Last week I had the opportunity to participate in a great Fortune Executive Leadership Roundtable called “Capitalizing on the Subscription Economy.” It was hosted by Fortune Senior Writer Phil Wahba, and included Sarah Bond, Corporate Vice President of the Gaming Ecosystem at Microsoft, Shravan Goli, CPO and GM for Consumer Business at Coursera, and Bob Lord, Senior Vice President of Cognitive Applications at IBM.
Here are some of the highlights of the roundtable, which I’ve edited for clarity. You can learn more about Fortune’s virtual event series here.
What makes a subscription sticky and worth paying for?
Sarah Bond of Xbox says it’s whatever delights your subscribers and provides them something that they can’t get anywhere else. “In the old model, you bought a video game for sixty bucks, and if you didn’t like it, you were stuck. People would be locked into just one thing and they would play some games almost exclusively or only two or three a year. By creating a subscription, we opened it up for people to actually discover things that they wouldn’t have otherwise. Not only did they play more games, they played more kinds of games. And they bought more games in addition to the subscription. So we’re always asking ourselves: What do people want to play? What experiences do they want to have, and how do we build it around that?”
Shravan Goli of Coursera says it’s all about career ambitions. “Stickiness is directly correlated to the ability of our learners to fulfill their career ambitions. And anytime you’re thinking about career ambitions, it’s a question of, what skills do I need to develop? What jobs are in demand? And as a result, what kind of a learning path gets me to those credentials and skills? And so that’s what we focus on.”
Bob Lord of IBM, who counts the Weather Channel as one of the business units he oversees, believes it’s a virtuous cycle inherent to subscriptions. “We’re constantly rolling out new features because we run on a subscription model. I can fuel my content at a much higher level than with an advertising business that goes up or down. So thanks to that consistent revenue flow, we’ve been able to put a product roadmap in place that constantly surpasses our customers’ expectations.”
I couldn’t agree more with the panelists. At its heart, the subscription model is all about continually delighting your subscribers with memorable experiences. When your business model fundamentally depends on happily surprising people on a consistent basis, you’re going to invest in it. And then, you find out that it’s a better business model in so many ways: you have more resilience, you actually know your customer, and you can create compelling new experiences for subscribers that expand on your main value proposition.
What are some subscription pitfalls to avoid?
Sarah Bond cautions against thinking rigidly about your business model. “What people really want from subscriptions is a membership, a relationship. At Xbox, we let gamers make purchases inside our subscription model, and that’s really powerful because it offers them a lot more choice. You’ll stop growing if you get really rigid.”
Shravan Goli advised businesses to avoid the trap of offering a subscription to simply follow other brands. “It’s important to find a product-market fit and to really start by addressing your customer’s unmet needs.”
I see a lot of people make these mistakes. They think about subscriptions as just a recurring payment mechanism and believe that a new way to price and invoice their service is enough. But a subscription is so much more than that! It’s a long-term relationship between a business and its customers. And like any relationship, it takes work. Everything you do needs to start with the customer and constantly revolve around their needs. You must be constantly experimenting, innovating, and re-evaluating your product-market fit.
How does a company measure success in the subscription model?
For Xbox, engagement is the key metric. “We can tell whether or not you’re loving the service by the number of games that you’re playing, and the hours that you’re playing per month. It’s the most important relationship that determines whether you want to stay with us or not,” explains Sarah Bond.
At Coursera, they keep their eye on upsells, particularly on the B2B side of the business. “If you think about the size of the account and the size of the relationship that you have versus the share of the wallet, how are you going to continue to upsell into that account?” asks Shravan Goli.
Bob Lord focuses on monthly recurring revenue, which includes churn. “Right now we’re over-indexed on our monthly subscriber growth, so the revenue piece is what we really pay attention to.”
How has the pandemic affected your business?
What do cloud computing, gaming, and education have in common during a pandemic? Explosive growth driven by the subscription business model.
“The pandemic has created, unfortunately, a lot of unemployment and uncertainty in people’s lives. It’s also accelerating some of the broader automation and digitalization trends we see in the market. So we’re seeing lots of people re-skilling themselves with AI, data science, IT, cloud, and security,” says Shravan Goli.
Bob Lord concurs on the digital acceleration. “In a short period of time, all of IBM, its partners, and clients went completely digital. And that engagement resulted in a lot of insights on how we should be pricing our products and allowed us to launch more subscription services as well.”
With entertainment options severely limited, gaming has been a refuge for many people during this stressful period. “We’re seeing a lot more people playing network games, where they’re connecting with friends and building connections and chatting with each other. It’s been really rewarding to know that we’re creating a safe connection right now,” says Sarah Bond.
Finally, what will the end of ownership look like post-pandemic?
Sarah Bond is emphatic that there’s no reason to own things anymore. “If there’s a service offering that gets you what you want in a cheap and flexible way, you’re going to opt for it. And what we’re seeing with Gen Z is that this trend is just going to continue. They’re used to using things and moving on when their needs change.”
Bob Lord agrees that it’s a generational thing. “I’ve always loved cars but to my disappointment, my son could care less about cars. He’ll just get in a Zipcar and zoom around and do what he needs to do and then check it back in.”
Shravan Goli thinks that higher education has changed for good as well. “The future is going to be a blended classroom environment: physical and online. It’s going to prioritize more job-relevant content, and it’s going to be something that students can access long after their four years are over.”
I truly believe this will be a permanent change. We’ve all been retrained to think: ‘If I can reach for my phone and access a service that gets me what I want, why would I want to go back to the old world and deal with product maintenance and obsolescence and products just sitting around?’
There’s no going back.
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