One of the biggest changes in business is the move to subscription based services rather than selling one-off, lump sum products. This is affecting industries ranging from the motor industry to software.
Business Spectator has a good interview with Tien Zhou of Zuora on the subscription economy and how it’s changing the business world.
We’re pretty passionate in our belief that every company will be a subscription business in the next five, 10, 20 years. That’s certainly what we’re seeing with digital companies, whether they are technology firms (software, hardware), media and publishing firms, or telecom companies. The ideas of content and access are starting to blend together and we are seeing more and more commerce companies dip their feet as well. So we’re really see this as an across the board phenomenon.
Probably the industry most focused on the subscription model right now are newspapers – subscribers have always been an important revenue stream for the print media and the loss of their advertising rivers of gold means they are looking at ways to get more money from readers.
As Tien Zhou points out, businesses moving to subscription services is an across the board phenomenon.
Yesterday I mentioned the Google Maps connected treadmill, that is a subscription model where the treadmill seller gets money from the initial purchase, but also a revenue stream from the services attached to it.
The same business model applies to connected motor cars or the social media enabled jet engine. The aim is to replace lump sum purchases with lifetime subscriptions.
Getting customers onto lifetime subscriptions has been one of Microsoft’s aims for the past decade as the company realised that software users, particularly those using Microsoft Office, hung onto their CDs for years and increasingly decades.
Perversely it took Google and Apple to show Microsoft how to wean customers onto subscription services.
That Microsoft Office is a good example of the evolution of subscription software, or Software-as-a-Service (SaaS), isn’t an accident. The enterprise computing sector is currently the most profoundly affected as companies like Google and Salesforce threaten high cost incumbents.
A good example of the changing economics of software is the supermarket chain Woolworths moving onto Google Docs.
With 26,000 seats, the reseller can expect to make $260,000 a year in commissions based on Google’s standard terms of $10 per seat per year.
That total sum is less than the commission a salesperson would have earned for a similar sized IBM, Oracle or Microsoft installation.
A whole generation of IT salespeople who’ve grown fat and comfortable on their generous commissions now find their incomes being dramatically reduced.
Similar things are happening in industries like call centres with Zendesk, point of sale systems and event ticketing with Eventbrite – incumbents are finding their incomes steadily being eroded away by online services.
At the same time agricultural and mining equipment suppliers are introducing big data services for their customers where the information gathered by the sensors built into modern tractors and bulldozers are providing valuable intelligence about the crop and ore being gathered.
The subscription business model is nothing new, King Camp Gillette perfected the strategy with the safety razor at the beginning of the Twentieth Century. The razors were cheap but the blades were where the money was.
Microsoft and the rest of the software industry tried to introduce subscriptions in the late 1990s with Software as a Service, but failed because the internet wasn’t mature enough to support the model. Today it is.
Like many things in today’s economy, the subscription model is going to change a lot of markets. It’s a great opportunity for disruptive businesses.
Subscription envelope image courtesy of jaylopez through sxc.hu
Great post, Paul. Interested to know how much those IT sales guys are earning in a deal if it’s more than $260k!
Subscription Fatigue.
Paul, a great post as usual, however, having seen inside some of these vendors that are moving their customers to subscription sales(often called “cloud model”), their objectives is to create both “annuity revenue” streams and greater “customer lock-in”. The logic is that their business will be worth more in the longer term if the revenue streams are more predictable through long term subscriptions and that there is a high cost for their customers to churn off their services.
An example of this would be the accounting software package traditionally dominated by MYOB and Quicken who are now threatened by Xero and others. I have 15 years of MYOB data on my computer and can access all these records with older versions of the software. Originally, the software cost me $300 and I have paid for several updates. If I move to Xero, what happens to my “stuff” when I stop paying? Whilst this is a consistent theme batted to and fro by the incumbents and their challengers, the success of the subscription models can be counted in the number of subscribers, and now that I have worked with Xero and Sassu with my clients, I gotta say, MYOB’s greatest issue of sharing data is well overcome by the new players.
But my point is, what happens to my cost base as a small business everything I need to do business moves to subscription? Add it up, its not cheaper. In fact, I predict that this cynical move to make businesses pay for the software continuously (subscription) coupled with increasingly higher barriers to changing providers is going to create subscription fatigue.
Software companies are already some of the most profitable businesses in the world and moving to annuity billing models is an attempt to gouge even more money out of their customers. Basically this extreme profitability is an indicator that the price of the software is out of step with the cost base of delivering the software. This mismatch is where real the disruptive opportunity exists for new entrants to move in with offerings that are orders of magnitude less expensive than what incumbent installed and subscription based players currently charge. Subscription fatigue kicks in when the monthly charges for access to phones, hardware, accounting packages, productivity apps, call centres, printers, LinkedIn (as a HR business how expensive a professional LinkedIn subscription costs once you get beyond a few users), CRM software, quotation and proposal software, customer support software etc etc ads up to much more than their installed counterparts. Subscription fatigue is compounded when all your customer records are in the cloud (Salesforce.com or similar) and your provider goes out of business.
It may not happen for a while, but watch out for the signs.
I think you’re right Matt, much of the move by the traditional vendors – MYOB, Quicken and particularly Microsoft – is a cynical move to increase revenues.
The thing is it’s a two edged sword for the vendors as customers aren’t going to move to subscription services unless they are confident their data is portable and safe, which also makes it easier for them to leave.
What we do need to watch from a customer’s point of view is that we don’t end up paying a lot more for software as a result.
Interesting times.