Explaining the Subscription Economy [Video]
Highlight Video: Explaining the Subscription Economy: Why Your Company’s Future May Depend On It
Tien Tzuo was the featured speaker for the Executive’s Club of Chicago inaugural program of its 2018-2019 Signature Series. The topic, of course, was the subscription economy and Tien’s new book, Subscribed. As the leading consulting firm that has a practice dedicated to subscription and recurring revenue businesses, Navint sponsored the event.
You can read more about the event in our blog post, 3 Insights from Tien Tzuo’s Fireside Chat on the Subscription Economy.
Tien Tzuo: 00:09 You have this natural incentive in the subscription model to make your customers happy. You have no choice, and so it creates a healthier product it creates a healthier relationship. And um, and even when you know, when companies sort of violate that relationship, you can see the customer’s rebel and that’s where churn spikes up in the business model, gets a little shaky. So we do think it’s simply a much better business model, but you have to, you know, overcome that hump of a leap of faith.
John Pletz: 00:36 If you’re an existing business and you’ve got real customers, real profits, you really want to get that pricing model right. Is there anybody who’s done a great job of that who ported their business and figured out pricing?
Tien Tzuo: 00:49 Here’s what we say. Nobody gets pricing right. It’s, it’s a never ending thing. And if you want the extreme case of that, if you just look at the company, the industry that’s a pure subscription business is the telecom industry. And in these phone companies, I mean they’re constantly changing their price and it’s not just a price as the packages, right? So this month it’s unlimited. Next month it’s family plan. Next month is multi-device plan. Oh, we’re going to take the unlimited way because it’s not profitable, but we’re going to give you something else instead. Oh, you travel a lot, right? And so there’s a $10 a day pass when, when you’re overseas. And so they’re constantly innovating. They’re constantly. So this, this is the never ending game it gets is also a dynamic marketplace. You’re going to have competitors and alternatives to come in. You’re gonna want to reach into new customer segments that have a different profile.
Tien Tzuo: 01:35 And so the key to this business model is that agility and iteration, which goes against the grain, a lot of a lot of what were built. But the most interesting thing and kind of what brings us hear to the Midwest is, is about three, four years ago, we started seeing the manufacturing sector and we started seeing companies like Ford and General Motors and Caterpillar, that Briggs and Stratton example I gave. And at first it was, well, what are they doing right? Is it all about subscribing to that product? Car a tractor, a thermostat, whatever it happens to be. And what we realized it wasn’t quite that it was that these products are all about becoming smart products, meaning they all have sensors are collecting data and they could communicate to the outside world about what’s going on. And there was just over three to five years in product life cycles that are one or two year product life cycles.
Tien Tzuo: 02:27 They just hit a point where so many of their products were sensor-ed up. A caterpillar, you know, they have 2 million assets in the field. When they started working with them, they said they have a quarter million in assets that have a tractor and excavator. But they’re up to like a million, so a million and half their assets in the field are smart assets now and so they can envision all these new services that they can launch on top of their products. And so some of these companies are going all the way of saying, look, you don’t even have to buy the product anymore, right? You’re subscribed to the service and the product comes along with it just like, just use Uber even though you knew, but most of these are so we’re going to sell the product the same way, but we’re going to launch new subscription services and have new revenue streams, the supplemental production revenue streams and, and they’re seeing this as a big growth.
Tien Tzuo: 03:13 And this kind of captures it. And so what we try to communicate really is this really is a different business model and there’s a lot about, there’s a lot of hidden assumptions that we all carry and how we run businesses today that’s anchored on the left. And we’re shifting to the right. I, what do I mean by that? Right? And so, so if you boil down business, it’s really about how do I come up with a hit product and how do I sell as many units to the products that I can’t write as many movie tickets as many cars and the laptops as many iphones the way I do that, as I put that through as many channels as as I can. So I, I give it a dealer’s, I go to salespeople, I have an ecommerce site, I put it in retail stores and I know there’s customers on the other side, but I often don’t even know who they are for it.
Tien Tzuo: 03:55 I just know somebody must’ve bought it. In everything we’ve built is around that in what companies are doing is they’re moving saying, look, let me start with the customer instead. And that’s always the magic. Right? And so Apple is saying, you know, yes, I got this really cool Apple iPhone 10, but don’t worry about that, right. You know that I have a billion and a half Apple ids in the Apple 10 is just one way. The iPhone upgrade is just one way. I have to monetize that, but 30, 40 percent of my revenues are actually coming from all these recurring services, right? You know, iCloud and Apple music and all these other things, and that’s how the modern company thinks. And so, so there’s all these vast implications of this right in that the way you build product is not creating a hit product is just getting something out there watching with your customers do, right?
Tien Tzuo: 04:43 The way you think about innovations is not, okay, let me come with the next version of the product. Let me see where my customers are spending their time and what else can I do? Right? So what else are they using my iPhone for? Oh, they’re listening music to it. Well, let me launch Apple music or they’re watching tv or let me launch Apple TV. I can expand what I do with my customers if I take that customer point of view
Tien Tzuo: 05:03 As these services are all customized to you, right? Because one of it, you can just customize it. So you set up your playlist on spotify and now you don’t really want to change anymore, right? You know you’re customizing your software application, but part of it is the applications are learning about you and so if the best services are tuned to your personal preference, is AI is going to be a big, big part of that, right? Because it’s going to understand your preferences, is going to understand your history, is going to understand your behaviors. Can people correlate that with other people that are like you and you want, you know, you have to have some control over it, but what you’re going to find is, is these services start to become highly knowledgeable, highly personalized to you, which is going to drive everything even further towards, towards the subscription services world.
Tien Tzuo: 05:43 Companies today run on ERP systems, right? The company is run on Oracle, they run on SAP and these are. These are good applications for the product economy, right? They do logistics, supply chain or that kind of stuff and there’s just a whole new class of systems that have to be built and the closest analog this are going to be the telecom companies, right? But, but again, these things are just too big, too massive, too, too hard to use. They’re not really built for the masses and even the telcos are tired and sick of these things because they’re just too expensive. They’re not agile enough. And so, so we want to go be the SAP, the Oracle right, or the business model of the future. So we’ve got a long, long list of features and capabilities that our customers are wanting to add more into the product because at the end of the day, um, you know, the reason we couldn’t never do this well at Salesforce is okay, this business model makes sense. I got to start with the customer. The old model on the left was about scaling up systems, right? It was about, you know, let me go. Why was it the biggest unit? If I can scale up to the most number of units, I can buy the biggest factory, spread it over a unit cost.
Tien Tzuo: 06:49 Drive down the unit cost and that’s how I make money, right? If I could sell, you know, a billion dollars worth of movie tickets, than Avengers is a hit, right? You know, if I can’t, it’s going to be, it’s going to be a bust and that was the game. This game is different. The scheme is getting into the marketplace, getting to know your customers, really, really iterating with them, trying to create a tight relationship and a tight partnership with customers as possible and then translating that loyalty into, into a good business. And so there’s a reason Netflix or when people complain about Netflix spending so much money on content, but if you just do the math, Netflix has a hundred and 10 million subscribers paying them $10 a year, $100, $10 a month, call it $100 a year. So they’ve got 10, $11,000,000,000 of revenue. It only costs like $2,000,000,000 to do all that streaming and they’ve already paid for all the content in the past licenses, so they’ve got like $9,000,000,000 to spend and they’re basically saying, look, we’re using the success, our scale in the loyalty of our customer base because, you know, people will quit Netflix.
Tien Tzuo: 07:46 It’s a TV now and to basically invest in growth and we’re using that as our advantage. And so, um, so this modern thing is about agility and having a very, very different business model, right? Which requires a very, very different set of systems because the systems in the past were about scale. This new system has to be about agility and because that’s how you win in this new model.