Today people are less interested in owning products.
What they want is the service. Cutting-edge companies don’t sell CDs or cars, they sell access to music or transport. Customers want the ride, not he car. The milk, not the cow. The new Kayne music, no the new Kayne record. Spotify, Uber and Netflix all have one thing in common which is a subscription service.
Subscription business model requires you a new way of thinking.
Growth subscription model follows a different trajectory.
In the old word, you could grow by doing 3 things (1) sell more units, (2) increase the margin (3) decrease the cost. IN the new world, you have 3 new imperatives (1) increase customer acquisition (2) increase value of customers (3) retain the customers longer.
It’s perfectly rational to spend all profits on growth as long as…
Your bucket (churn) doesn’t leak. Remember if you’re growing your ARR (Annual Recurring Revenue) faster than your recurring expenses, you can step on the gas.
A transition to SaaS model might defer revenues for at least one year.
In 2011, Adobe decided to stop selling its software in physical form and switched to online software-as-a-service model. It was a great move that opened a new digital market, but Adobe had to sallow a fish, which is a span of time during which costs increase and revenue decreases. As Adobe forecast, stocks initially plummeted before slow recovery. The long-term gains were massive however. Adobe stocks today are pricing by astonishing 25% every year.
Brick and mortars compliment online experience, not the other way around.
The new winners are using their physical stores as extensions of their online experiences, not the other way around. They’re flipping the script.
You don’t buy Hyundai’s hybrid car anymore. You subscribe to it.
For $275 a month, it’s a lot like picking a cell phone plan. Pick your model online, choose between a 24- or 36-month plan, select your upgrades, then walk into a dealership to pick up your vehicle. No price haggling, no loans, no back-office pitches. “our goal is to make car ownership as easy as it is to own a mobile device.” Says Mike O’Brien, VP of product planning. Likewise, Porsche’s Passport subscription features access to half a dozen car models and covers maintenance, insurance and vehicle tax and registration starting at $2,000 a month. Other automakers like Cadillac, Ford, Volvo are also rolling out subscription-based models to cater to the new market.
Even Uber is testing a flat-rate subscription service.
In several cities, you can now pay a monthly fee in exchange for bundles of reduced-rate trips with no surge pricing.
Look closely and you’ll see Starbucks taking a cue from GAFA.
GAFA (Google, Apple, Facebook, Amazon) equivalent in China is known as BAT (Baidu, Alibaba, Tencent). But what’s the common theme among all of them? Subscriber IDs. They all have dashboards that let them see what their customers are doing, so they can make smarter decisions around. In Starbucks’ case, it might be how many drink rewards ‘stars’ to give out or where to open a new store.
Another big reason? IT buyers prefer opex to capex.
Historically software companies have preferred capital expenditures (capex) for tech investments, as this afforded them the ability to take advantage of amortization and depreciation of the capital investments over a period of time.
But as tech shifts to the cloud, there’s a complementary shift happening in favor of opex over capex. Operating expenses bear the advantage of pay as you go model for services used with comparatively little to no up-front investment. Not only this is a greater value prop, as a business is getting exactly what it pays for, it’s also a strategy to drive growth, and a way for large enterprises to be nimble rather than locked into expensive IT infra that lacks flexibility and often serves as nothing more than a bottleneck for transformation.
Subscriptions are the only business model entirely based on customer satisfaction.
When your customers are happy, they’re using more of your service, telling their friends and you’re growing. You get to start every quarter with predictable revenue. You get to make smart, data-driven decisions. You get to benefit from your customer insights, which are a huge competitive advantage.
Tien call this the world of happy business: happy customers, with happy companies, reinforcing one another, iterating forever, with no beginning and no end.
Worth noting…
Upselling vs cross-selling
While upselling is a strategy designed to sell a more feature-rich and expensive service edition, cross-selling is a strategy designed to sell additional services to provide a more comprehensive solution.