Adaption of  Consumer Behavior Changes

In 2015, Tien Tzuo argued in Fortune that traditional business education focuses too narrowly on creating and selling hit products, overlooking shifts in consumer behavior. He highlighted the rise of subscription models, emphasizing "access" and "service" over ownership. Companies like Spotify, Uber, and Netflix illustrate this trend by offering access to music, transport, and videos through subscriptions rather than selling physical products. This approach reflects a shift towards meeting customer needs more directly, enhancing service quality, and adapting to changing market demands. For businesses, encouraging subscription models isn't just a competitive advantage but a necessity for survival in an evolving market landscape, where adaptability is key to long-term success.

Take General Electric: it was ranked fourth in 1955 and thirteenth in 2017. Once known for making light bulbs and fixtures, now most of its revenue comes from digital subscription services like data services. IBM shows a similar transformation. It moved from sixty-first in 1955 to thirty-second in 2017 by shifting from selling commercial scales and measuring tools to providing IT and business subscription services. The other 88 percent of companies didn't make it because they couldn't keep up with the changes. They weren't adaptable enough.

The Rise of Subscription Services

Companies like Netflix, Spotify, and Amazon are everywhere today, making it hard to imagine life without them. Chances are, you have an account with at least one. So, how did they become so influential? Subscription access to music and video has surged over the past few years. The Internet and file-sharing sites like Napster started this trend around the turn of the millennium. It was a scary time for big film studios and record labels. Afraid of losing their footing, they launched legal attacks to shut down their new competitors. But they missed the huge potential of this new market. Start-ups quickly saw the opportunity. They figured that entering this market could allow them to compete with, and even dominate, established companies.

It was a smart move. Netflix began streaming films in 2007. In just a decade, it grew to 100 million subscribers! Today, about two-thirds of Americans subscribe to video streaming services. Spotify went from zero to 500 million subscribers in under nine years and now makes up about 20 percent of global music industry revenue. Big companies also didn’t see that streaming services would boost retail sales of obscure music, ending a 15-year decline. Subscription services have also changed how people shop, thanks to e-commerce – another fast-growing market. Its annual growth is about 15 percent, and e-commerce now makes up 13 percent of total retail sales.

E-commerce Growth and Data-Driven Personalization

Online commerce is multiplying, unlike physical stores which saw only three percent annual growth and the closure of 7,000 US stores in 2017. Amazon leads the way with over 90 million US Prime members, almost half of all American households, generating $9 billion annually in subscription fees and $117 billion in sales. What drives this success is the advantage companies like Amazon have in data retention. By knowing what their customers buy, they can predict other products they might like. This allows them to personalize shopping experiences and make them more individual-focused.

Travel and News with Subscription Models

Industries like travel and news, built by executives who traveled with newspapers in hand, are now being transformed by subscription models. Starting with transport, which has already seen significant changes, ride-sharing companies like "Uber" and "Lyft" are prime examples. Their rapid growth now serves over 60 million riders, reducing the need for many Americans to own a car. The number of Americans aged 20–24 with a driver’s license dropped from 92% in 1983 to 77% in 2014! For those who prefer driving, high-end carmakers like "Porsche" offer subscription services that provide access to a range of cars for around $2,000 a month. 

In aviation, "Surf Air" offers a subscription model where members can take unlimited flights on private jets for a monthly fee. This service saves time at airports and provides more flexibility. From the company’s perspective, knowing their monthly revenue in advance allows for smarter scheduling, unlike most airlines.

The Resilience of Newspapers in the Digital Age

Despite the digital revolution's impact, traditional newspapers remain resilient. A recent study reveals that 169 million Americans, nearly 70% of adults, read newspapers monthly. Young adults are increasingly subscribing to online news services; from 4% in 2016, subscriptions among 20-24-year-olds rose to 18% in 2017. Newspapers thrive due to reader loyalty; unlike ad-driven platforms like BuzzFeed, they offer quality content over clickbait. Newspapers pioneered the subscription model, favored for reliable information. They adapt well online; for instance, the Financial Times boosted digital subscriptions six-fold by temporarily removing its paywall during the Brexit referendum while promoting subscription deals.

Adobe's Journey

Adobe's transition from selling physical software to a subscription-based online model in 2011 marked a significant shift to Software-as-a-Service (SaaS). While this move opened new digital markets, it encountered challenges. Initially, Adobe faced financial turbulence during what they termed a "fish" period, where costs increased and revenue dipped due to delayed subscription income. This led to a temporary drop in stock prices as the company adjusted to the new model. Despite these initial setbacks, Adobe's commitment paid off. By 2014, their Creative Cloud service, formerly sold mainly as physical software, successfully transitioned to a subscription-based platform. This shift enabled Adobe to better respond to market demands and thrive in the digital age.

Looking ahead, similar transformations are anticipated in manufacturing, driven by the Internet of Things (IoT). Manufacturers worldwide are increasingly integrating sensors and connectivity into their products, creating smart devices capable of real-time monitoring and updates. This technological evolution, expected to encompass billions of products by 2020, has the potential to revolutionize customer service through subscription-based enhancements.

Innovation Change

In traditional business models, innovation follows a straightforward path from idea to market release. Product teams work together to create and launch products, which then succeed or fail based on market response. Once a product is out, it's typically considered finished. However, subscription-based models flip this approach upside down. Here, innovation is a continuous process of growth and adjustment. Companies no longer see products as ever "finished." Instead, they constantly evolve them based on customer feedback and data. This agile approach, coined in 2001 by software developers, emphasizes collaboration with customers, functional software, and flexibility in responding to change. Products like Google’s Gmail, which kept its "beta" label for five years, exemplify this constant improvement based on user needs.

Even musician Kanye West applied this concept to music with his album "The Life of Pablo," continuously refining it after its initial release based on fan feedback. This model, akin to software-as-a-service (SaaS), shows how products can adapt and improve indefinitely in response to customer demands.

Marketing in Subscription-Based Models

In subscription-based models, marketing differs significantly from traditional approaches centered on the "four Ps" (Product, Price, Promotion, Place) and push-pull strategies. While traditional marketing focuses on creating desirable products, competitive pricing, effective advertising, and strategic distribution, subscription models adopt these principles. In these models, 

• "Place" shifts focus from physical retail to prioritizing customer service and feedback integration. 
• “Promotion” emphasizes storytelling over direct advertising, with companies like Zuora highlighting the transformative benefits of their products. 
• “Pricing” strategies also evolve, moving away from cost-driven profitability to tiered services that offer increased value with higher subscriptions, as seen with Dropbox and Spotify's premium offerings.

Strategies for Long-Term Customer Relationships

Sales teams are often criticized for focusing more on selling products than on customer satisfaction. This can cause issues later when customers face problems with their purchases and have no support. In contrast, subscription-based businesses prioritize building stable relationships with subscribers. They emphasize continual improvement, reassuring customers that their service will always get better. 

Zuora has identified smart sales strategies to maintain these relationships. They focus on acquiring initial customers, reducing subscription cancellations, increasing sales with upgraded services, and expanding internationally.

• Acquiring Initial Customers: Early customers set the stage for your business's reputation and future growth. 
• Reducing Churn Rate: This measures how many subscribers you lose. To keep it low, attract the right customers rather than trapping people in unnecessary contracts.
• Upselling and Cross-Selling: Upselling means offering more expensive services, while cross-selling suggests better solutions for existing customer needs.
• Going International: Expanding into new markets is crucial in today's global economy. Delaying could mean losing potential subscribers to competitors.

A successful company doesn't tackle all these strategies at once but focuses on a few to sustain growth.

Financial Reporting for Subscription Companies

In Zuora's early days, annual growth forecasts faced skepticism due to traditional bookkeeping methods. These methods focused on balancing credits and debits, fail to capture forward-looking revenues crucial for subscription-based businesses like Zuora. The double-entry bookkeeping system, aimed at balanced accounts, inadequately represents subscription services. It can inaccurately portray spending as exceeding income, masking a company's true financial health. Zuora addressed this with a new focus on Annual Recurring Revenue (ARR). Starting with gross ARR (annual subscription revenue), they subtract churn and recurring costs like administrative fees to calculate recurring profit. This approach distinguishes itself by treating sales and marketing costs as investments that enhance future revenues through expanded ARR, thus improving the company's financial outlook.

IT Departments in Modern Businesses

Many businesses traditionally viewed their IT departments as essential engines, ensuring smooth operations and efficiency. However, as technology advances, these old systems no longer suffice. Initially, IT departments coped by integrating various external cloud-based apps for tasks like marketing and management. Yet, these solutions often focus on counting production units rather than accommodating diverse subscriber needs, leading to complex and messy workarounds.

Managing subscriber experiences, for instance, becomes challenging, requiring extensive recoding across multiple systems. Additionally, extracting comprehensive business insights is hindered by incompatible data sources. In contrast, subscription-based models demand agile systems capable of handling continuous cycles of renewals, upgrades, and customer needs like international roaming services. This shift requires IT to focus beyond mere product sales and adapt to diverse subscriber behaviors promptly and efficiently.

Transform Your Business with PADRE and PPM

Wondering how to turn your business into a customer-focused subscription service? Zuora offers valuable advice with its PADRE system. PADRE helps visualize your business with a customer-first approach, focusing on five key steps:

1. “Pipeline”: First, create awareness and generate demand through marketing.
2. “Acquire”: Guide customers through subscribing by understanding their needs and facilitating smooth transactions.
3. “Deploy”: Quickly and efficiently set up customers with your service to prevent them from losing interest.
4. “Run”: Focus on daily operations and adapt to how subscribers use your service.
5. “Expand”: Innovate to retain subscribers by offering new features and improvements, such as UberPool or enhanced device compatibility with services like Spotify on Sonos.

In addition to PADRE, consider three essential factors: People, Product, and Money (PPM). 

• “People”: Hire top talent to keep customers satisfied.
• “Product”: Continuously improve your offerings to meet customer needs effectively.
• “Money”: Allocate resources wisely for efficient operations.

Successful implementation of PADRE requires teamwork across departments, enhancing coordination and problem-solving. For instance, Zuora addressed deployment delays by adjusting expectations, streamlining processes, and gathering customer feedback. Implementing PADRE and PPM ensures your business thrives by focusing on customer satisfaction and efficient operations.