In today's retail market, consumers want the freedom to access products and services on their terms. Shoppers are increasingly putting value on access over ownership and care more about experiences than the products themselves.
"They are rejecting the traditional 'one size fits all' approach and embracing services that treat them as the unique individuals that they are," said Tom Krackeler, senior vice president of products at Zuora, a company that provides retailers with the platform for subscription-based services. "We are seeing a growing preference by consumers to subscribe to ongoing services, rather than simply buying products—rides over car purchases, music streaming over CDs, etc. This consumer-driven trend can be seen across all industries, whether B2B or B2C."
Zuora calls this shift in the market the "subscription economy." In the U.S. alone, consumers spent $420 billion on subscriptions, nearly 90% of adults in the UK subscribe to a service, and 75% of Australian businesses expect a revenue increase by adopting the subscription model.
"Any business that is not already making this shift is at risk of being left behind," Krackeler added.
FierceRetail sat down with Krackeler to learn more about the subscription economy and where it is headed in 2018.
FierceRetail: What are the advantages of having a subscription service?
Tom Krackeler: The subscription business model offers plenty of advantages for businesses. For one, it opens up new growth opportunities and revenue streams. Subscription services provide businesses with the opportunity to better understand their customers based on their changing preferences and behaviors—to develop longer-lasting and more meaningful relationships.
They are able to capture more data and make more informed decisions to innovate and improve the customer experience. All of this ultimately results in increased and more predictable revenue, greater customer retention, and increased lifetime customer value. This gives businesses a strong foundation and a sharper competitive edge.
The model also allows companies of any size to succeed and disrupt. All it takes is the success of one brilliant innovation to impact an entire industry. Look at Uber and the auto industry—who knew that would happen? But once it does, it moves fast. Similarly, the move from goods to services unlocks huge economic growth for retailers. IDC Research has found that 34% of retail organizations have implemented, are in the process of implementing, or have plans to implement recurring payments in 2017 with another 26% interested in implementing recurring payments in the future.
FierceRetail: What are the biggest challenges to implementing a subscription service?
Krackeler: The subscription economy calls for a whole new way of doing business. Adopting subscription business models requires a complete business transformation and impacts all departments, processes and business systems.
When established companies enter the subscription economy, they must contend with new complexities that significantly impact the back-office. For example, 72% of the Fortune 500 say the single greatest challenge limiting their growth is their technology. And it’s the aging infrastructure, like the ERP that they bought 20 years ago, that is holding them back.
The problem with legacy systems is they were designed for a product era paradigm where it was all about getting products out to the customer in a transactional manner. With a subscription-based business, because it's an ongoing recurring relationship with the customer, the system must be designed to help the company successfully manage that dynamic relationship. The impact of changes on pricing, billing, and finance cannot be underestimated. To maintain a strong, recurring revenue business model, companies need a single platform that can orchestrate the entire order-to-cash process and enables them to offer seamless customer experiences on the front-end and automate all the transactions in the back-end.
FierceRetail: What are the pieces that B2B seem to have perfected that B2C are still lacking in?
Krackeler: Whether B2B or B2C, you must think about your customers and their needs. But many B2C businesses are still thinking about the business model in terms of the products or services sold to the customer. We like to tell people to “flip the script on that;" think about your customers but don’t think about them as endpoints, as somebody whose sole purpose is to buy your products. Think instead about their needs and preferences. Ask yourself, “How can I fulfill those needs with my expertise and my products?” But really use the technical capabilities that you have today, whatever it is, sensors, internet, etc. It doesn’t have to be big and complex. The point is, get to know who your customers are first, and then you can rethink what you do to deliver an outcome they want, instead of simply getting them to buy a physical product that you have.
FierceRetail: Can you give an example of a retailer doing a good job with a subscription service in 2017?
Krackeler: Today, the overwhelming imperative of every consumer brand should be to know your customer. If you don’t do that, you will fail—plain and simple. If you’re still selling your product off of shelves to strangers in five years, there’s a good chance you’re not going to make it to ten.
You must take a customer-first approach to retail by starting directly with the customer, and creating fun, compelling subscription experiences that get smarter and smarter over time.
Amazon is a great example of a company that does this well. It now dominates our lives— clothes, music, TV, news, cloud—and continues to upend the retail industry in so many ways. Amazon really understands their customers. Think about it, they have so much valuable data and know every purchase you’ve ever made with them. Now think about Macy’s or Target. No matter how many decades you’ve been shopping there, these companies don’t know you, the individual customer at all. Most of us prefer shopping with Amazon rather than buying the same product at another retailer simply because of their exceptional customer service. Customers got so hooked to their single-click shopping, speedy deliveries, and no-hassles returns that they were ready to pay more for Amazon Prime subscriptions. The company is a great example of acquiring, retaining, and growing customer relationships in the subscription economy.
FierceRetail: What do you think will be different about subscription services moving forward?
Krackeler: All companies will eventually realize that future growth can only come from subscriptions. Once a subscription offering is available in an industry—retail, software, transportation, music—that's where the customers go. Retail companies are finding new sources of revenue in the subscription economy. For example, traditional retailer Nordstrom with Trunk Club subscriptions or PetSmart with online subscriptions. Companies are seeing that the future is in offering ongoing services on top of products to deepen relationships with customers. According to the Subscription Economy Index (SEI), subscription-based companies are growing revenues approximately nine times faster than the S&P 500.
All signs indicate that subscriptions will continue to gain popularity. Businesses that succeed in this new economy will be razor-focused on their customers and continually innovate to anticipate and meet their ever changing needs.
FierceRetail: What else can you tell us about subscription services?
Krackeler: Subscription businesses require that every role within an organization embark on a whole new way of thinking. It’s a completely different business model. It’s no longer about one-off transactions and simply shipping products out to customers. That was the old world. In the new world it’s about putting the subscriber at the center of everything you do. Subscriber-centric businesses must develop multi-channel experiences to deliver the outcomes their customers want, wherever they are. So the Subscription Economy, in fact, requires an entirely new leadership team and a CEO, CMO, CIO, CSO, CFO, CPO, etc. who can think and operate within this new paradigm.