Amazon’s children’s book subscription service that Prime members can subscribe to launched in August 2018 — and book publishers are all saying, “Haven’t we been through enough?” We’re on the verge of a major macroeconomic shift, where people are shunning ownership of things for access to services.
We call this The End of Ownership. You can subscribe to services to read books, listen to music, drive a car. You can get your clothes or dog toys or razor blades delivered monthly. And yes — Amazon is very, very good at getting these services into the hands of its millions of Prime members. It is consistently buying up more businesses to deliver even greater value to its subscribers, and it could be gunning for your business, too.
1. Getting Pricing ‘Just Right’
Giving subscribers too many options is overwhelming. Giving them too few options is unattractive to customers who demand choices and value. But there’s a just right sweet spot based on understanding how your customer values your offering that leads them over time to sign up for more. A case in point lies in how you charge subscribers for usage with a pay-as-you-go component to your billing plan: without usage billing, subscribers may feel that a one-size-fits-all plan is charging them for more product than they use. But if you charge primarily based on usage, subscribers feel like you're looking over their shoulder and charging them for everything they do.
Our research shows that churn is lower and companies grow faster when there is a usage component to pricing: these companies experience 6% lower churn and 8% faster annual growth. But faster growth happens when the usage component is less than 50% of the bill: an additional 4% annual growth compared to companies where usage is the main mode of billing.
A great example of this is Ford’s new subscription service Canvas. For most customers, most of the fee is a simple recurring fee based on your car choice, but you also pick a mileage package and pay by the actual miles driven. On a typical month, a customer is paying mostly for the service, but they still won’t feel like they are paying for mileage they don’t use.
2. Goldilocks’ Return
Allowing customers to opt into and out of accounts — or let’s say to exit when the bears come home but come back later when they’re gone — leads to better revenue and lower churn. Those companies where every subscriber makes changes to accounts grow at 3X the rate (28% faster) of companies whose subscribers don’t make changes to their subscription accounts. They also reduce churn by 25%. Customers know they can be choosy about which subscriptions they have, so those that offer flexibility of opting in and out will set themselves up for the long haul.
A well-known company that does this well is Dollar Shave Club: it lets customers pause accounts for up to six months or easily cancel and resubscribe without any penalties. Subscription services in other industries like SaaS and media should take a page from this playbook: it is common practice to “let sleeping dogs lie” when a subscriber seems to forget they have a service by continuing to pay when they never log in. But that ultimately ends badly and the subscriber may feel tricked or taken advantage of — a clean suspension would make them more likely to come back. California’s new subscription law is pushing more companies in this direction, which requires online cancellation options for subscriptions purchased online. Why not give those subscribers cancelling online an easy suspend option?
3. Be The Bear
Don’t just fall asleep while others are out there eating up your long-term viability. You alone know what your customers want, and you can personalize your offerings and deliver them exactly what they’ll want next on a recurring basis. We know that subscription companies have grown revenue 5X faster than U.S. retail sales over the past 6.5 years. That means that offering the right subscriptions is a way to gain an edge over competitors and grow your business, too.
Many, many companies from traditionally non-subscription industries are taking the plunge and discovering the power and predictability of recurring revenue! People think of Caterpillar Inc. as the quintessential industrial company, with machinery that is ubiquitous at construction sites around the world. But Caterpillar is also reinventing itself with a new game: they are analyzing data gathered from sensors on its fleet of half a million construction machines around the world. This allows Caterpillar to offer customers a subscription data service that provides guidance on how to improve the operations of their building and mining projects.
And Caterpillar isn’t alone. Car companies like Ford, BMW, Porsche and others have started offering subscriptions to help combat the trend towards ridesharing. Traditional makers of capital goods like Schneider Electric, an energy management and industrial automation company, have adopted subscription models as well.
The Ending Has Yet To Be Written
Despite the massive change we have already witnessed, it's still early days for the Subscription Economy! But even if early movers have taken the lead in your industry, it is still possible to learn from their experiences and missteps and ultimately catch up and even win the race. Just remember what Goldilocks can teach us...
Zuora's Chief Data Scientist Carl Gold is the creator of the Subscription Economy Index™ and the Data Science behind Subscriber Insights. Gold has a PhD from the California Institute of Technology and has first author publications in leading machine learning and neuroscience journals. Before coming to Zuora, he spent most of his post-academic career as a quantitative analyst on Wall Street. Now a data scientist, he uses a variety of modern tools and techniques to analyze data produced by online systems. Gold is currently writing a book about data science, you can find more information on www.fightchurnwithdata.com.