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Subscription Based Business Model Examples
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The century of subscription-based business has only recently gained traction with the success of companies such as Salesforce, Netflix, Adobe and Microsoft. Over the past five years, the subscription model business has grown more than 100% annually, from $ 57 million in 2011 to $ 2.6 billion in 2016 (Stanford GSB, McKinsey).
Due to the popularity of Software as a Service (SaaS) at first glance, subscription-based models are often closely associated with technology companies. However, this is no longer the case. From food boxes to shavings to heavy equipment to gym classes, over the past decade, businesses across various industries have begun to adopt the subscription model. This wave has identified what could be the next major shift since the Industrial Revolution: the subscription economy.
Subscription Automation: What It Is & How To Start
A subscription-based business model is an idea in which customers pay a series of fees at regular intervals for accessing a product or service. This model is designed to keep customers engaged for long-term relationships with the business. According to Tien Tzuo, CEO of Zuora, the question of which subscription business has shifted from “How to get a product to market?” Go to “How can I meet customers through the network they use?” Zuora is an enterprise software company that builds the technology infrastructure needed for a subscription-based business. Through its platform, businesses can manage quotes, orders and billing. Zuora was founded by Tien Tzuo, one of the first employees of Salesforce. His expertise in subscription modeling has made him a thoughtful leader on the subject. Zuora’s growth itself is a testament to how fast the subscription business is growing. The company has recorded a staggering revenue growth of around 25% CAGR for the last 5 years. Zuora’s customer base covers the entire world, with high-profile companies in various fields.
Tzuo’s philosophy is that the customer core (not the product) is at the heart of the subscription-based business model. This shift has evolved the traditional book model from a linear operating network to a more dynamic life cycle. (See Exhibit 1).
Instead of creating a popular product that will be sold once, the idea is to turn this one-time purchase into an ongoing resale by offering new content with more customization. The result? Successful companies are often successful. On the other hand, businesses enjoy recurring cash flows that allow for greater visibility into future revenue flows. This is the most important. As companies gain greater visibility, they will be able to better manage their resources into key areas such as research and development to drive growth and innovation.
. How to provide the ultimate experience for customers who use your product or service to make them more willing to spend?
Revenue Models: The Advanced Guide To Revenue Modeling
If you follow closely, Apple is at the center of a restructuring of its business model. Since 2018, when iPhone revenue growth slowed, Apple has been vocal in shifting its focus. The company is trying to accelerate revenue growth by using different machines to service its business. In 2016, Goldman Sachs analyst Simona Jankowski proposed an Apple subscription package for its hardware and services. Last week, Apple announced the Apple One, where users can enjoy subscriptions including Apple music, Apple News, Apple TV +, Apple Arcade, iCloud and more. By adopting this model, it is clear that Apple is focused on monetizing Apple ID users. As suggested by Jankowski, it may not be long before Apple releases a subscription service for its hardware.
According to Zuora Subscription Economics Index, subscription-based revenue has increased by 18.1% CAGR in the last seven years (2012-2019). To put this into perspective, it is five times faster than the S&P 500 (3.6%) and US retail sales (3.7%). Data is compiled quarterly based on billions of dollars in revenue and financial transactions from various industry standards. Exhibit 2).
It is interesting to note that the subscription business is evolving into an incredible industry. It is used by various businesses in unexpected ways. For example, there are currently subscription services for guitars, pesticides, aircraft engines, tractors and even elevators. Some of the fastest growing sectors include: health care, education, insurance, utilities, real estate and pet care.
In this large project, adopting a subscription-based model can also have a positive impact on a more sustainable world as it increases the use of materials and resources. It can eliminate the idea of ”buy and waste” very well.
The 5 Business Model Patterns You Should Follow In 2021 — Business Model Innovation Lab
Consumer buying behavior is a gold mine that every business tries to dig. Understanding your customers is essential for the success of any business, but even more so for a subscription-based company. The growth of the subscription business has been accompanied by a change in customer attitudes: a shift from ownership to access. According to a recent Natixis Thematic Asset Management survey, 68% of adults no longer value ownership. Today, users search
. More than 70% of respondents agree that subscribing to the service frees them from the burden of ownership. Instead of owning a car (and the burden of maintaining it), customers want to experience the thrill of riding.
From a B2B customer point of view, subscribing to a paid service when you go offers its unique financial benefits. Instead of booking the outflow as a capital expenditure, the company should record it as a recurring operating expense. One large capital outlay will disrupt the company’s short-term free cash flow. On the other hand, small recurring volumes should have a much smaller impact, thus improving the company’s flexibility in allocating resources.
The convenience of smartphones and the evolution of the digital ecosystem through the Internet of Things have also played a key role in supporting this subscription trend. In her latest internet trends report, Mary Meeker points out that digital subscriptions are exploding due to major improvements in the digital user experience, especially for mobile phones.
Subscription Business Model Pros & Cons, Plus Examples
We believe that another special force that powers the growth of the subscription business is the rise of big data analytics. Importantly, the direct model to the subscription business users is private for many users who purchase data. In this day and age, data is a valuable commodity that enables companies to improve their product / service offerings to meet the needs of their customers. This privileged double-edged sword has created greater control over regulators and users over data privacy.
Switching to a subscription business model is not as simple as going digital and issuing your monthly customer invoices. As companies move from receiving large prepayments from their customers to monthly payments, their entire business operations change. In their book “Technology as a Service Playbook: How to Grow a Profitable Subscription Business”, the Technology and Services Industry Association (TSIA) developed the concept of change as a “fish model” (see Exhibit 4). . Companies that want to switch to this model will have to swallow the fish and have a huge impact on their revenue. This change eventually presents the biggest challenge to managing a company.
In 2011, Adobe faced the same problem when the company made the decision to change their business license from a permanent license to a cloud-based subscription service. At the time, Adobe was in the throes of the aftermath of the Great Recession of 2008 on the successive periods of flat income growth. Although there are many marketing opportunities, Adobe is unable to take advantage of market demand because their business model prevents them from doing so. They are only providing software updates every 18 or 24 months as their customer innovation needs change rapidly. Companies can not make their existing customers spend more on their products, despite strong product ratings. The only option they have to accelerate revenue growth is through price increases. They knew immediately that this was not a sustainable strategy.
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Recurring Pricing Models
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