted the music business, but Spotify has redefined the music listening experience. In adding personalisation and discovery to music, just as Amazon did to book buying, and charging customers a small ongoing fee for the entire experience (rather than selling individually priced music tracks) Spotify has made digital music ownership redundant.It seems to be working (at least for Spotify and its customers).
According to the company’s chief executive Daniel Ek, Spotify now has more than 50 million users, and 12.5 million of them are subscribers who pay about $120 a year for unlimited access to Spotify’s music catalogue. Not bad for an eight year old company. No wonder Apple paid $3 billion for Beats, a streaming radio service that was founded by rapper Dr. Dre and long-time music industry exec Jimmy Iovine.
So what’s happening in this part of the world?
Swann Technology chief technology officer Geoffrey Wanless outlined the Australian security company’s plans for subscription revenue. Wanless said his company saw opportunity in the huge number of consumers connected to smart home devices.
“We realised that our customers aren’t actually looking to buy a camera. What they want is security – a feeling they will be looked after. Our challenge was to develop a more consumer-friendly product, broader in scope but one that would allow us to establish a much closer relationship with our customers, so we could instil peace of mind,” said Wanless.
The insight uncovered a slew of new service initiatives Swann believes will disrupt the security industry. For example, monitored home security is typically packaged as a fixed-term contract, and Wanless believes his company could bundle security sensors with in-home video cameras to offer home monitoring on a one-off basis, such as Easter weekend.
Suddenly fixed-term contracts don’t look so good. And how about pimping up standard smoke detectors with connected sensors that will text message an at-home neighbour when the smoke alarm is activated.
Next, the spotlight turned to newspaper publishers, who are popularly regarded as dinosaurs of the digital era.
Fairfax Media’s Mark Cohen put delegates in the picture. Advertising revenue that funds journalism is in steep decline, and getting people to pay for content is tough work. But smart publishers are evolving. They will tell you that newsprint was only ever a delivery mechanism, and by better understanding customer habits – what they read and when they’re “sitting forward” and when they’re not – publishers are better placed to offer the right content, on the right platforms, at the right time. And people are prepared to pay for the experience, in the process boosting the advertiser’s inventory of qualified (and more valuable) members.
According to Cohen, digital subscription is the way to open wallets, because it helps publishers to cosy up to customers and glean insights that steer the addition of more valuable content. For example, many people enjoy listening to music as they read. Publishers have been quick to commercialise this symmetry and many now offer their customers music streaming, which enhances the overall experience and boosts the perceived value of a subscription.
Even accountancy services are ripe for change.
Providers like Deloitte recognise the traditional time-based model is under pressure. Ben Shields, who heads up Deloitte Private – a practice dedicated to high net worth individuals – says clients want a relationship defined by sound advice and real-time views of their financial situation. This is less about bookkeeping and retrospective views of accounts and asks providers to reconstitute their expertise as a set of service benefits that can be purchased for a set ongoing fee.
The subscription economy isn’t a bolt from the blue.
There are plenty of Xeros in the world – subscription software services are everywhere. However, the format is alien to many businesses in other sectors. They should take notice. There is a common trait that defines the success of the world’s most valuable companies, names including Amazon, Apple and Google. These companies understand the value of a customer ID – the key element of subscription. An ID represents a one-to-one relationship that is necessary for tracking engagement and identifying new selling opportunities to individual customers.
Finally, the sales pitch.
Businesses will struggle to reinvent themselves for the subscription economy without the right software. Introducing Zuora. The vendor says software that manages the bulk of business workflow, called ERP, is geared to product transference and is heavy with backward looking finance systems. CRM systems do important work, but they’re too narrow. A new category of software is required. Zuora calls it relationship business management software – a system that unifies commerce, billing and finance to manage the dollars and cents of relationships.