Meta Trend #2: The Subscription Economy
Why own when you can rent? That’s the sentiment of more and more businesses these days when it comes to acquiring everything from the software that runs your company to the boost in power you need from your wind farm. We believe this shift in mind-set and buying habits represents nothing short of a sea change in the structure of the modern economy, and we rank it alongside the Customer First Revolution as one of the two meta trends that businesses must come to grips with in the coming decade.
We define the Subscription Economy as the fundamental transformation from an economy based on high capital-intensive sales of products into an economy based on services that you pay for as you use them, or as specific outcomes are realized.
The Subscription Economy, as a pervasive phenomenon, is still in the early innings, but its growth is visible all around us and massive disruptions are sweeping through key industries from high tech to transportation to manufacturing. One of the best-known examples is the software industry, which is currently witnessing a major shift from packaged software to “cloud subscriptions.”
If you intend to win the competition for customers, you would be smart to understand why businesses are flocking to the subscription model of doing business, and begin to think creatively about how you can make your own business “subscription friendly.”
The “Cloudification” of Business
A key driver of the Subscription Economy is a critical new business capability we call the “cloudification” of business—a term coined in the book, Ruthless Execution, Second Edition. What does it mean to “cloudify” your business? It means digitizing your products and services and transforming them into an offering—or platform—that is accessed over the Internet. In some cases companies establish a marketplace by “opening up” their product, turning it into a broad platform on which others can add value and new offerings.7 Cloud-ifying your business provides a new way to stay closer to your customer. It has clearly become the third wave of the Internet revolution, in which products and services are put on the cloud for customers to use as needed.
Investment Equations Will Be Radically Realigned
The significance of the cloudification of business is far-reaching and anything but trivial, since many established business models and partnerships will be rendered obsolete. First, it radically changes the investment equation for customers by lowering up-front capital requirements. This has the advantage of better aligning the customer’s investment with the returns. Instead of paying for most of the investment up-front in the hope that it will pay off down the road, now your customer’s investment costs are spread over the life of the solution and are more in line with the incremental benefits they see from your solution year to year.
Switching Costs Don’t Matter Anymore
One of the strongest attractions of the Subscription Economy is this: If you ever find you’re not seeing enough benefit compared to what you’re paying, it’s relatively easy to “unsubscribe” and shop for a new service. What this means is that across many industries a long-standing strategic force and pillar of protection—switching costs—is being marginalized. We’re not suggesting that switching costs are dead. In industries where large and expensive physical assets are involved, switching costs will still be relevant; however, the influence to shape vendor performance and expected business outcomes will significantly increase for customers. Increasingly, industry leaders will need to design new incentives for staying—such as providing a clearly superior customer experience—but the cost or hassle of switching won’t be one of them. Instead, companies will need to develop an ongoing stream of new capabilities to deliver value.
Barriers to Entry Will Crumble
Just as the barriers to customer defection are eroding, so too are the traditional obstacles to competitors invading your turf or creating a whole new market seemingly out of nowhere. A great example is Amazon. The Seattle-based behemoth started off as a bookseller before extending its web platform to include just about anything you wanted to buy on the planet. Then in 2003, while retooling its data centers to improve its Web application, Amazon discovered it could take some of the computing power in the revamped centers and “rent it out” through the cloud.
Practically overnight, Amazon Web Services (AWS) was born, and it swiftly skyrocketed to become one of the biggest forces in cloud services. Netflix, to take one example, now runs its streaming video services over bandwidth it rents from AWS. Forbes magazine recently declared AWS the “largest pubic cloud vendor on earth,”8 leaving entrenched computing giants like IBM, Oracle, and Microsoft scrambling to catch up. In the Subscription Economy, traditional barriers that incumbents depended on to fend off upstarts have melted away.
Products Will Morph into Services
The spreading Subscription Economy will see more products being refashioned as services. Just “taking delivery” of equipment is no longer good enough for customers who increasingly prefer to shift the headache and risk of maintenance and breakdowns to the vendor. That’s why companies like Rockwell Automation—profiled in Chapter 9, “How Rockwell Automation Measures Success”—are reinventing their factory automation products, incorporating Internet of Things technologies so that assembly-line machines can monitor themselves, self-install new software, and preempt breakdowns without ever bothering the customer. It is a far more servicelike experience, saves time and money, and also manages to create a new kind of “stickiness” that dissuades customers from straying to the competition.
A different example is Cisco, which has been the dominant player in the computer networking industry for the past two decades. For years the company’s primary source of revenue had been physical gear like routers and switches that companies install in their data centers. But with more customers preferring to rent computing power, Cisco has begun offering the equivalent of “networking as a service” in which Cisco owns the networking infrastructure, monitors its performance, upgrades it, and adds bandwidth as needed—all from a remote command center. Cisco expects this portion of its revenue stream to continue to grow over the next decade, perhaps soon rivaling its traditional hardware sales.
Delivering Outcomes Will Be Critical
The Subscription Economy, with its “what have you done for me lately” culture, will shine a harsh light on business outcomes. Is your customer able to reduce costs as promised? Get more output out of your machines? Cut downtime as expected? Drive new revenue? The new “as a service” economy puts less emphasis on the particular product you’re pedaling and more on what it can do for your customers. Increasingly, your customers don’t care about your products, but about the business outcomes that matter most to them. That’s why the most innovative enterprises on the planet are focusing on selling and delivering business outcomes. We’ll profile several of these outcomes-centric companies in the pages ahead.
The emerging Subscription Economy and Customer First Revolution will force businesses to take a hard look at how they are currently doing sales, marketing, product development, services, and support. In many cases, long-standing processes will need to be reorganized and transformed. For example:
- Sales teams will need to shift some of their focus from inking a deal to proving business value to customers. Doing this early on will open up opportunities for additional sales. Teams will need to remain vigilant year-round, especially as renewals loom, and be prepared to show continuing value delivery to minimize churn.
- In a similar fashion, marketing groups will need to reorient their campaigns around longer-term relationships that require constant nurturing to avoid defections. So marketing becomes less about nurturing leads and more about nurturing relationships. And companies will need to market the advantages of “maturing” with their solutions.
- Professional services and product development teams will see dramatic changes as well, with a new emphasis on collaboration with customers and business results.
- Operations and support teams will need to be more proactive than ever before, constantly monitoring key performance data and using predictive analytics and possibly embedded sensors to ensure that the solution is meeting expectations.
Is your business ready to take on the Customer First Revolution? To thrive in the Subscription Economy? In the next chapter, we’ll share with you three key capabilities that we believe are essential to succeeding in the new customer-centric, outcomes-focused, subscription-powered world. These include new skills and processes for listening to your customers to uncover what matters to them; engaging them creatively and authentically to build credibility and loyalty; and finally ensuring that the outcomes you promise are fulfilled—perhaps the most critical but also the most difficult skill to master. Across each of these areas, we will also stress the importance of measuring to accurately define your customer’s challenges and the value you’re delivering.