The rise of the subscription economy

We no longer sell just a machine, but a guarantee of uninterrupted production. We no longer sell CDs, we have continuous access to music. Therefore, it is no longer a matter of a short-term operation, but of a long-term relationship.

The model has been around for a long time in the phone with mobile plans, but recently it has expanded to cover all areas of activity and all types of products. The trend is more noticeable since 2020. The COVID era has contributed to this acceleration by disrupting the habits of all consumers. In addition, we have recently witnessed a change in mindsets: the customer no longer wants to own, but to satisfy their needs through a simple and fluid experience. Buy a trump card – in other words, use trump ownership.

The company, in turn, is able to maximize the “lifetime value” of its customers, allowing for more revenue. In a more linear fashion with a recurring turnover that implies better predictability and therefore better financial management.

These developments and benefits explain the emergence of this new economy, which is increasingly becoming a necessity.

As evidence, the subscription economy has grown 4.6 times faster than the traditional economy in 10 years and is set to represent a €1.5 trillion market in 2025.⁽¹⁾.

But designing successful subscription products requires a deep transformation of the company.

The subscription economy: from services to industry to consumer products

Subscription models were first created for intangible services such as Netflix, which pioneered the subscription media industry, or even B2B software services like Salesforce.

Later, companies launched digital services in addition to their product offerings to better meet the needs of their customers. Fender⁽²⁾ is a good example, when they noticed that many guitar buyers quickly stopped playing the guitar because it was not easy to learn, they decided to launch Fender Play: an online video service that teaches the instrument via subscription. Amateur guitarists can quickly play their first chords, remain motivated and loyal to Fender.

However, the subscription economy should not be limited to product dematerialization or the creation of complementary digital services. Recently, it has started to affect many industries based on the sale of physical products. For example, Le Petit Ballon has offered a monthly bottle of wine subscription at home since May 2018.

Therefore, all companies and all sectors are affected by the subscription economy.

Customer benefits: experience and personalization

In the current economic context, customers pay special attention to the experience offered and the benefits inherent in it. They keep only what really meets their needs.

The subscription economy allows you to address the needs of customers as closely as possible by offering an offer closer to their expectations.

Thus, the company is able to determine its competitive position, retain its customers better and even reach new segments. To succeed in the subscription economy, a number of implications for a company’s operations must be anticipated.

A revolution for all business areas

To begin with, it is important to start with the needs and “pain points” of customers design and regulation of its offering to bring strong added value. Achieving this requires the application of new market research and customer analytics methodologies. Data plays an important role in this regard. It is fundamental in the subscription economy. It is also important to adapt its innovation model by introducing more flexibility and speed thanks to user-based design thinking methodologies and MVP and rapid test/iteration concepts. The goal is to create a real customer value proposition (CVP) where every element of the offering contributes to the experience.

Then adapting the strategy price definition is necessary using a ‘value-based pricing’ model rather than a traditional model: it is a matter of starting from perceived customer value to design the features of the offer and its price. “Value-based pricing” allows you to offer different options and packages according to defined segments, optimizing service penetration, profitability and “cross-selling”.

Marketing the subscription offer also requires aligning company tools and processes. The e-commerce platform is at the heart of this transformation: it requires features specific to the subscription model. For example, the subscription module should include activation of the subscription option only for selected products/services, automatic collection of payment and automatic invoicing according to a defined schedule.

In addition, it will be important to have subscription-specific reports and performance indicators (number of subscribers, number of active subscribers per month, average revenue per subscriber, etc.) directly from the subscription module or through company reporting / BI. tools. In fact, a company starting from a blank slate will have to invest in the implementation of a complete e-commerce platform to build its online presence.

In traditional commerce, the act of sale often ends with the act of purchase. In the subscription economy, the customer subscribes to get an experience, the connection is continuous: sales and marketing systems therefore it is affected. On the sales side, the incentive system must therefore be iterative and adaptive; not motivating your network with special “digital services” bonuses is often a factor preventing the development of such services. On the marketing side, adopting more advanced loyalty models and campaigns is highly recommended.

It’s about getting a 360 customer data base (CDP), but also technologies that enable hyper-personalized and real-time recommendations. Therefore delivery, trial period, terms of engagement/termination etc. It is important to have bundled and customizable offerings to be able to offer a variety of options. In conclusion, any good campaign requires understanding the entire customer context through an omnichannel architecture.

The information is also important to identify the evolution of needs and uses in order to be able to adjust the offer quickly.

Indeed, in order to bring value to subscribers, the experience offered must be continuously enriched: this is the only way to retain and win over new users with ever-changing needs. The good news is that a subscription involves regular use of a product or service. This repetition of usage is an opportunity to have a constant source of customer data.

An initial understanding of needs, segments, personality, customer journey and pain points is necessary, but often not sufficient; acquiring AI tools and automated tools to create real-time customer journeys/profiles allows it to evolve its subscription offering while continuing to deliver the value it’s always looking for.

Finally, the subscription economy is also having an impact finance and accounting, and requires new metrics to truly measure benefits (at the risk of halting model evolution if new performance metrics are not adopted). There are 7 key indicators of the subscription economy ⁽³⁾ but also 6 maturity levels ⁽⁴⁾ to take advantage of all the mentioned advantages.

Need special support

To support companies in the evolution of their models, IBM has conceptualized an incubator dedicated to the subscription economy. This helps accelerate organizational model evolution, scale, and increase the value of subscription offerings. We also help companies get the critical building blocks to take advantage of this new market, such as a new “business platform” or even sales and marketing technologies.

Subscription provides greater financial predictability through recurring revenue, better understanding of customers and greater flexibility to adapt to their ever-changing needs.

It also promises new revenue streams and better loyalty. Leaders will remember that the transition to this business model constitutes a true transformational program for the company. The transformation is long-term: it is not a big explosion and therefore goes through several stages of maturation.

We are at the beginning of a new economy with undeniable advantages that can reconcile the interests of both the company and the customer.

⁽¹⁾Source: McKinsey.

⁽²⁾Source: Zuora

⁽³⁾SourceForrester

⁽⁴⁾Source: IBM.