The Subscription Economy: What It Is and How It’s Changing The Way People Buy

Part 1 of 3

We recently sat down with Dave Frechette, Vice President of Worldwide Sales Strategy and Execution at Zuora, a leading commerce, billing, and finance solution for subscription-based businesses, to discuss his thoughts on the “Subscription Economy.”

The Subscription Economy is a phrase, coined by Zuora, describing the new business landscape in which traditional pay-per-product (or service) companies are moving toward subscription-based business models.

We’ve taken the notes from our conversation with Dave and laid them out in this three-part blog series.

The Shift Felt ‘Round The World

Over the past few years we’ve seen a seismic shift in growth strategies for business, brought about by a growing preference on the part of both businesses and consumers to subscribe to services, rather than buy products.

Suddenly, the formula for growth is focused on monetizing long-term relationships rather than shipping products.

These market shifts are driven by new models of consumption and cut across all industries. Consumer preferences have changed and businesses are beginning to understand that if they don’t meet their customers where they want to be, one of their competitors will.

A recent Gartner study found that by 2015, 35% of Global 2000 companies will generate revenue through subscription-based services and revenue models.

Another study in The Economist, commissioned by Zuora, found that over half (51%) of the companies surveyed, in the US, UK and Australia, have changed or are in the process of changing the way they price and deliver their goods and services.

These market preferences are transforming B2B companies and the revenue models they use to drive success. This new business consumption model has driven a shift towards a digital strategy for access to their products and services.

In the Subscription Economy, revenue goals and client relationships are now monetized in the cloud. Experts predict that, within 3-5 years, a digital consumption strategy will potentially drive 80% of businesses.

Older, traditionally mainstream businesses are moving from selling packaged software to the fundamentally different world of a digital distribution model.

In some industries, transactional business models, where systems were designed to build a product, sell the product, keep inventory on the product, ship the product out the door and book the revenue, are now secondary to the Subscription Economy model.

Transforming B2B and B2C to B2Any

Powered by consumer behavior in the B2C market, buyers now expect to make buying decisions for their businesses in the same way they make buying decisions for themselves as individuals.

We’re seeing a new “B2Any” relationship cut across many industries and encompass relationships for selling to businesses, partners, and consumers.

It’s important to understand two things about this shift toward the Subscription Economy:

1. It’s here to stay. Once companies or consumers make the shift to subscription, they rarely convert back. So, this occurrence is not a blip on the screen – it’s a transformational change that's happening throughout the economy.
2. Wall Street loves this model. It’s predictable. Companies that implement this model correctly are able to predict revenue and profitability with a lot more certainty and focus.

Think about how hard it is to acquire and keep a customer in the traditional model:

• You spend money on the front-end to get that customer
• Then, three years later, you hope that customer comes back to you, instead of going to your competitor

In this business model, a customer’s sense of loyalty, relationship and brand is questionable at best. With the new subscription sales model, there’s a lot more predictability in the business transactions, because as we’ll explore in further detail, there’s a much deeper level of customer engagement.

The Subscription Economy is important to understand because it affects the way businesses market, operate and sell. The next blog in this series will take a deep dive into the internal changes companies are making to their overall business models and how those essential changes can be implemented for success.

You can find part two of this series here.