Tien Tzuo is the Founder and CEO of Zuora, the subscription management platform. He’s also the author of Subscribed: Why the Subscription Model Will Be Your Company’s Future–and What to Do About It.
The book gives examples of companies in different industries that shifted to the subscription business model, and what companies need to consider when making the shift.
Top 5 Takeaways:
- Consumer tastes are shifting to outcomes over ownership. For instance, people want transportation. But they don’t care about owning a car if they have ready access to a ride via Uber or Lyft.
- Successful subscription businesses sell relationships instead of transactions. Good relationships are beneficial because they are long-term, cheaper than finding new business, and provide stable, recurring revenue.
- Subscriptions generate recurring revenue. In other words, if customers are satisfied and don’t churn, subscription businesses start every year with revenue already locked in instead of starting at zero. This recurring revenue baseline makes planning easier and valuations higher.
- Product companies can be subscription companies. It is easy to see how subscriptions work for perishable products (e.g., groceries). But non-perishable products can generate subscriptions when a service is wrapped around them. For example:
- Husqvarna makes lawn maintenance products such as mowers and trimmers. They provide a subscription service in Sweden where subscribers get access to equipment which is stored, charged, and maintained by Husqvarna.
- Caterpillar makes construction equipment and is able to monitor equipment performance. They offer a subscription analytics platform that uses performance data to detect when maintenance is needed, preventing large-scale breakdowns.
- Income Statement expenses can be thought of as Recurring Costs (COGS, G&A, R&D) and Growth Costs (Sales and Marketing). A larger recurring profit margin results in more money to spend on growth. Trading today’s profits for revenue growth can be worth it since the revenue will recur over several years. After scaling, profits can be captured simply by reducing Sales and Marketing spend.
Bonus Takeaway: The Fish Model, a visual depiction of the transition to the subscription model.