If you want your business to get ahead, get a subscription model
What is the biggest trend shaping global business? The growing dominance of the smartphone over everything we do and buy? The incredible rise of China? Or the emergence of artificial intelligence? You can make a decent case for all of them. But actually, it might be something that hardly anyone is paying much attention to. The development of the subscription economy.
From Netflix to Amazon Prime, to Spotify, Apple and Microsoft, subscriptions are not only powering the world’s most successful tech companies, they are increasingly starting to get some traction in old economy markets like razor blades as well. As we increasingly switch from buying things to buying experiences and services, their dominance is only going to grow. But very few companies have yet mastered how to build those relationships. The trick for investors may be to identify those that have – because they are going to be the biggest winners over the next decade.
Take a look at the most successful companies over the past few years, and they nearly all have one thing in common. Not only are they techbased, innovative and creative, they mostly have subscription either at the heart of their business or as a major part of it. Netflix and Spotify are the two most obvious examples.
Netflix has turned itself into the biggest media company in the world with its huge range of high-quality programmes for a single set price, while Spotify persuaded people to pay for music again with its vast range of songs. Netflix now has an astounding 130m subscribers, double the population of the UK, while Spotify now has 83m.
Amazon Prime is a form of subscription, and now has 100m members, while Apple is increasingly driven by sign-ups to its services (Apple Music, for example, is already up to 40m people) and Microsoft has revived itself as much by building subscriptions as selling software.
In Subscribed, a new business book making waves in the US, Tien Tzuo, the founder of the software firm Zuora, describes it as the one key trend that is reshaping the way businesses operate. “We’re in a pivotal moment in business history, one not seen since the Industrial Revolution,” argues Tzuo. “The world is moving from products to services. Subscriptions are exploding because billions of digital consumers are increasingly favouring access over ownership, but most companies are still set up to sell products.”
Of course, there might well be some hype in all that. Not many things can genuinely equal the Industrial Revolution in their impact on business history. Even so, Tzuo is making an important point, and one that traditional companies need to take on board. Subscription may have made its biggest impact so far in technology, but it has already started to break out of that and has the potential to become far more important over the next few years. In this country, Sky has always based its business on millions of sign-ups to its satellite packages. The Dollar Shave Club persuaded millions of men to subscribe for a monthly supply of razors and ended up being sold to Unilever for a reported $1bn. The guitar manufacturer Fender has
‘If razors can be sold by a regular fee, then there probably aren’t many products that can’t be’
branched into subscription lessons in how to play the instrument. In fact, subscription models have three big advantages over traditional rivals.
First, they can drive down costs because they guarantee recurring revenues which mean the company can be run on far tighter margins. One reason Dollar Shave Club did so well was because it offered a much better deal to those of us who were often surprised, to put it mildly, by how much its rivals thought they could charge for a tiny strip of metal encased in plastic in the supermarket. Next, they offer a vast range of products at a single, convenient price, which explains why Netflix and Spotify, and to some extent Sky, have done so well.
Finally, they can cut out middlemen and deliver products directly to consumers, driving down costs even further, and increasing choice.
There are lots of industries where there is still the potential for massive growth. Cars may well be one of the industries with the biggest potential, especially as driverless vehicles make their way on to the road over the next few years. There is not much point in owning a car when you can pay a monthly fee for using one when you want to – indeed car-sharing companies are already offering that.
If razors can be sold by subscription, then there probably aren’t many products in the supermarket that can’t be marketed in the same way. Lots of wine is sold on subscription plans, and speciality food could easily go the same way. So could travel and, of course, books.
There is a message in that for investors. The companies that understand subscription and can make it work are likely to be the big winners over the next decade. Indeed, the driverless car industry might end up being controlled by Netflix or Spotify or Amazon rather than Toyota or Volkswagen, simply because their understanding of subscription systems is so much more sophisticated. So might travel or food. And any traditional business that has not worked out how to respond to that may well have a dismal future.