EN-GB
The subscription economy has grown over the last decade. Like other sectors, the pandemic gave the subscription economy a major boost. Whatever way you look at it, subscription is a big deal and a big economic trend. However, much like every other macro trend, there are some prevailing myths or assumptions made about subscription models. By addressing some of these common myths, business organisations can feel more confident about their decision-making, putting their thoughts on subscription on the right course.
Subscription is a commercial model in which a customer must pay a recurring price for access to a product or service. Many products and services can be consumed in this manner. Although subscription is now very topical, this way of paying has been around for hundreds of years.
Myth 1: It is a B2C Thing
Subscription models are a growing trend across all industries. The subscription share of economic activity is running multiple times higher than any other method of transaction. Seventy percent of organisation leaders say subscription models will be key to their prospects in the years ahead, and another study revealed that subscription organisations have grown nearly six times faster than the S&P 500 over the last nine years. A lot of that growth has come from business-to-consumer (B2C) activity, with consumers subscribing to anything from magazines, clothing, and food, to wines, music, and TV.
However, subscription models are increasingly taking over organisations outside of B2Cs. In a changing and uncertain world, subscription is a great way to consume technology or other assets or services. Most (61%) enterprises are now aggressively shifting toward paying for all technology via subscription. The major buying group in an organisation – the IT departments - will be moving a significant part of their budget to subscription models and cloud-based solutions and services, which are likely to be subscription only.
Myth 2: It’s All About Cloud
Salesforce probably never thought of offering a perpetual licensing model! Certain categories are almost exclusively transacted via subscription. Anything as a service: Infrastructure as a Service, Platform as a Service, Software as a Service. Cloud-run organisations also go almost exclusively hand-in-hand with subscription and as a Service models.
Cloud organisation may always use subscription models, but subscription models are not always cloud-based. Many companies use the terms “cloud” and “subscription” synonymously. However, distinguishing between the deployment model (cloud variants versus on-premise) and the commercial model (perpetual versus subscription) is an important distinction.
The benefits of a subscription model run to all areas of technology and beyond, and to all areas of organisation. Increasingly, software and technology that isn’t cloud-based or public cloud-based is being sold via subscription. For example, a McKinsey survey of large enterprise IT decision-makers found that demand for on-premise subscription software increased significantly over the past decade. Eighty-two percent prefer to buy their on-premise software via subscription. The simplicity and flexibility of the subscription model are the main reasons cited for this shift.
Myth 3: It’s All About the Finance
Subscription is about how you pay for a product, app, infrastructure, or services and support. It generates a recurring cost line based on ‘demand’ on variables such as the number of users, hardware or software usage, or in more sophisticated scenarios, demand based on business or outcome-linked metrics. Accountants and management teams will pore over reports of subscription usage, retention, and revenues as the numbers come in. So yes, it is about finance.
But subscription is also all about the customer. If you take care of the customer, the subscription numbers will take care of themselves as satisfied customers stay. With subscription-based organisations it means revenue becomes locked in period after period and is increasingly predictable, which accountants and management teams like.
In addition, subscription models enable organisations to better serve their customers. For example, proper subscription models typically offer two capabilities to improve a customer's lifetime value. The first is an ability to package the solution or service to the customer segment, meeting a more targeted need and capturing more value in the process. Second, given its recurring nature, subscription models support getting closer to the customer, understanding them, and having great insight into their status. This constant touch is a huge opportunity to sell more to them over time. Think of “Customer Success” which is an organisation function that has grown up with subscription and “as a Service” models. Customer Success is designed to get an organisation closer to the customer and often that then enable more sales.
Myth 4: It’s a Startup Thing
Amazon and Salesforce, two subscription trailblazers, were startup companies once. Amazon in the late 1990s was going to be the “Earth’s Biggest Bookstore” and Salesforce in the early 2000s was going to “end software ownership.” Today, both startups and established organisations are using the subscription model to meet customer needs and grow their customer base.
Subscription is for “everyone and everything,” delivering multiple benefits to both the customer and the vendor. Incumbent organisations that have had revenue built on perpetual licensing have rapidly transitioned and are now adding in subscription models, from Adobe and Microsoft to Mitel. Mitel certainly isn’t a startup but now offers subscription models across the portfolio. Both partners and end-users benefit from this capability in many ways.
Myth 5: It’s a Subscription-only World
There is no denying that subscription is a big deal. We now associate the subscription model with successful companies like Adobe, Amazon, Netflix, Microsoft, Salesforce, Spotify, and many others. However, subscription may not be for everyone right now. Not every organisation (and consumer) will want or need to be able to transact via subscription for every product, app, or service. Organisations and IT will need and want to be able to transact via other means, such as buying outright for a long time to come.
Given that fact, the choice is important. Vendors should be promoting subscription models, but they should also be offering choice and flexibility, providing the widest set of commercial models to meet the widest set of partner and end-user needs.
