By Rob Preston
Time was, a company produced a good or service, customers bought it directly from the company or from one of its retail/channel partners, and the parties to that transaction pretty much called it a day—unless a defect or other problem was discovered. Absent a service contract, the transaction was a one-off event for the buyer and seller.
Today, a wide range of startups and established companies are serving consumers and businesses under a different model, albeit one that’s as old as the magazine industry: subscriptions. They’re selling everything from shavers, music, tutorials, home-monitoring systems, and luxury cars to aircraft engine maintenance, healthcare advice, and business software as subscription services—charging fixed or usage-based prices, usually by the month.
Estimates of the size of the global subscription services market vary, with some industry watchers putting it at close to US$1 trillion and growing by double-digit percentages every year, as cloud infrastructure and software tear down the barriers to market entry. Billions of dollars of venture capital funding have poured into subscription-based startups during the past several years.
One ambitious subscription venture is Carbon, the subject of the cover story for the summer issue of Profit. Founded in 2014, the company 3D-prints custom parts—even complete products—for the likes of Ford, Johnson & Johnson, and Adidas under its “hardware-as-a-service” model.
Another innovator is Ring, a Shark Tank reject founded in 2011 that makes a video doorbell/home security system that connects to customers’ home Wi-Fi networks, sending real-time notifications to their smartphones or tablets when someone comes to the door. Customers onsite or off premises can view and speak to the person at the door via a high-definition video stream and two-way audio communications. The innovative system alerts customers when someone presses the button on the doorbell or when it detects motion. An optional subscription recording plan also lets customers review the video if they miss a caller or package deliverer—or someone with malicious intent.
Hybrid Model Will Prevail
Like Ring, most established companies have adopted a hybrid business model rather than going all-in on subscriptions. Companies such as General Electric, General Motors (see “Nice Ride” sidebar), and News Corp. predict that anywhere from 40 percent to more than 90 percent of their revenues could come via subscriptions within a decade. If just 5 percent of the world’s output were to be sold as subscription services, that would generate about US$3.75 trillion in annual revenue.
Every company is becoming a cloud company, and that creates massive opportunities.” –Jason Maynard, Senior Vice President of Strategy and Marketing, NetSuite Unit, Oracle
Unilever’s US$1 billion acquisition of Dollar Shave Club, founded in the cloud just six years ago, followed by rival Procter & Gamble’s launch of Gillette On Demand in May 2017, show that even the biggest, most successful consumer- product companies and brands are taking this trend seriously. Both of those services let subscribers choose one of a handful of shavers, for which they receive inexpensive replacement razor cartridges each month for a monthly fee. Convenience and low price are their main value propositions.
Or consider what GE Digital is doing with its cloud-based Predix software platform, which it and other developers are using to build applications that connect to a variety of GE and third-party assets, including aircraft engines, wind turbines, and railroad equipment. Predix applications collect machine-grade data and analyze it to help customers improve system performance and uptime, cut energy costs, boost output, and deliver a variety of other business “outcomes.” GE Digital, launched in September 2015, already generates more than US$6 billion in revenue from Predix and Predix-based services, whose subscription, pay-as-you-go pricing model lets customers easily access and scale services as their needs evolve.
“Every company is becoming a cloud company, and that creates massive opportunities,” notes Jason Maynard, senior vice president of strategy and marketing with Oracle’s NetSuite unit. NetSuite’s cloud ecommerce and financial applications help run a number of subscription-based customers, including Ring, Blue Apron, and Loot Crate. “No longer will product companies just sell products or service providers just sell services,” Maynard says. “Every business must offer its wares as a service. This requires new business models whereby customers can consume offerings via a subscription or by usage and potentially even pay for outcomes.”
What’s to Like About Subscriptions?
Vendors, as well as their Wall Street and venture capital investors, like the subscription model because it generates more regular and predictable revenue streams and more cross-sell and up-sell opportunities. It’s noteworthy that one of the main data points that moves Amazon.com’s stock price up or down after every quarterly financial report is the number of Prime subscriptions the company sold in that quarter (because that’s a measure of recurring revenue and customer loyalty)—not so much its total revenue or profit/loss numbers.
The subscription model is also forging stronger seller-buyer relationships. Because subscriptions, especially for high-value products, make it easier for customers to switch vendors, it becomes even more incumbent on those vendors to continuously earn their customers’ business through ongoing innovation and personalized service.
A prime example of a product line whose provision has become more high-touch now that it’s a subscription service is Oracle’s suite of cloud-based human resources applications: Oracle Human Capital Management Cloud (Oracle HCM Cloud). Its on-premises counterparts—HR applications that customers install in their own data centers and maintain themselves—are updated by Oracle about every two years. And even then, many customers pass on the updates, given the inherent complexity of such software deployments.
In contrast, Oracle HCM Cloud applications are updated about twice a year and delivered to customers automatically over the internet with minimal fuss. What’s more, about 80 percent of the new features in the last release of the cloud suite came via direct feedback from Oracle’s subscriber customers, much of it on the Oracle Service Cloud Idea Lab online community, says Chris Leone, the senior vice president at Oracle who leads development of those apps. To date, more than three-fourths of the nearly 8,000 Oracle HCM Cloud customers have signed up for that community—about 33,000 individual users in all.
With cloud subscriptions, “customers are seeing the product evolve much faster than they ever imagined, and it’s evolving in the way that they’re asking it to evolve,” Leone told Oracle’s Chris Murphy last fall. “It’s kind of this closed loop now. We’re moving faster and listening more to our customers, and they’re seeing it.”
Consumers who grew up with Netflix and Spotify are particularly comfortable with the subscription model, drawn by convenience and their “desire to be surprised and treated like they are special.”
Likewise, Carbon, which streams about 1 million data points per day from each of its printers on their operation, performance, and output, augments that data with direct feedback from customers, who rate the quality of each print job via an Oracle Service Cloud interface. “We want to eliminate all downtime,” says Chris Hutton, director of business operations at Carbon.
Technology strategy is, of course, inseparable from the customer orientation that drives the subscription business, because the model often depends on a connection between digital and physical experiences. Consider “box” subscription retailer Trunk Club, whose stylists work with each customer to create an assortment of clothes that fit his or her individual style and preferences. Then the stylists share that virtual “trunk” via a mobile app. The clothes ship only after the member gives the OK.
The Trunk Club platform is built on a microservices architecture, where each element required to build a trunk preview—information on products, members, outfit options, and fulfillment—is its own service with its own snippets of data, which are then pulled together via an API that delivers the full picture to the customer through the company’s app. “As a product-first company and a technology company, we’re always iterating on what we can do better, making small changes, and learning from the experience to make it better for the customer,” says Brian Lee, engineering manager at Trunk Club, which was acquired by Nordstrom in 2014.
No industry has embraced the subscription model as aggressively as retail, where subscription services from giants such as Nordstrom, Amazon, Walmart, and Starbucks compete at some level with the aforementioned box services from a range of digital natives that specialize in the recurring delivery of different assortments of niche products. Among the many box players besides Trunk Club are Stitch Fix (men’s and women’s clothing), Kiwi Crate (kids’ items), Birchbox (cosmetics), Blue Apron (meals), Bean Box (coffee), and Loot Crate (gaming and other geek merchandise).
A recent study by clickstream data and analytics firm Hitwise estimates that the number of box retailers grew nearly 3,000 percent between January 2013 and January 2016, with visits to those sites reaching 21.4 million. The study maintains that consumers who grew up with Netflix and Spotify are particularly comfortable with the subscription model, drawn by convenience and their “desire to be surprised and treated like they’re special.”
“More important than price is the sense of discovery; subscription box shoppers love to try new things,” says the Hitwise report. “They’re also likely to serve as evangelists by recruiting others around them—often using social media—to try the new products they’ve discovered and love. And while being the first to a new trend might have been of critical importance to this audience when they were slightly younger, at this stage in their lives many are happy just staying ahead of the curve . . . without exerting much effort.”
Illustration by Wes Rowell
Rob Preston is editorial director in Oracle's Content Central organization, where he provides insights and analysis on a range of issues important to CIOs and other business technology executives. Rob was previously editor in chief of InformationWeek. You can follow Rob on Twitter at @robpreston.