The Subscription Economy

Posted: June 30, 2010 in CRM, Economics, Technology
Tags: , ,

There are multiple ideas about the shape of the future competing for primacy in the electronic village.  I am pushing on sustainability but another idea that I really like is called the subscription economy championed most vociferously by Tien Tzuo, CEO of Zuora.  Subscriptions fit well into Tzuo’s company plan since his company has a billing and payments system for subscription purchases.  But there’s more to it than a self-serving motto and I think the subscription idea feeds nicely into the idea of sustainability.

When we talk about the subscription economy it means that an increasing number of products and services are available today through subscription rather than outright purchase.  It’s easy to see through examples like car leasing and cell phone use.  When you lease a car you are actually subscribing to a certain use level for a time.  At the end of the lease you return the car and either get another lease or possibly purchase a car outright.

With a cell phone you buy a package that leaves you with ownership of the phone but a mandatory period of subscription to the service.  Go over your subscription rate and you pay more.  At the end of the agreement most carriers let you continue month to month, until you want or need another phone and the process starts again.

Car leases look just like a car purchase in that you get a monthly bill though that bill is lower than it would be if you had bought the car.  And we’ve been accustomed to buying phone service for over a century so there’s no drama in the cell bill except for the itemization, if you read it.

Finally as a third example, there’s SaaS computing and we all know how that works.  But what we don’t see in any of these cases is the significant back office processing that comes with a subscription economy.  With cars and cell phones it’s no big deal because even though these are subscriptions, they are so tightly controlled that the subscription functions just like a purchase.  That’s true in billing for a car lease and, except for overages on your cell bill, it holds there too.

SaaS is a different kettle of fish for several reasons.  First the usage costs are low and here’s the key — customers have broad latitude in changing their subscriptions which is very unlike the car and cell examples.  A hallmark of SaaS is that customers can change their configuration almost at will, which has direct impact on billing.  The overhead involved in billing can be substantial especially if a bill is incorrect because expensive human labor is needed to make corrections.

Unfortunately, the billing systems that work well for relatively static business processes that include purchases and even leases, work poorly in the subscription economy.  The economic challenge is that if the overhead involved in making billing correct exceeds the cost of the good sold  (or subscribed to) then you can’t have a thriving or even sustainable business.  That means the billing system is potentially an inhibitor of innovation.  If you ask yourself what’s preventing wide scale subscription for more products and services that we use every day, part of the answer is likely the cost of billing.

Take newspapers and periodicals for instance.  You might think of newspapers giving away their content on the Internet as silly and you might be right.  But content is one of those things whose demand is so variable that charging for it might cost more than the product itself.  In a way, when a paper gives you its content gratis, it is acknowledging that it would lose money selling it to you.

Until recently, giving content away on web sites was OK because a large portion of print media revenue comes not from subscriptions but from advertisers.  But advertisers have been deserting print so the issue of charging for content has taken on new urgency.

Of course content is just one example.  Other examples are waiting in the wings for a business model that enables them to become real and profitable.  Some of those examples can even be found in conventional areas like SaaS.  For instance, a SaaS company may be able to offer more permutations of its products to fit more market niches but because those niches may be rather thin and because the SaaS company may still be using a conventional billing system, the SaaS company cannot profitably exploit the niche.

Then there’s the green issue.  Take a company like Brighter Place the group started by Shai Agassi to build networks of charging stations for electric cars.  The idea is that you can subscribe to car battery services, which include battery charging or outright swaps the same way you subscribe to cell phone service.  That’s a major part of an emerging subscription economy.  So far entire countries including Israel and Denmark, the state of Hawaii and the city of San Francisco have enlisted in this new idea.  But the idea will need a very scalable billing system to make everything work.

Maybe that’s a bit complicated but the net of this discussion is that subscriptions can play a greater role in our economy if only we can get the business model right and that starts with back office overhead.  In case you are wondering why that’s important, consider this: as the cost of a product declines more people can afford it and the potential market size grows.  That was the beauty of SaaS when it debuted and it’s still true.  In fact, in a down economy, a price drop caused by subscriptions is equivalent to a big stimulus.

So, Zuora introduced Z-Commerce for the Cloud last week.  It’s a solution designed to address many of the issues that so far hinder broader acceptance of things delivered as subscriptions.  The product is delivered as a SaaS solution — no surprise there — and there is good reason in my mind to believe that the subscription economy is one of those things that will contribute greatly to more sustainable business processes.  And that’s something we’ll all need down the road.

So, what did you think?

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