Let's Take a Little Journey.
Perhaps one we didn’t expect nor even want to go on. But I promise you, arriving at the destination is worth the trip. But first, I want you to imagine how hard it would be to change an engine on an airplane while it is inflight – while it is engaged in a dogfight.
The Cause of the Retail Apocalypse
That’s pretty much what most of today’s retailers are facing. They have a large number of systems, face a virtually unlimited number of competitors, and consumers who are rapidly changing both their tastes and expectations. So they are faced with changing their systems out while their business is in-flight. While competitors are attacking from every direction and in every channel.
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Then Came the Subscription Economy.
You may not have heard of the ‘the subscription economy’ but unless you live in a cave, you’ve been a subscriber most of your life.
You have a monthly electric bill?
That is a subscriber model, as is your mobile phone, water, garbage, pest control, and other goods and services you’ve been consuming via ‘monthly subscriptions’ for a long time. That is one of the reasons owning ‘utility stocks’ has traditionally been the go-to investment vehicle of choice for people seeking steady, predictable income from their investments. Those are the obvious subscription-based business model businesses.
What is the New Subscription Model Economy?
Companies like Zuora are at the vanguard of introducing the subscription model into a wide range of previously untouched business models.
Forward-Thinking Subscription-Based Companies
You can already find companies in diverse spaces using subscriptions in surprising ways. For example, you can buy diapers using a monthly subscription at Target. You can buy flight hours on private jet operators on an annual subscription. If you’re an owner of a private jet, you can also sell those hours as a subscription service. You can even implement a roll-over flight model with this approach.
The Consumer is already a part of the subscription economy - are you ready?
Selling via Subscription Models Impacts Virtually Every Element of Your Business:
- Finance, though having dealt with with subscribers for years in the previously mentioned industries, has a much more complicated job due to subscriptions.
For instance, if you can sell subscriptions that can be and are uniquely tailored to each and every subscriber, you have some very complex revenue recognition rules you have to decide upon and follow. Can your finance system handle it? - Supply Chain Management. You would think that having steady consumers at the end of the supply chain would make it easier to manage a supply chain.
But if each of those subscribers, in fact, has not only a unique financial arrangement with the seller, but a unique consumption pattern, then having a highly responsive supply chain that can deal with these near constant changes, especially in a complex, multi-echelon supply chain, becomes exponentially more complicated. - Sales is dramatically affected, in both good and bad ways. Selling via subscription models, means that theoretically, sales has to make the sale only once.
Sales Incentive and Commission Model Challenges
However, if you combine commission models with subscription models, if you thought keeping sales commissions straight before was a challenge, now you have a whole new level of complexity.
For instance, how long does a sales commission paid on a subscription that might run for years, long after the salesperson who sold it, has moved on?
How will you provide a ‘trusted’ audit trail to the sales force of those revenue streams?
- Marketing is where it gets real interesting. In the age of the digital marketer, with systems like Hubspot, you can literally track the source of every sale, down to the channel, i.e., organic, direct, PPC, etc.
Value of the Initial Conversion
But, does the marketer, when reporting results, report the value of the initial conversion, or the value of the subscription, and if so, for what period of time?
- Marketing and Strategy Management. Within the world of the Balanced Scorecard (full disclosure, this is a special interest for me) approach to Strategy Management, one of the key requirements is to have a ‘quantified vision’.
In its simplest form, this means putting a number to planned future growth objectives, such that, we want to be number one becomes, we want to grow from 1 billion in annual sales to 1.5 billion in annual sales within 1 year.
With a clearly quantified vision, marketing, given their ability to track revenue results by channel, can now create and launch marketing initiatives, based on past performance, to meet these new targets. The challenge lies in marketing to the subscription model and getting an understanding of the financials included in the marketing tools, currently not there.
- Marketing, Strategy Management and the Supply Chain. If you do have a Balanced Scorecard Strategy in place, which includes a quantified vision, and marketing does have the ability to launch the campaigns across the marketing channels it will take to hit those objectives, you also have the added complexity of ensuring that you’re aren’t committing the cardinal sin of getting a customer to the point of sale only for them to find it is ‘out-of-stock’.
- Customers. Perhaps more than any other player in this ‘subscription economy’ the consumer is most affected, even if not fully aware of it.
For instance, they will need to know and keep track of how many ‘subscriptions’ they actually have going. Like any other item they purchase, those goods and services bought via subscription can and will be compared to similar items available via other channels, perhaps on a subscription basis as well.
It will take ‘account’ management on their part to keep expenditures under control, no small challenge for many.
It may also require providing more help on the part of the subscription provider in order to keep the consumer happy and on that monthly, quarterly, or annual subscription plan.
- The IT Department. If marketing and sales are facing a challenge from the subscription economy, the IT department is actually the one in charge of changing those engines.
If there is one major area of disruption that they have to get right, it is their reporting system, specifically, the datawarehouse.
With the strong movement to the cloud, often by departments outside of IT, especially the marketing department, there is an ever growing network of systems that are being procured using a subscription approach, each of which has its own unique data model, along with underlying, often unstated and undocumented, assumptions.
For instance, whether you are using an account model or people model for sales. Each of these systems usually come with a reporting system, though it is rarely the primary focus of the system, nor is it ever truly cross-platform aware.
Datawarehouse is Required
This is happening so fast, with so little planning, that the demand for a company wide datawarehouse, which allows reporting across all platforms, has never been greater. Without it, the ability to truly deal with a subscription model across all the affected parts of the business are nil.
- The IoT department. Oops, there isn’t one. This isn’t really new, rather, it is a new way about talking and naming the data coming out of ever more ‘things’, due to the ever decreasing cost of sensors and the increasing capabilities of those same sensors, equipment, and networks.
There are plenty of businesses that have been dealing with real time data feeds from operating equipment which is geographically dispersed. One of the most obvious is Jet Engine manufacturers.
Their engines have for many years been equipped with computerized engine management systems which can constantly transmit performance data while inflight, though the network for receiving that data is often spotty.
That is why jet engines are so reliable and why you now see a lot more twin engine jets that are certified to fly across the oceans.
What this has led to is a unique ‘subscription’ model called Power by the Hour or PBH. Many government airplane contracts now are in Power by the Hour mode, and the suppliers have to figure out not only how to keep everything running, anywhere in the world, but how to price that service and still make a reasonable profit. Airlines are going that way as well.
- Human Resources. Systems like SAP SuccessFactors, available via the cloud on a subscription model basis, means human resources has both new capabilities and new challenges.
These systems usually have pricing metrics that mean your cost go up as your usage goes up along one of those dimensions. At a minimum, you have to factor these into your annual business planning if you hope to have budget available for the scaled pricing arrangements.
Finally, there is a ‘department’ I didn’t mention, the government. They do like their taxes, as we all know. And here in the United States, where we have well over 5000 taxing authorities and are one of the few places where I have seen companies spring up to handle the complexity of taxes with SAP Add-on products, when you start to mix in the complexity of subscriptions, some of which have applicable taxes and some of which don’t, you have complex tax tables and rules to implement, all old hat for the utility industry, but definitely new, uncharted territory for many businesses going the Subscription Model route.
More Examples of the Subscription Economy
There are many more examples of businesses that use or could use the subscription model to boost revenue and defeat their competition. It would be impossible to list them all here, but a few we've worked with over the years are worth mentioning:
- Meal Plans
- Metro Tickets
- Massage services (you've seen these in airports)
- Tutoring
- Classes in general
In addition to these examples, there are also businesses, ours being one of them, that help companies 'ideate' new subscription models. For example, how about annual subscriptions for compost?
Get More Help Moving to the Subscription Model
We offer a variety of services to help you migrate to this new model.
