Tien Tzuo
4 min readMar 10, 2015

THE SUBSCRIPTION ECONOMY: A BUSINESS TRANSFORMATION

In 2007, a trend began that would soon be recognized as a once-in-a-century transformation in the way business is transacted: from buying products to subscribing to services. We call this new business environment the “subscription economy.” Companies like Salesforce.com, Amazon, Netflix, and Box were the vanguard of the subscription economy, but the story is now far broader and deeper, and relevant to nearly every industry.

In addition to providers of software, books, and music, companies in media & entertainment (News Corp, HBO); consumer services (TripAdvisor, Touring Club Suisse); telecom & utilities (Telstra, YP); financial services (AXA); healthcare (ThermoFisher Scientific); education (lynda.com, Kaplan); farming (FarmIQ); and, through the innovations around the Internet of things (IoT), even manufacturing (General Motors, Swann Communications, NCR, Schneider Electric) are pivoting to or starting up as recurring revenue subscription businesses.

A New Type of Customer

To thrive in the subscription economy, it’s not enough to slap a low monthly price on a product and call it a service. What you deliver and how you deliver it has to be completely rethought. And not in the boardroom or a conference room, and not just with product managers and the finance team.

Instead, it has to be rethought from the perspective of the relationship to subscribers, because the shift to the subscription economy is being driven by subscribers, not vendors. According to a 2014 report by The Economist Intelligence Unit, 80 percent of customers are demanding new consumption models including subscribing, sharing, and leasing — anything except actually buying a product outright.

Customers today, especially millennials, see less separation between their business and personal selves and expect their business relationships to be more personalized. They also expect a real-time experience with immediate fulfillment. By definition, subscribers can easily switch service providers, so vendors wanting to earn the loyalty of their subscribers must present on-going value and memorable services that get better and better. To provide this, they must be able to sell, market and deliver based on a clear understanding of subscriber behavior, and they must nurture every subscriber relationship.

New Tools for New Relationships

To operate in the subscription economy, companies need a new set of software applications that will facilitate their transformation. Over the past 20 years, companies large and small have invested millions and even billions into customer relationship management (CRM) and enterprise resource planning (ERP) systems to support sales automation, customer service, inventory management, supply chains, and accounting.

CRM and ERP systems, however, were designed for products, not for companies with subscription business models. In a world where every customer is now a subscriber, companies must adopt new technology to manage the entire subscriber lifecycle, including new subscriber acquisition, subscription management (i.e. enabling subscribers to upgrade, downgrade, renew and otherwise modify their subscriptions), automating recurring billing and payments, and measuring recurring revenue and subscription metrics.

Making the Change

In addition to deploying new software tools to manage subscriptions, companies shifting to a subscription basis must transform themselves in four key areas:

  • Subscriber Identity — It is now insufficient to maintain customer records that include only contact information such as name, phone, email address, etc. A “subscriber identity record” must include purchases, products, local pricing, promotions, payment history, refund history, renewal value, usage metrics and much more.
  • Subscriber Journey — Companies must now create and manage a complete subscriber journey that personalizes and deepens the relationship from initial signup and purchase to include upgrades, add-ons, new services and renewals.
  • Subscriber Culture — Creating a subscriber culture means that every working professional that touches the brand and subscription experience — every marketer, seller, partner, product specialist, customer service representative, and finance professional — is focused on the subscriber relationship, that is, puts the subscriber first, shares knowledge generously, and is always adapting to the evolving needs of subscribers.
  • New metrics — Subscription-based companies must be able to track a new set of metrics for subscriber health (subscriber growth and change), business velocity (annual contract value and total contract value), subscriber engagement (payments and declines), subscription finance (monthly and annual recurring revenue), and relationship retention (renewals, upsells, churn).

Market Opportunity

The need for this technology is creating a new multi-billion dollar software category focused on “relationship business management.” While reliable statistics are not yet available to measure this new and rapidly growing market, companies such as GM, News Corp, and Schneider, are predicting that anywhere from 40 to 100 percent of their revenues will eventually be subscriptions. If just 10 percent of the companies in the world shift 50 percent of their revenues to subscriptions, that is easily a $10 — $20 billion market.

The shift to the subscription economy is accelerating. Companies that want to become or remain leaders in their industries and enjoy the financial, market, technology, and customer loyalty benefits of deep, long-term subscriber relationships need to begin planning their transformation today.

Additional Resources:

SlideShare — Drivers of Success in the Subscription Economy

Tien Tzuo
Tien Tzuo

Written by Tien Tzuo

Founder and CEO of @Zuora (NYSE: ZUO) and the author of “SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future — and What to Do About It.”