The ‘Subscription Economy’ Is Growing, And It’s Bigger Than Just Media

Tien Tzuo

Tien Tzuo is CEO of Zuora, a subscription-billing company based in Silicon Valley. Previously, he was the chief strategy officer and chief marketing officer at Salesforce.com.

One of the biggest news stories this past week has been Apple’s plan to offer various forms of content via subscription, as well as Google’s answer to it in the form of its One Pass service. Yet, while the Apple (NSDQ: AAPL) and Google (NSDQ: GOOG) announcements are grabbing headlines, there’s a much bigger story here that goes beyond just these two announcements.

We are seeing a larger shift to a subscription economy that means a lot not just for publishers but for all companies.

More and more, our lives are wrapped around subscriptions, and that’s not just in online media. You can now subscribe to software (e.g. salesforce.com), entertainment (e.g. Netflix (NSDQ: NFLX), cars (e.g. Zipcar), computing power and storage (e.g. Amazon)–you name it. The relationship between people and businesses, and the products and services they use, is no longer a one-time event.  

The implications of this shift–from an economy based largely on one-time purchases to one based ever more on subscriptions–are profound and ultimately stand to benefit both businesses and consumers.

The 20th-century economy was rooted in manufacturing: companies were focused squarely on making and shipping as many tangible goods as possible. Car companies, for example, were measured on how many cars they ship in a quarter.

In contrast, modern companies focus on their customers, and focus on building long-term relationships with customers through a set of services. Zipcar, for example, reports on how many members it has, not how many cars it owns. And with these long-term relationships come a recurring, predictable revenue stream. That is the subscription economy.

Amazon (NSDQ: AMZN) is a great example. Through the Amazon Prime program, Amazon customers are provided unlimited, free shipping for a $79-per-year membership fee. Though Amazon is primarily a transaction-oriented company, Amazon Prime provides a stream of ongoing, predictable subscription revenue. (Prime provides arguably a much bigger benefit to Amazon, too: by offering free shipping, customers are far more likely to purchase their goods at Amazon and remain a loyal customer.)

Of course, that’s just the tip of the iceberg. AT&T (NYSE: T) realized it could make more money and acquire more customers by offering the iPhone for $100 less and raising the monthly access fees by $10. Software developers realize they stood to make a lot more money by offering their iPad and iPhone apps on subscription vs. simply as one-time purchases. They stand to make significantly more money by offering an annual subscription to their applications (say, $3) as opposed to merely getting paid 99 cents up front.

The benefit to the consumer? App developers would be incentivized to continue innovating their apps or risk losing their subscribers.

Who would have predicted just a few years ago that a subscription-based car company would be such an unbridled success? Zipcar is an example of a company that has used the power of subscription pricing to carve out what is estimated now to be a $3 billion market, creating a range of offerings–from a pay-as-you-go “Occasional Driving” plan to “Extra Value” plans that range from $50 to $250 per month–to meet the needs of different people and drive the highest levels of customer acquisition.

Of course, the publishing industry has been a part of the subscription economy perhaps longer than any other. Upwards of 90 percent of a magazine or newspaper circulation is through home delivery to regular subscribers. And more than any other industry, its future depends on monetizing online content, since 100 percent ad-supported models are unsustainable.

Moreover, publishers also realize that offering “one-off” pieces of online content has limited appeal to consumers, and that customers increasingly want their content across all their mobile devices. Which is precisely why they had been waiting with bated breath to offer subscriptions on the hottest platform to reach tablet and smartphone users: namely, iTunes and the Apple App Store.

How will the Apple and Google announcements play out? While Apple is notorious for playing by its own set of rules, I am at least somewhat hopeful that a healthy dose of competition–such as that represented by Google’s One Pass–might offer some relief to customers.

Disclosure: None of the companies mentioned in this piece are clients of Zuora.

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