The Pivot To Subscriptions: 5 Key Considerations for Businesses

Adapted from The Membership Economy: Find Your Super Users, Master The Forever Transaction, And Build Recurring Revenue

Much of our economy has operated historically on the principles of ownership. Companies manufacture and sell things; consumers and organizations buy them and then own them, taking on the rights and responsibilities of private ownership. What’s different about today’s Membership Economy is that technology makes it possible for individuals to connect directly to products and services via cloud technology.

Technology also allows customers to connect directly and continuously to the company itself. As a result, access models enable stronger relationships, greater loyalty, and more benefits for members.

As individuals grow frustrated with the responsibilities of owning too much stuff (think of the successful self-storage industry), they are looking for ways to cut back on ownership while simultaneously finding new ways to access the products and services they want.

It’s the difference between owning a huge music collection of CDs and accessing the music in the cloud (Pandora, Spotify). It’s the difference between buying a DVD and streaming (Netflix, Amazon). It’s the difference between owning a car and sharing one for a quick shopping trip (RelayRides, ZipCar). It’s the difference between hosting your own software on your own computer and accessing it as a service (Adobe, Intuit, Salesforce).

To transition from an ownership model to a membership model, you need to start by taking a big step back. At the root of any good business are three things: vision, mission, and culture.

The tree trunk is made strong by the enterprises core competencies.The branches represent specific products and services. Management plays the role of arborists, tending to the tree, pruning back products and service offerings that are no longer healthy to allow others to thrive, and treating the tree with mulch, pesticides, and soil infusions to protect it from pesky competitors and the changing weather of market conditions.

Look at the roots and trunk of your business and ask these fundamental questions:

• What is core to your business?
• Why does your business exist?
• What strengths have you built?
• What benefits do your customers get from the different branches of your business?
• What alternative products, services, or organizations also provide those benefits even if they are not traditional competitors?
• What disadvantages do your current members complain about most?

For your members, the transformation from ownership to access should result in lower risk, lower up-front expenses, and lower maintenance. If it doesn’t, they will leave. And some of them will leave – it’s part of the pruning process. You might experience some additional, short-revenue decline in transitioning from the big and lumpy transactions to small, recurring payments.Thats all right. If you’ve structured the transition properly, the business lost will be made up many times over in business gained. Lets examine the experiences of Adobe and Intuit, two companies that have moved from ownership to access.

Adobe: Transitioning Successfully from Offline to Online

The story of Adobes transition from ownership to membership garnered a lot of press attention, some of it negative. But it is actually an example of a pretty successful case.

In May 2013, Adobe changed its model from licensing Adobe’s Creative Suite Software, sold as a physical disk, to a cloud-based subscription to Adobe’s Creative Cloud. Creative Cloud grants access to software, as well as some new features with respect to sharing.

By November 2013, Adobe had reached 1.44 million Creative Cloud customers, sending its stock to an all-time high. Despite all the signups, which were arriving faster than Adobe initially predicted, lots of longtime customers were displeased with Adobe’s move. They didn’t like the idea of software that stops working if they stop paying, leaving projects high and dry unless they resubscribe. Disgruntled customers called upon Adobe to rethink its discontinuation of the boxed software, but Adobe is sticking with subscriptions.

Anytime you force members to change, there will be fallout. But sometimes its worth the cost. Despite the complaints, most of those who signed up plan to renew, according to a 2014 survey from CNET and analyst firm Jeffries.

Compare this story with that of Weight Watchers Online. When Weight Watchers spun off its new subscription-based business model, it gave consumers a choice to use offline, online, or a hybrid. Adobe didn’t provide a choice. It just ripped off the BandAid with a big “Tada!” And it suffered some bad reviews. But ultimately Adobe has thrived.

Adobe’s approach was certainly riskier but it was also less expensive and more decisive. Adobe didn’t commit to maintaining multiple options for its customers. Adobe might have had a smoother transition if it had continued to support the ownership model as well as the membership model.

On the other hand, making such a clear change has made it easier for Adobe to move the company aggressively toward more of a relationship-driven approach with customers.

Intuit: Transition from CD Ownership to Subscription Access

Like Adobe, Intuit initially established its customer base by selling packaged desktop programs. QuickBooks, its popular accounting software application, lets small businesses create and manage invoices, pay bills, prepare tax forms, and handle payroll.

A marketing-oriented company, Intuit noted changing demands from customers. It also recognized the possibilities of newly available technologies. CEO Brad Smith noticed that many businesses were moving to subscription models, which provided three key sources of ongoing value to users:

• Access from anywhere, via any computer, and by multiple users. This is key in a company with multiple employees.
• Access to the very best, latest features and services, without having to constantly shop for the newest offering.
• Connection with the company for faster, more insightful service than was possible with a traditional call center.

Intuit also saw that a move to an access model could be good for the company in  toerh ways

• A network effect of developers, creating and their improving product
• A network effect of users, building ties to one another, reinforcing engagement and loyalty
• A recurring revenue model, which drives a much higher valuation.

Smith has said that the key issue in the online business is converting first-time users into second-time and ongoing users, which he recognized was a “big transition for a packaged software company.”

In 2000, Intuit began offering QuickBooks Online. Many customers switched as soon as QuickBooks for the Web became available. Customers loved the low initial cost, the constantly updated features, and the ability to connect remotely with employees. And for a while, with both offerings available, everyone was happy.

However, over time Intuit discontinued its fixed price offering. Customers were frustrated with this mandatory change, and there was a minority that didn’t benefit from the new features and offerings. These frustrations caused a lot of problems for Intuit as many customers felt that the new membership model provided less value, often at a higher total cost of ownership.

For example, a small business with simple invoicing processes and only one person managing all accounting did not need the multiple points of access, the additional functionality, and the constant updates. So such businesses were frustrated with the mandatory change, just as some of Adobes customers were. Even with the gradual transition from ownership to access, Intuit still lost some customers.

Intuit’s transition from ownership to access has been slow and careful, with support for both approaches. In addition, it has experimented with attractive promotions to convert packaged software users into what Smith calls “connected services customers.”

Perhaps the company has been too slow, as other subscription and community accounting companies have had time to establish themselves and steal market share. Intuit has received some criticism for its slow transition, but it looks like its new model is working—it reports a new QuickBooks for the Web subscriber “on average every minute of every day.”

For Intuit, a slower approach worked better than a big forced change. Transparency about the change, communicated clearly to its customers, combined with extensive planning and analysis, helped the transition succeed.

Key Considerations in Moving from Ownership to Access

When an organization moves from ownership to access, leaders need to consider three key issues at the outset:

Product

Rebuild the product so that it can be offered as a subscription, not a transaction. This often involves starting from scratch.

For tech companies, it implies a new infrastructure. For offline organizations, it might require access to support, always-current data, or shared pools of resources with a library model.

The important thing is that the new offering is at parity, or ideally, even better than the prior offering, and that the benefits will help customers in the long term, if not also in the short term.

Pricing

Rethink pricing—what is the value of access for a finite period of time? A month? A year? Will existing customers have the new standard pricing, or will they have a special “grandfathered” arrangement that recognizes and rewards them for their loyalty?

Communication

Communicate the changes to existing customers. Be as transparent as possible. If there are advantages in the short term, explain them. If there are only longer-term advantages but the transition won’t immediately result in benefits, be honest.

Transitioning from ownership to access has implications in terms of the kind of relationship you will have with your customers— they will become members and will expect a real relationship that lasts. So start clean and with integrity.

What Can We Learn from This Model?

Technology has enabled many kinds of business models to embrace membership. And many are transitioning. While this model can be beneficial for both the organization and the customer, not everyone emerges victorious. For the ones who don’t want to change, a new business model can be frustrating or feel unfair.

The best organizations continue to innovate on their business model. They want to move beyond competitive one-upmanship to find green field opportunities to continue to impress and delight customers, and membership is a way to differentiate from the competition. However, they need to be careful to provide ongoing, evolving value that justifies the ongoing costs.They also need to be sure that they make the transition in a way that doesn’t create resentment among loyal customers.

Adobe could have made its transition from ownership to access less traumatic than it did, but it seems to have survived the tempest. Intuit has been making its QuickBooks transition slowly and carefully. Each of these solutions can work.

Remember

• Offer additional value to justify the ongoing costs of membership.

• Consider supporting the ownership model, at least for any subsets of loyal owners for whom your new access model doesn’t make sense, even if you transition everyone else to an access model.

• Be transparent about change; communicate clearly to stakeholders who include customers, employees, vendors, and shareholders.

• Research and analyze impact across all market segments.

• Expect push-back if you’re forcing customers into a new model and be prepared to respond.