The idea of ‘ownership’ has been steadily changing over recent years. This is what we like to call the ‘own-lease-rent-subscribe continuum’, which describes the progression of the different ways individuals call ‘ownership’. In short, it goes like this:
Own: Ownership is the traditional or historical way to access an asset – for instance you are considered to have achieved the ‘Great Australian Dream’ if you own your own home. This is what a lot of migrants aspired to, after losing everything during WWII, and starting fresh here in Australia. Often financing was a necessity in order to achieve ownership of an expensive asset, like a car or home.
Lease: A lease is a contractual agreement between two parties that outlines the intended use of the asset in question, as well as the time frame that it will be leased for. The introduction of leases gave people the opportunity to enjoy almost all the benefits of ‘ownership’ without tying up capital, and can be sometimes indistinguishable from owning with finance (car lease vs. hire-purchase).
Rent: Renting, while quite similar to a leasing, is generally for much shorter periods of time, such as a month to month rental home or even for a few hours, like a moving van or folding chairs.
Subscribe: Finally, subscription is the last phase in the own-lease-rent-subscribe continuum, where individuals choose not to rent the good or service, but want regular access to the resource or product, when it suits them (E.g. FlexiCar or AirBnb).
The Subscription economy is a new way of looking at ownership and how people ‘buy’ things. In the subscription economy, utility trumps ownership. People would rather have access to a resource when it suits them than to actually own it. It represents a shift in consumers spending habits. Consumers may not have the capital to invest in resources that they don’t use all the time, and would rather pay each time they need it. Goods are now being repackaged as services, and more companies are now looking to shift from a traditional business model to a subscription business model.
Traditional vs. Subscription Business Model
Companies have generally followed a traditional business model in terms of the way they have sold their goods or services. This means that their customers are only customers for one-off transactions, and the value they get from the customers is only equal to the value of the items sold. Customers used to be walk-ins and anonymous, so Loyalty programs were created to entice regular purchasing (such as Fly-buys), as well as allowing them the ability to capture information on demographics and other shopping behaviours.
The Subscription business model changes the value of the sale – subscription based companies look at the lifetime value of a customer rather than a single transaction, and results in a revenue stream over time. Other key metrics of subscription based business performance are customer acquisition cost, acquisition rate, cost to serve and churn rate.
Marketing has also changed within the subscription economy as a result of this shift. Instead of competing against competition on the features of the product – companies are offering a service and convenience. This is a massive shift in the marketing process; let us look at Dollar Shave Club as an example.
The way it used to work was:
- Customer realises that they need a shave, and goes to the store and buys a razor blade.
- Customer uses razor blade until they need to either replace it or stop using it (i.e. they start growing a beard).
- If they choose to replace it (can be 6-8 weeks), then they go back to the store and, based on the experience they hadand any other influencing factors at point of sale (availability, promotional offers, etc.), will either change brands or make a repeat purchase.
Here we see that the onus is on the customer to purchase it. Dollar Shave Club (and other subscription businesses) changed this purchasing habit so it now looks like this:
- Customer realises that they need a shave, and subscribes to Dollar Shave Club.
- They receive a razor in the mail, and use it.
- A month later, they receive a new razor, and throw out the old one, even though it still may be usable.
- If the customer wants to grow a beard, or chooses to discontinue the service for an alternative reason, then they can cancel the subscription.
Previously the customer would use up the razor until they either needed a new one or actually got around to purchasing a new one, now the customer is no longer in control of the regularity of the purchase. The move to subscription means that the repeat purchase happens automatically, without the customer having to do anything. Dollar Shave Club has offered their subscribers a convenient alternative to having to continually remember to purchase new razors, and in doing so, the customer sees value in the offering, which means that they have one-less thing to worry about. The subscription is a win-win scenario. The subscription offering offers things like:
- Value: easier access to a resource
- Sharing: better use of resources
- Trust: will you be there next month?
- Convenience: Simplification the purchase decision or cycle, use on demand
- Personalised service
Essentially, the subscription economy offers customers the ability to access resources they want, when they want them, for as long as they need them, most often without the significant financial expense of ownership.
There are a few key challenges that come with the shift to subscription business models:
- Invoicing. No longer is it sufficient to send a one off invoice for a single transaction. Your bill becomes part of your regular communication with your customers – in many cases it will be your primary point of communication. How will you make this most of this?
- Flexible / Configurable product & pricing catalogue – One of the keys to success for a subscription business is adjusting your offer to acquire new and retain customers. You need the ability to add new and adjust products and pricing without creating an unmanageable burden for the finance or IT department, or worse, constantly outsourcing to your billing provider.
A mixed regulatory environment and a lack of control of the supply chain are other factors that need to be considered.
Companies also have to ask themselves a number of questions when transitioning to a recurring revenue model:
- Finance – how do you recognise revenue? How do you manage one time vs. recurring revenue?
- Subscription Contract management – how do you handle upselling? Or mid month cancellations? How do you manage renewals? What is the process for situations that impact on customer subscriptions like credit card expiry?
- Collections – How do you manage the collections process – can you send SMS reminders to customers? Implement rules to issue late payment fees?
- Measurement & reporting – how do you track critical KPIs such as acquisition and churn rate?
- Channel/reseller/commissions management – when it’s no longer a one transaction sale – how do you incentivise and commission salespeople and agents?
While other businesses are shifting to the subscription economy, this is nothing new in the telco space. Telco’s were one of the original sellers of subscription services. They are experienced in pricing services and cross-subsidisation, and have already established recurring billing relationships with customers. This is why many new subscription businesses are turning to experienced telco billing providers such as Billing Bureau to cater for their billing needs.