Don't Buy, Subscribe: Are subscriptions the future of the economy?

by Tien Tzuo

When we founded salesforce.com almost a decade ago, we thought we were only inventing a new technology model for delivering software. “Software shouldn’t be trapped on a CD,” we said. “Software should live in the Internet, where anyone can easily consume it.” We didn’t realize that we would actually create a whole new business model for our industry as well: subscription services– the idea that you shouldn’t buy software, you should subscribe to it as a service. 

Over the years, it's been interesting to see why consumers have preferred subscribing to software verses buying software:

• Lower upfront costs.  Why pay millions up front when you can pay for what you want as you go.  When we’re all required to do more with less, software-as-a-service is the golden ticket. With no software or hardware to buy, install, maintain, or upgrade, SaaS requires minimal upfront cash and the path to success is exceptionally short.

• Long term savings. About two thirds of IT time and budgets is spent on maintaining infrastructure and dealing with updates. And because of all these hidden costs, the TCO of an on-premise software solution is 2.5 times as high as that of a SaaS solution. With SaaS, IT gets that time and money back, freeing them to focus on the “real” projects.

• Low risk and freedom. At a time when multi-million dollar software installations gathered dust, the pay-as-you-go terms for SaaS attracted quite a following. The flexibility was unprecedented: for the cost of a printer, companies could start immediately, add more users whenever they wanted, and cancel at anytime.

• Better alignment between vendor and customer. SaaS providers are highly motivated to make subscribers successful. How so? With the threat of a service cancellation looming each month, everyone from sales to product development will jump through hoops to ensure that subscribers continue with the service. Since subscribers aren’t locked in, any mistake–from a service outage to poor adoption– is cause for cancellation. That’s why SaaS providers are so focused on customer success. At salesforce.com, we even invented a special post to own customer success and adoption: the Chief Success Officer.

Recently, I’ve started to ponder an interesting question: what if we weren't alone in discovering the power of subscription services? What if the shift to subscriptions was not a trend limited to software, but one that is going on in many industries?

Take Netflix, for example. In 1999, Netflix pioneered the idea that subscribing to entertainment was much better than buying or renting a DVD from the store. Instead of buying a single DVD, Netflix subscribers choose from over 100,000 DVDs. And instead of driving back the store to avoid late fees, they get the freedom of no due dates. It’s no wonder Netflix is now the world’s largest entertainment subscription service.

And take ZipCar, the world’s largest car sharing service. “Zipsters” don’t pay for car maintenance, insurance, or gas, and they don’t even have to deal with parking. Instead, they subscribe to ZipCar so they can reserve a car whenever, and wherever they want. I was sold. Instead of buying a 2nd car that just sits around most of the time, my wife and I became ZipCar members, and I seem to find every excuse I can to take out the Tacoma pickup.

Recently, I came across yet another example: handbags, quite the opposite of software. Bag, Borrow, or Steal loans subscribers their dream luxury handbag, for as long as they want—a special occasion, or several months. Then subscribers can change their look, exchanging the handbag for the latest style. Instead of spending hundreds, or even thousands of dollars on one purse, Bag, Borrow, or Steal subscribers can always carry the latest trend.

Software, DVDs, cars, handbags. What if subscriptions make sense for anything? 

What if subscriptions are not just the future of software, but the future of our entire economy?

Comments

[Vivek]

While I agree that Subscription based systems are coming to the fore and will continue to see high growth, I would disagree that our economy would completely transform. One way to analyze this problem is to take Geoffrey Moore's concept that corporations should outsource everything that is not core to their business. The SaaS movement in some ways validates that concept. If we extend this to people, they will outsource (and subscribe) things that are not core to their lives. Leasing a car has been around for many years but most people still prefer owning one, albeit the need to visit the dealership a few times a year. People prefer owning a house and their clothes. On the other hand music and movies are great candidates to outsource.

By the same token, Zuora is a great idea because it solves a key problem that is not core to most subscription businesses and does so in a hosted fashion.

[tom mclaughlin]

Subscriptions don't make sense for everything, but they will gain greater acceptance, I think, for a variety of industries whose products' chief benefits share the following attributes:

1) the core benefits of the product are consumed or enjoyed within a very short lifecycle; demand for the product is a continuous stream.

This applies to, among other things, enterprise-critical information; breaking news; "seeking alpha"-type investment-related research; entertainment and fashion products; car rentals for events such as weddings and reunions, food and drink; home heating; phone usage.

2) the need fulfilled by the product has very high urgency over repeated intervals, alternating with little or no urgency for protracted periods; demand is subject to severe spikes.

This is also true of certain kinds of business information, especially regarding risk management, quarterly financial reporting, disaster recovery. It also applies to health care, tax advisory and financial planning services, real estate advisory and other professional services. Finally it also applies to consumption of things like sweets, gaming, other (shall we say) addictive pleasures.

3) the product has built into it the seeds of its own obsolescence and requires frequent replacement.

This applies increasingly to consumer electronics products, also knowledge industries including encyclopedic or other professional knowledge sources as well as educational programs, especially in engineering and biological or medical science.

4) the product requires a high degree of personalization, either in configuration, timing and place of delivery, or in pricing, to deliver the expected benefit.

Applies to all of the above. This is the most crucial shift of all. Marketing will increasingly be focused less on selling hard-coded or otherwise immutable features/functions and more on selling convenience in pricing and delivery-- when the customer wants it, how the customer wants it. And helping the customer get rid of it when he or she's done consuming it.

Specific examples of new subscription models:

1) media: there will be 1,000 different pricing options for readers of, say, nytimes.com. Some readers will pay $1/week and get only Tom Friedman, Science, Money and World News. Others will pay $2/week and get Arts and Leisure, NYC Metro Real Estate, Urban Gay Lifestyles. Others will want only Travel and Food & Wine, and still others will pay only for Book Reviews.

Additionally, online social networks will increasingly find ways to tap into expertise of amateur commenters and bloggers, and package their wisdom and deliver it to readers via subscription models-- not via RSS but on-demand, a la Yahoo Answers or Gerson Lehrman's Expert Search offering.

2) food: increasing consumer knowledge about health risks of processed foods OTOH and the hype and illusory benefits of pseudo-health food marketed by the likes of Whole Foods will open up opportunities for small local organic farmers and meat purveyors to educate custoemrs via blogs and wikis and then charge subscriptions for access to seasonal fresh real food, on-demand. Webvan, we hardly knew ye.

3) medical services: the unsustainably hgih rate of increase in health care costs, combined with an explosion of medical knowledge and accessibility of that knowledge to patients via the internet, will open up opportunities to disaggregate health insurance plans into smaller bundles of services offered on a subscription model, more similar to vision or dental plans. Families will subscribe to a Pediatrics Service, for example, that would include not just pediatricians' consultations but also access to a wide variety of specialists and even non-medical caregivers and experts.

4) related to #3, delivery of government services will also begin shifting more toward an on-demand subscription model in which citizens will pay lower taxes but be charged for access to bundles of services that make sense for their unique needs and position in the lifecycle. For example, families with newborns will receive a very large tax break but be asked to subscribe to a set of services offered by the government or partners of the government related to childcare, counseling, immunizations, educational and cultural offerings including universal pre-K.

That's about all I can think of now. The subscription model is indeed pivotal to these changes, and they will arrive sooner than we expect.

tpmclaughlin at g mail

[tote bags]

The fashion is growing so rapidly that not even knowing that whether its applicable for us or for others.