By Jason Pressman in Forbes
Jason is Managing Director at Shasta Ventures and invests in consumer, cloud computing, SaaS and open source software. He also serves on Zuora’s board.
The idea underlying the subscription economy is hardly a new one—the subscription business model first emerged during the 17th century as a way for authors to sell atlases, geographies, histories, and works of literature on an ongoing basis. While the idea itself may be old, the advent of the internet sparked a resurgence over the past two decades, transforming how almost everything—from dinner and CRM software to pet food and Cadillacs —gets sold.
Today, the subscription economy is thriving, powered by real time insights and data on customer activity, and there is no going back. Yet, we are still in the early days of what’s possible.
Lessons from Walmart.com
I’ve had many conversations with people who think the modern subscription economy (as we know it) has only been around for 4-5 years. But the reality is that it’s been around since 2000 when I was at Walmart.com building an e-commerce platform alongside a team that was investing in a broad array of digital businesses. These businesses included an ISP, digital photo services, digital music services, and DVD rental services, all of which were offered to consumers as subscriptions. This marked a significant contrast from Walmart’s historic ethos of selling products. While some of these businesses didn’t pan out, the positive response from customers made it clear to me that the digital world was paving the way for the subscription economy.
At Walmart, we were an early customer of Coremetrics, one of the first leading Application Service Providers (ASPs), which in today’s terms would be called a Software-as-a-Service analytics provider. I remember when I made the call to buy the Coremetrics service, my peers said I was crazy to put our analytics outside of the firewall. I thought they were crazy not to see the opportunity. Our team had so many projects to focus on—why wouldn’t we pay for a company that did analytics as a dedicated service, and therefore did it better than we ever could? Plus there was the added benefit of only paying for what we used, and conversely, not paying for what we didn’t need. And, the consistent upgrades were a tremendous benefit as well. Coremetrics gave us much-needed insights into our customers’ online behavior but just as importantly showed the increasing adoption and engagement of online shopping.
Based on this experience, I came to believe that the next 20 years would set the stage for a massive shift from buying something once to ongoing subscriptions. Much of my career and my investment thesis at Shasta has centered around the belief that the subscription economy is the future of business.
Cement-as-a-Service?
There is no doubt today that the subscription model resonates with customers. It provides greater flexibility, adaptability, efficiency, and accountability on the enterprise side while allowing for greater convenience, novelty, and affordability on the consumer side. Why develop your own analytics system when you can pay for a service that is instantly available and higher performing? Why own a car when you can rent a new one as-needed, without worrying about insurance, parking or maintenance? Why trek to the pet store every time you run out of dog food when you can have a high-quality product delivered to your door on a regular basis?
These days, it’s almost more unusual not to do a subscription business than to do one. Startups and legacy businesses alike are experimenting with what’s possible in vertical industries that didn’t seem feasible before. Take Cadillac, which recently launched a program allowing drivers to drive multiple models for $1,500 a month.
That said, a subscription model is not appropriate for all types of businesses. Cement is a useful example since it’s truly a non-recurring product—people generally need cement once not repeatedly. But it’s important to note that businesses that on the surface sell “non-recurring” products are also providing subscription opportunities in innovative ways. John Deere and Caterpillar, for example, offer subscription services that provide data and analytics around their equipment. Customers do not subscribe to the assets themselves, but rather to complementary data services that optimize their use of the underlying asset.
The same concern with putting data in the cloud that I first encountered at Walmart remains an issue for many enterprises today. The statistics vary, but more than 85 percent of software is still run on-premise through vendors like SAP and Oracle. But that’s not where the growth is. These categories are shrinking, and it’s hard to imagine that any next-generation, forward-thinking company wouldn’t think about a subscription-based model. We are also seeing many older companies actively trying to migrate their software from legacy to subscription-based. Adobe is one of the most successful examples of this trend, managing to shift 50-60 percent of its business to subscription.
Customer Focus
Today it all comes down to the customer. A focus on the customer, rather than the technology or the product or the transaction, is the force that drives the subscription economy. To succeed with a subscription model, businesses must serve their customers, understand their needs, and keep them happy over time. A deep and intimate knowledge about customers is key. Subscriptions mean relationships, and those relationships must continue to develop in order for businesses to grow and make money.
According to Zuora CEO Tien Tzuo, subscription-economy companies “live and die” by their ability to focus on the customer. Zuora is a Shasta portfolio company that helps companies build subscription business models. Zuora works with a prestigious roster of companies including Box, The Guardian, General Motors, and Dell. In a recent Q&A with Forbes, Tien said: “You have to know how many customers you can address, how many customers you can acquire, how many customers you can retain, and how much revenue you can get per customer. You have to know all of this in great detail and in real time.”
Back in 2000, this degree of granular analytics was not possible. People didn’t walk around with data-generating smartphones, and powerful Big Data tools were not accessible to businesses of all sizes. Today, that has changed. Business have affordable access to a wealth of data about their customers and how they interact with their product. This sets the foundation to deliver the quality customer experiences necessary to grow successful subscription businesses. The subscription model may not be new, but now it’s poised to soar and there is so much farther it can go. This economy knows no bounds, and it will be exciting to see what innovative new opportunities entrepreneurs dream up going forward.
For more, check out the Subscribed Podcast with Jason Pressman here!