A major change is afoot in the way people are spending; they are moving away from one-time buying, toward subscribing to services. For marketers, that shift opens the door to a new set of revenue opportunities, but it also means some fundamental changes in how they market.
What began with Netflix and Zipcar is now moving across billion-dollar industries, including communications, entertainment, publishing, and more. Industry research analyst firm Gartner predicts that by 2015 35% of Global 2000 companies will generate revenue via subscription-based services and revenue models.
But making the shift with your business requires more than slapping a "Subscribe" button where your "Buy Now!" button is, because it's a fundamental change in the way we as marketers approach entire markets and how we launch, price, and package products.
Marketers should pay attention to how the industry is changing around them, lest they get left behind. Here are five keys to better understanding how the Subscription Economy is changing the ways marketers need to think and behave.
1. Focus not on products but on people
A marketer's success was once determined by how many products a business shipped, or how much revenue was generated from a one-time sales transaction. Marketers were rewarded for gains in market share, however brief, even at the cost of ever-thinning margins. But with subscription services, such metrics are obsolete.
Instead of focusing on products, units shipped, and annual profits, marketers in the subscription economy should care about one thing: how many customers they reach and retain.
Customers are the lifeblood of a subscription business, and retaining their loyalty is much more important for success than a single, large purchase. The goal of the Subscription Economy is to shift beyond the 20th century discrete, fleeting transaction-based relationship to an ongoing servicing of a community of loyal customers.
Consider Nike. The retailer is arguably the leader at athletic brand image and experience worldwide—a powerful intangible. Recently, Nike has been using services like Nike+ and Nike FuelBand to build tight, recurring relationships with its customers. Nike's vice-president of digital sport, Stefan Olander, explained the shift this way: "Nike used to be a product company, but with Nike+ and the FuelBand, it's becoming more of a service company."
In essence, Nike is taking brand loyalty one step further. The traditional marketing model depends on the brand experience to deliver sales even in the face of retailer recommendations, competitive positioning and promotions, and fickle point-of-sale decisions. With Nike+ and FuelBand, brand loyalty is built via a direct relationship with the customer that leads to continued sales over time.
2. Just as services need to be flexible, so must marketing
Gen Y consumers started a trend that's expanding. They asked a simple economic question: Why pay big bucks for something just to get stuck with one model, or one style, when you can pay a low monthly fee and get access to the whole collection?
Some have called that the emergence of the "Sharing Economy," but the focus on services goes beyond simply sharing products to completely rethinking how we approach everything from telecommunications to retail and even healthcare. A one-size-fits-all approach to customers no longer exists, so marketers need to understand how businesses can target diverse, demanding, and constantly changing customers.
Consider BMW vs. Zipcar. A majority of BMW's sales comes from its leasing business, which is run by the marketing department. A BMW lease already operates much like a service. Customers pay a one-time set-up fee and then a monthly fee over the life of the contract. Oil changes and maintenance are included in that price.
But as a service, BMW falls short of delivering the flexibility of Zipcar's pay-as-you-drive subscription membership. With Zipcar, you might drive a Toyota Matrix one day and a Mazda the next. If I'm a BMW customer, why can't I grab a 3 Series for a few weeks, and then switch to an X5? And Zipcar's fees even include the gas!
Zipcar's attractive service recently compelled BMW, Hertz, Ford, and GM to establish their own relationships with car-sharing services. They understand that this is more than a business model distinction; it's a fundamental question of pricing and packaging.
As marketers move to the Subscription Economy, they have to completely rethink what they sell—in many cases, with a host of other services—and how they sell it. Most important, they need to be able to modify what they offer and how they price it regularly because change will be constant. If you can't shuck and jive in the Subscription Economy, you will get run over.
3. Go beyond B2B vs. B2C
As any good MBA would tell you, the name of the game in business is focus. You choose a track—sell to businesses or consumers—and build your world around that choice. But online you have the flexibility—and, more important, the customer demand—to serve so many more customers. Focus is still critical, but so is delivery.
For example, customers in one market may love your product, but if you can't deliver it how they want, via the devices they want, and for the prices they want, focus is the least of your problems. In the Subscription Economy, marketers need to understand that the old barriers between consumer and enterprise have fallen by the wayside. Companies that can speak to both audiences will be the ones that succeed and survive.
Consider online storage and collaboration company Box: It started by selling direct to consumers and people inside companies with a freemium model. Later, the company added a premium subscription version to provide those users more services.
By adopting a "B2Any" mentality, Box rapidly grew that initial base while quietly expanding into enterprise-size deals. Just recently, Box announced a deployment to 40,000 employees at Procter & Gamble. How did it get there? By satisfying individual fans who sung Box's praises widely, and by building the company completely around its customers.
That's not B2B or B2C but B2Any. Marketers should be prepared to talk to enterprise, consumers, and both audiences—often with the same campaign.
4. Success is built on owning the customer, not the sale
You might be thinking, "This is great! I've almost got my board presentation done, and I am going to rock everyone's world with this!" But hold on and ask yourself a fundamental question: Who, ultimately, owns your customers?
That's a critical question. Because if you don't own them, you can't win in the Subscription Economy.
Consider the videogame industry. Game titles are the sexy end of the business. But the platforms and console manufacturers are the ones that own the customers, not the game developers. Sony, Microsoft, and Nintendo understand who their customers are, how they use their products, what their preferences are, and other important information. A game developer can determine how successful a title was only by the number of units sold. Contrast that with Zynga, which owns the customers and understands them, down to the virtual pigpen and baked goods.
Some game developers have realized this shift and are already moving toward subscription models by offering unique features, weapons, and upgrades. They want to work around the platforms and go directly to the players. The future of those developers may depend on this shift.
The challenge for all marketers is to lead customers to their own "platform." What tools, offerings, and methods can you use to compel customers to engage with you directly rather than via Best Buy or Amazon? In general, the key is to provide some kind of value that customers couldn't get elsewhere. Find that key, and you are on your way.
5. Sometimes free is better than nothing
Though it's counterintuitive, your best strategy might sometimes be to give an offering away. Especially when you're starting anew, "free" is one way to build a loyal base of subscription customers. And that base can tell you a lot about what customers want, how to best deliver it, and, ultimately, what they will and won't pay for.
Of course, marketers (and chief financial officers) may have this fear: "But if I'm giving them the milk for free...." Let's be clear: "Free" is not a strategy. No one is going to win a price war based on "free." (In fact, the winners in the Subscription Economy won't have to resort to price wars.) And the growth of the Subscription Economy has demonstrated that businesses and consumers are willing to pay for something if they see a compelling value in "upgrading."
The marketers who will succeed in the Subscription Economy are those who understand the customer better, deliver the services they want via the devices they want, and deliver at the right price. Success requires putting the customer at the center of your company's business model by delivering valuable services today (and more tomorrow) that people will be loyal to and will pay for. And success will require providing customers a portfolio of pricing plans, tailored to the unique needs of different customer segments. And those needs might include a free trial.
Consider how well the free trial worked for Pandora, the online music service. Pandora starts off users with a free, ad-supported model and then transitions them to becoming subscribers over time. And that's just the start. Over time, Pandora can launch a whole series of new services and premium offerings to entice customers to subscribe or spend more on their subscriptions.
For example, Ford recently announced Pandora availability via its Ford Sync system. That's a great start. But if I'm a Toyota owner who listens to Pandora for free, I would absolutely pay for the premium service if I could get Pandora in my Toyota. Looking at opportunities like that creates a whole new competitive playing field where Pandora, or the likes of Rdio, are directly taking on Sirius.
* * *
The Subscription Economy is here. Once marketers acknowledge that, the next question is "What are you going to do about it?"
In the last 30 years, marketers have spent massive amounts of resources building up customer loyalty... only to have the shift to the Internet, mobile, and social media change the playing field. Marketers have recognized that these are not just simple technology shifts. The Internet, mobile, and social media have opened up an entirely new way for marketers to engage with customers— an ongoing revenue-based relationship.
This shift is far more complex than taking a 20th century Manufacturing Economy model and moving it online. The Subscription Economy creates a fundamental change in the customer relationship, and for the better.