In today's rapidly changing business landscape, a new model is taking center stage: the subscription economy. Tien Tzuo's book "Subscribed" explores this transformative shift in how companies operate and how consumers engage with products and services. The subscription model is revolutionizing industries across the board, from entertainment and retail to transportation and manufacturing.
Tzuo argues that the traditional business model of creating a product and selling it to as many people as possible is becoming outdated. Instead, companies are increasingly focusing on providing ongoing services and experiences that customers can subscribe to. This shift reflects changing consumer preferences, with people valuing access and convenience over ownership.
As the founder and CEO of Zuora, a company that helps businesses transition to subscription models, Tzuo brings unique insights into this new economic landscape. His book offers a comprehensive look at why subscription models are taking off, how they work, and how businesses can successfully make the transition.
The Rise of the Subscription Economy
Changing Consumer Preferences
At the heart of the subscription economy is a fundamental shift in what consumers want. People today are less interested in owning things and more interested in having access to services when they need them. This change is evident across various industries:
- Music: Instead of buying CDs, people subscribe to streaming services like Spotify for access to vast libraries of music.
- Transportation: Rather than owning cars, many people now use ride-sharing services like Uber or subscribe to car-sharing programs.
- Entertainment: Netflix and other streaming platforms have largely replaced DVD purchases and rentals.
This shift reflects a broader trend towards valuing experiences over possessions. Consumers want the benefits of products without the hassles of ownership, maintenance, and obsolescence.
Adapting to Survive
Tzuo argues that embracing the subscription model isn't just about gaining a competitive edge – for many companies, it's becoming a matter of survival. He points out that only 12 percent of the companies in the 1955 Fortune 500 list are still on it today. Those that have survived have often undergone major transformations.
For example:
- General Electric has shifted from primarily manufacturing light bulbs to generating most of its revenue from digital subscription services.
- IBM has transitioned from selling commercial scales and measuring equipment to offering IT and business subscription services.
Companies that fail to adapt to this new reality risk becoming obsolete. The subscription model offers a way to stay relevant by continually meeting evolving customer needs.
Industries Transformed by Subscriptions
Entertainment and Media
The entertainment industry was one of the first to feel the impact of the subscription revolution. Tzuo describes how the rise of file-sharing sites like Napster initially panicked big film studios and record labels. However, it was startups that recognized the potential of this new market:
- Netflix went from zero to 100 million subscribers in just a decade after launching its streaming service in 2007.
- Spotify gained 500 million subscribers in under nine years and now accounts for about 20% of global music industry revenue.
Interestingly, the rise of streaming services has actually boosted retail sales in some areas, arresting a 15-year decline in the music industry. This demonstrates how subscription models can create new opportunities rather than simply cannibalizing existing markets.
Retail and E-commerce
The retail sector is another area being dramatically reshaped by subscription services. E-commerce is growing rapidly, with an estimated annual expansion of 15%. This growth is in stark contrast to the mere 3% annual growth for physical stores and the closure of thousands of brick-and-mortar locations.
Amazon exemplifies this trend:
- Over 90 million US households have Amazon Prime memberships.
- This translates to $9 billion annually in subscription fees and $117 billion in sales.
The success of companies like Amazon is largely due to their ability to leverage customer data. By understanding what customers buy, they can personalize recommendations and create a more tailored shopping experience.
Transportation and News
The subscription model is also revolutionizing how people move around and consume information:
Transportation:
- Ride-sharing companies like Uber and Lyft now serve over 60 million riders, reducing the need for car ownership.
- The percentage of young Americans with driver's licenses has dropped significantly.
- High-end carmakers like Porsche are offering subscription services that provide access to a range of vehicles.
- In aviation, companies like Surf Air offer unlimited private jet flights for a monthly fee.
News:
- Contrary to early fears, the digital revolution hasn't killed newspapers. About 70% of American adults still read a newspaper monthly.
- Young people are increasingly likely to subscribe to online news services.
- Quality journalism is thriving as people are willing to pay for reliable content rather than relying on free but lower-quality sources.
These examples show how the subscription model can breathe new life into traditional industries by offering convenience, flexibility, and personalized experiences.
The Transition to Subscription Models
Challenges and Rewards
Transitioning to a subscription model isn't always smooth sailing. Tzuo uses the example of Adobe to illustrate what he calls "swallowing the fish" – a period of decline that companies often experience when making the switch.
When Adobe moved from selling software as a physical product to offering it as a subscription service (Software-as-a-Service or SaaS), they initially saw a drop in revenue and stock price. This is because subscription revenues are typically deferred for at least a year.
However, the long-term gains were substantial:
- By 2014, Adobe Creative Cloud had transformed from a primarily physical product to an almost entirely subscription-based service.
- Adobe's stock price rose from $25 in 2011 to $195 at the time of writing, with an annual growth rate of 25%.
This example shows that while the transition can be challenging, the potential rewards are significant for companies willing to weather the initial difficulties.
Manufacturing and the Internet of Things
While tech companies led the way in adopting subscription models, manufacturing is now poised for a similar transformation. This shift is being driven by the Internet of Things (IoT):
- Thousands of manufacturers are embedding their products with sensors and connectivity features.
- By 2020, billions of smart devices – from cars to watches to clothes – will be capable of monitoring performance and efficiency in real-time.
This wealth of data creates opportunities for manufacturers to offer ongoing services and improvements to their customers on a subscription basis. The IoT has the potential to turn manufacturing into the ultimate as-a-service business, with suppliers continually monitoring and updating their products.
Rethinking Innovation and Product Development
From Linear to Agile
The subscription model is changing how companies approach innovation and product development. Traditionally, innovation followed a linear process:
- Research
- Design
- Manufacture
- Market release
In this model, once a product left the factory, there was no further development. The market would determine its success or failure.
Subscription-based models, however, embrace a more agile approach to development:
- There's no such thing as a "finished" product.
- Innovation is about continuous growth and improvement.
- Products evolve based on ongoing customer feedback and changing needs.
This approach, known as agile development, prioritizes:
- Customer collaboration
- Functional software
- Responsiveness to changes
- Adapting to customer needs over rigid adherence to plans
Real-World Examples
Tzuo provides several examples of this agile approach in action:
- Google's Gmail kept the word "beta" in its logo for five years after launch, signaling ongoing development.
- Musician Kanye West continued to modify his album "The Life of Pablo" even after its official release, essentially creating the first "SaaS album."
These examples illustrate how the subscription model allows for a more dynamic and responsive approach to product development, one that can continually adapt to meet customer needs and preferences.
Marketing in the Subscription Era
The Traditional Four Ps
Tzuo explains how the subscription model is changing traditional marketing approaches. He starts by outlining the classic "four Ps" of marketing:
- Product: Making something people want
- Price: Making it competitive yet profitable
- Promotion: Advertising it intelligently
- Place: Selling it in the right locations
In traditional marketing, promotion and place are often understood in terms of "push and pull" factors:
- Push: Using various channels to encourage customers to choose your product over competitors (e.g., paid product placements, sales commissions)
- Pull: Using advertising to attract customers to seek out your product
The New Marketing Paradigm
In the subscription model, these elements take on new meanings:
Product becomes Subscription: The focus shifts from a one-time sale to an ongoing service.
Place: The gap between producer and customer needs to be bridged. For example, Autodesk taught their retailers to offer annual maintenance plans based on customer data.
Promotion: It's less about straight advertising and more about storytelling. Tzuo's company Zuora focuses on:
- How: The product (helping companies transition to subscription models)
- Who: The market (any company looking to make this transition)
- Why: The reason for existing (the trend towards subscription economies)
Price: Instead of maximizing profits by reducing manufacturing costs, companies introduce multi-tiered systems where prices increase with the level of service offered (e.g., Dropbox or Spotify's premium tiers).
This new approach to marketing reflects the ongoing, relationship-based nature of subscription services. It's less about convincing customers to make a one-time purchase and more about demonstrating the long-term value of the service.
The New Sales Ethos
Building Stable Relationships
The subscription model fundamentally changes the role of sales teams. Instead of prioritizing one-time transactions, the focus shifts to building and maintaining long-term relationships with subscribers.
Key aspects of this new sales ethos include:
- Emphasizing growth: Sales teams highlight how the company's service will continually improve over time.
- Ongoing responsibility: Unlike traditional models where sales teams could "take the money and run," subscription models require ongoing customer satisfaction to maintain business.
Strategic Sales Approaches
Tzuo outlines several strategies that successful subscription-based companies use to maintain and grow their subscriber base:
Acquiring initial customers: This group is crucial as they set the tone for future subscribers. Targeting the right early adopters can help corner the desired market.
Reducing churn rate: This involves focusing on retaining the right kind of users rather than trapping people in long contracts for services they don't need.
Increasing value through upselling and cross-selling:
- Upselling: Encouraging customers to upgrade to more expensive, high-end services
- Cross-selling: Offering better solutions to a range of user problems to retain existing customers
Going international: In today's globalized world, expanding into new markets is easier than ever and often necessary to stay competitive.
While it's challenging to pursue all these strategies simultaneously, a healthy company will typically be working on two or three at any given time to maintain growth.
Financial Challenges and Solutions
The Limitations of Traditional Bookkeeping
Tzuo highlights how traditional financial methods can struggle to accurately represent the health of subscription-based businesses. The problem lies in the mismatch between classic double-entry bookkeeping and the forward-looking revenues of subscription services.
Double-entry bookkeeping:
- Balances credits against debits
- Provides a simple overview of revenue, outgoings, and bank balance
- Works well for traditional businesses with one-time sales
However, this method can make healthy subscription companies look like they're spending more than they're earning because it doesn't account for future recurring income.
A New Financial Model
To address this issue, Tzuo and his CFO developed a new system based on Annual Recurring Revenue (ARR). Here's how it works:
- Start with gross ARR (money made from subscriptions annually)
- Subtract churn (losses from forfeited subscriptions) to get net ARR
- Deduct recurring costs (admin fees, overheads) to get recurring profit
- Sales and marketing costs come out of recurring profit but are also added to future revenues (as they contribute to growth)
- Add this to net ARR to get gross ARR for the next period
This model provides a more accurate picture of a subscription company's financial health by accounting for future growth. While it might show little profit in the short term (as much of the recurring profit is reinvested in growth), it better reflects the company's potential for long-term success.
IT Challenges in the Subscription Era
The Limitations of Traditional IT
Tzuo argues that traditional IT solutions are becoming increasingly inadequate for subscription-based businesses. The problems include:
- Reliance on systems designed for counting units of production rather than managing subscribers
- Difficulty in editing subscriber experiences across multiple systems
- Inability to gather comprehensive business insights due to data being spread across incompatible systems
The Need for Dynamic Systems
Subscription services require more dynamic data systems to match their own flexibility. These systems need to handle a constant cycle of renewals, suspensions, upgrades, and downgrades.
Key features of subscription-oriented IT systems:
- Automatic usage checks and prompts for upgrades when thresholds are reached
- Ability to register changes in subscriber behavior (e.g., being abroad) and adjust services accordingly
- Focus on multiple subscriber behaviors rather than just product sales
The goal is to create a seamless, responsive system that can adapt to the diverse and changing needs of subscribers in real-time.
Implementing the Subscription Model: The PADRE System
To help businesses transition to a subscription model, Tzuo introduces the PADRE system developed by his company, Zuora. PADRE stands for Pipeline, Acquire, Deploy, Run, and Expand. Here's a breakdown of each component:
Pipeline: Raising awareness about your company and generating demand through marketing.
Acquire: Guiding the customer's journey towards taking out a subscription, focusing on understanding and meeting their needs.
Deploy: Setting up the customer with your service quickly and efficiently to prevent them from losing interest.
Run: Managing the day-to-day operation of your service and responding swiftly to changes in how subscribers use it.
Expand: Focusing on innovation to retain subscribers through growth and added functionality.
In addition to PADRE, Tzuo emphasizes three other crucial factors, known as PPM:
- People: Staffing your company with top talent to keep customers satisfied.
- Product: Continuously improving your offering to meet evolving customer needs.
- Money: Allocating resources efficiently and effectively.
Implementing PADRE requires cross-functional coordination within the company. When done successfully, it can actually improve overall coordination by providing a common language and framework for problem-solving across departments.
Case Studies and Real-World Examples
Throughout the book, Tzuo provides numerous examples of companies successfully implementing subscription models:
Netflix: Transformed from a DVD rental service to a streaming giant with over 100 million subscribers.
Spotify: Grew from zero to 500 million subscribers in under nine years, reshaping the music industry.
Amazon Prime: Attracted over 90 million US households, generating billions in subscription fees and sales.
Adobe: Successfully "swallowed the fish" by transitioning from selling software as a product to offering it as a service, leading to significant long-term gains.
Porsche: Entered the subscription market by offering access to a range of cars for a monthly fee.
Surf Air: Provides unlimited private jet flights for a monthly subscription, revolutionizing air travel for some customers.
Financial Times: Boosted digital subscriptions by strategically dropping its paywall during major events like the Brexit referendum.
These examples illustrate how diverse industries are adopting and benefiting from subscription models, from tech and entertainment to manufacturing and transportation.
The Future of the Subscription Economy
Tzuo paints a picture of a future where subscription models become increasingly prevalent across all sectors of the economy. He predicts several trends:
Increased personalization: As companies gather more data on their subscribers, they'll be able to offer increasingly tailored services and experiences.
Growth of the Internet of Things (IoT): More products will become "smart" and connected, opening up new possibilities for subscription services in manufacturing and other industries.
Shift in consumer attitudes: Ownership will become less important as people prioritize access and experiences over possessions.
Evolution of business metrics: Traditional financial measures will be supplemented or replaced by metrics more suited to subscription businesses, such as Annual Recurring Revenue (ARR) and customer lifetime value.
Changes in product development: The line between product and service will blur as companies focus on continual improvement and adaptation based on customer feedback.
Transformation of marketing and sales: These functions will increasingly focus on building and maintaining long-term customer relationships rather than closing one-time sales.
Challenges and Considerations
While Tzuo is generally optimistic about the subscription economy, he also acknowledges several challenges and considerations:
Initial financial hit: Companies transitioning to subscription models often experience a temporary decline in revenue and profits, which can be difficult to navigate.
Cultural shift: Moving to a subscription model requires a significant change in company culture and mindset, which can be challenging for established businesses.
Data privacy concerns: As companies collect more data on their subscribers, they'll need to navigate complex privacy issues and regulations.
Customer fatigue: With the proliferation of subscription services, there's a risk of customers becoming overwhelmed or frustrated with managing multiple subscriptions.
Increased competition: As more companies adopt subscription models, standing out in a crowded market may become more challenging.
Technological requirements: Subscription models often require sophisticated IT systems, which can be costly and complex to implement.
Advice for Businesses
Tzuo offers several pieces of advice for businesses looking to transition to or optimize their subscription models:
Start with the customer: Every business decision should work backward from what the customer wants, not just what's easiest or cheapest for the company.
Embrace agile development: Be prepared to continuously evolve and improve your offering based on customer feedback and changing needs.
Rethink your metrics: Traditional financial measures may not accurately reflect the health of a subscription business. Consider adopting new metrics like ARR.
Invest in customer success: In a subscription model, customer retention is crucial. Prioritize ongoing customer satisfaction and support.
Leverage data: Use the wealth of data generated by subscriptions to personalize experiences and improve your service.
Foster cross-functional collaboration: Successfully implementing a subscription model requires coordination across all areas of the business.
Be prepared for the "fish": Understand that there may be a temporary decline in traditional financial metrics when transitioning to a subscription model, but stay focused on long-term growth.
Conclusion
In "Subscribed," Tien Tzuo presents a compelling case for the rise of the subscription economy. He argues that this shift is not just a passing trend, but a fundamental transformation in how businesses operate and how consumers engage with products and services.
The book provides a comprehensive overview of why subscription models are taking off, how they work, and how businesses can successfully make the transition. From entertainment and retail to transportation and manufacturing, Tzuo demonstrates how diverse industries are being reshaped by this new economic paradigm.
Key takeaways include:
- The importance of focusing on ongoing customer relationships rather than one-time transactions.
- The need for businesses to be more agile and responsive to changing customer needs.
- The value of data in personalizing experiences and improving services.
- The challenges of transitioning to a subscription model, including initial financial hurdles and the need for new metrics and systems.
Tzuo's insights, drawn from his experience with Zuora and numerous case studies, offer valuable guidance for businesses navigating this new landscape. While he acknowledges the challenges, his overall message is one of opportunity: companies that can successfully adapt to the subscription model are well-positioned for long-term success in an increasingly service-oriented economy.
As consumers continue to prioritize access over ownership and personalized experiences over one-size-fits-all products, the subscription economy is likely to play an increasingly important role in shaping the future of business. "Subscribed" serves as both a wake-up call for companies still operating under traditional models and a roadmap for those ready to embrace the subscription revolution.