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Netflix, Prime, Blue Apron: How subscription businesses are taking over

Everything you purchase–from transportation to entertainment to groceries–will soon come with a monthly plan, says Zuora CEO Tien Tzuo.

Netflix, Prime, Blue Apron: How subscription businesses are taking over
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After scrolling headlines in the New York Times, you head into the kitchen and open today’s Blue Apron box to prepare a shrimp risotto before turning on Netflix for an episode of Comedians in Cars Getting Coffee. You may not have noticed, but you’re now fully enmeshed in the subscription economy.

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The subscription model is a booming field. In recent years, this market has grown by more than 100% a year, increasing from $57 million in sales in 2011 to $2.6 billion in 2016, according to one expert.

Tien Tzuo says the subscription model is the way of the future. In 2008, after nearly a decade at Salesforce, Tzuo founded Zuora, a software company built to aid organizations shifting to this model. In his recent book, Subscribed: Why the Subscription Model Will Be Your Company’s Future–and What to Do About It, Tzuo aims to change how executives think about their products and organizational structure in the subscription economy. “If you’re not shifting to this business model now,” Tzuo writes, “chances are that in a few years you might not have any business left to shift.”

Tien Tzuo, MBA ’98, evangelizing the shift to subscription-based business models, coined the phrase “subscription economy.” [Photo: courtesy Zuora]

Here, Tzuo, who earned his MBA from Stanford Graduate School of Business in 1998, shares more about why it’s no longer the era of the “unknown customer,” what it means to transform a business to a subscription model, and his views on the value of an MBA.

You write a lot about the need to change our mind-set. Why is this shift difficult?

Tien Tzuo: Once you get in the habit of thinking this way, it becomes easier. My colleagues and I, often over dinner and wine, would challenge each other to come up with businesses that couldn’t be turned into a subscription model. We tossed out ideas like guitars, cement.

We realized it’s not about the physical product; it’s about what the customer is trying to do. And that inversion of thinking is at the root of everything.

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Using cement as an example, you realize that flooring is the actual need. There’s a whole revolution of industrial carpets now. There’s a service contract, you simply pay some monthly fee plus overages, usage, etc. So you can actually subscribe to a floor.

You call Adobe the company that provided the “textbook” to inspire others and reference how its revenue dropped drastically after the transition to subscription. How do you advise leaders to manage through that pain?

TT: The fear is if I’m selling a guitar, instead of taking 400 bucks right now, I’m taking money over time. And so doesn’t that destroy revenue? If I just flip the switch, my revenues would plummet.

You can actually keep selling your product and sell new digital subscription services, like Fender does–its Fender Play offers access to online lessons for $9.99 a month–or, if it’s a complete switch to subscription, you can face what Thomas Lah and J.B. Wood (authors of Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business) dubbed “swallowing the fish.” Costs go up and revenue drops, but after the transformation to a subscription model is complete, costs go down and revenue comes back up. [See figure below.]

We want it to be as inspiring of a story as Adobe is: They flipped the switch and revenues were down — it hadn’t been below a billion dollars in the first quarter in like 10 years. But Adobe didn’t cut staff commensurate to their revenue. They did some adjustments to cost and explained this to Wall Street and gave them detailed metrics. Yes, the stock dropped when they had their earnings call, but 24 hours later, after they spent six to eight hours with the analysts, things were back up.

As more businesses move to a subscription-based model, should we be worried about privacy with our data?

TT: Services can monitor your behavior. Generally, that’s a good thing because [companies are] using that knowledge to create better services for you.

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But once a customer leaves a service, a company should just return them the information. It’s their data. That’s pretty black and white, tends to work well, and is well-aligned to things like the General Data Protection Regulation [an EU law that regulates how companies protect citizens’ private data].

Advertising may never go away, but as subscription services become the norm, readers and publishers alike are starting to appreciate the dividends of a direct consumer relationship. The behavioral insight that comes with membership plans and paywalls helps media companies move away from empty calories like page views toward more valuable engagement metrics like time spent.

We like the paid subscription-based business model because we think it’s a healthy dynamic between the vendor and the customer. There should be rules and regulations that the data is the customer’s data, not the vendor’s. It’s the advertising model where the vendor thinks: “Well, I think this is our data, not your data.” And my response: “Why is it your data? It’s my behavior.”

In Subscribed you dive into industries that have done this well, namely the New York Times with newspapers and Uber with ride sharing and, perhaps more surprisingly, Caterpillar with construction equipment. What other industries can we expect to see in this market?

TT: One that I am really excited about is airlines. Surf Air is called the “Netflix of Aviation,” and members get limitless access to flights for a monthly fee. It’s an example of building a business by starting with customer wants and needs, attacking pain points with a machete, and growing a loyal subscriber base. There are already subscription-based companies in real estate, education, finance, and pet care.

The reality is ownership is dead; now it’s really about access as the new imperative.

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In a 2015 piece in Fortune, you said a business school education was “worthless” and recommended people don’t get an MBA. Has your view changed?

TT: I’m still waiting for my alumni card to be rescinded–just kidding.

I don’t regret going to business school; there’s a lot of things that you learn. There’s an embedded assumption in business today that the goal of business is selling units of their product. It’s built into how do you do marketing, it’s built into how you do finance. And this model is different.

Anybody who’s going to Stanford GSB today, I’d say it’s not that lessons in the past are not important, but try to understand there are different models. The underlying concepts are still the same–you still have to have profit and revenues–but the time dimension and the customer dimension add more nuances to the overall picture.


This article was originally published on Stanford Business and is republished here with permission.

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