What is Subscription Monetization and Why are Companies Rushing Toward It?
What is subscription monetization?
Before we dive into “what is subscription monetization,” let us first take a look at what is driving this change, so you’ll be able to appreciate the concept even more.
Any market change is based on three factors, which I refer to as a change pyramid:
- Technology Consumption
- Customer Expectations
- Economic Models
When any of these factors go through a change, the impact is seen on the other two. So, what has changed now?
It’s no secret that all three factors have changed over time, but a sudden shift happened to the change pyramid. Customers are refusing to be part of the pyramid, and instead, want to take the central stage to drive the impact on technology and economic models. “Customer Experience” is rapidly becoming a powerful force that determines a company’s survival. As per Gartner’s report, 81% of customer experience leaders report they will compete mostly or entirely on CX. While less than half have established the rationale for why CX drives business outcomes, it still has undeniably large influence.
“Steadily, customer experience will be a company’s differentiator and an entry barrier.”
So, the conversation is shifting from a great product to excellent customer experience. Great products can be re-engineered within months, while great experiences require a long time to cultivate and replicate.
The question now is, how can a company deliver the best customer experience? One way to succeed is when there is a significant service component alongside the products—and yes, SaaS-based technologies are making this possible. For example, Netflix delivers an amazing customer experience because they now focus less on individual DVDs, and instead concentrate on complete, on-demand access to their ever-growing repository. Adobe, Microsoft, Apple, Google—the list goes on of companies joining this movement.
“Companies now focus on product utilization rather than product acquisition.”
Remember when Satya Nadella asked his sales team to focus on increasing the OneDrive utilization rather than on the number of units sold? That is what I mean by focusing on usage.
Coming back to our story, the need for positive customer experiences pushes businesses to change their “product only” mindset to “experience matters” mindset. As a result, they transform their products into subscription-based services, which provides them with more control to deliver incredible experiences.
These are all the examples of business born in the product world, while a new breed of companies jumps directly into the subscription-based world. Surfair and Blue apron are some of the examples of those companies.
So there you go: a revenue model that monetizes these subscriptions is known as “subscription monetization.” Here is the full definition:
“A customer-centric approach that offers products/services on a subscription-basis to deliver incredible customer experience and earn consistent and recurring streams of revenue.”
Reread it, and you will find that the critical aspects of subscription monetization are a customer-centric approach, products and services as subscriptions, exceptional customer experiences, and recurring streams of revenue. You can refer to how any of these successful companies operate—Dollar Shave Club, Spotify, Netflix, Amazon Prime, Apple, Microsoft, Adobe—and the definition becomes clearer.
Why are companies rushing toward subscription monetization?
Earlier, companies used to launch new products, enter new markets, reach new demographics to create new revenue streams. But here lies an opportunity for these businesses to earn new revenue by doing all of it at once. Subscription Monetization, at the core, consist of doing two things:
- Compelling companies to create more subscribers (through business relationships)
- Monetizing these business relationships
Once that is done, businesses experience significant advantages. Here are the top 5:
#1: New Revenue Streams
A big motivating factor for businesses is earning a new revenue stream right off the bat. The new revenue streams come from new subscriptions and ease of expansion into other markets. Customers are more than willing to try out a monthly subscription, rather than investing in the lifetime value.
#2: Recurring Revenue
To me, this is the strongest motivator for businesses, as a predictable, recurring revenue stream is all that a company could ask for. Subscriptions, in general, are not very expensive and customers do not think twice about spending on a small monthly subscription fee instead of a large sum to own the product forever.
#3: Direct Control of Customer Experience
Innovation and customer experience depend on how well we know our customers. The subscription-based models put businesses in direct contact with the customers and vice-versa. This provides more control to the enterprises to manage their customers’ experiences, so they won’t need to depend on unfamiliar retailers and distributors.
#4: Increased ROI on Marketing and Sales
As businesses are in control of positive customer engagement and experience, the personalization of communication and marketing efforts will deliver better results. The need to spend more on expensive physical branding is replaced with smarter spending on digital marketing and relationship management tools.
#5: Incredible Flexibility to Launch New Products and Reach New Markets
It takes years of effort and large monetary funds to design and launch a new product. Many businesses are not geared to spend such R&D dollars. Crossing borders and reaching new markets is made simpler by the SaaS world. The subscription-based model gives them the flexibility to tweak their offering and catch their competition off guard.
Subscription Monetization creates infinite possibilities for businesses to excel and succeed. While there is a common myth that it might not be suitable for all companies to make this switch, the world is changing and several more surprises are coming our way in the near future (Check out the Ford subscription model for their cars!).
I hope you are enjoying these changes as much as I am loving the direction the world is headed in. Please do share your thoughts and comments, as well as any experiences you’ve had in the subscription world.