book.chapter Understanding the subscription economy

The business landscape is undergoing a seismic shift as the subscription model revolutionizes industries across the globe. The compelling nature of providing access to the benefits of a product or service, rather than ownership, is reshaping consumer expectations and business strategies. This paradigm shift is poised to redefine commerce, as customers increasingly seek the outcomes they desire without the burdens of owning physical assets. The surge in demand for subscription services is opening up new revenue streams and heralding a new era in the way business is conducted. In the past two decades, the Fortune 500 list has witnessed a dramatic turnover, with over half of the year 2000's companies no longer present. In their stead, digital giants such as Amazon, Apple, Google, Facebook, and Netflix have risen, sharing a common disregard for traditional product-based business models and a relentless pursuit of direct customer relationships through digital means. Historically, companies like Disney sold their products through third-party distributors such as Walmart, which inadvertently made customers loyal to the retailer rather than the brand. However, today's consumers are distinct in their preferences—they favor personalized experiences and continuous improvement over standardization and planned obsolescence. This shift in consumer behavior is driving monumental changes in markets worldwide. The traditional business model focused on bringing products to market swiftly and selling in high volumes to leverage economies of scale. However, today's successful companies are flipping the script by starting with the customer. They immerse themselves in the environments their customers frequent, gather extensive knowledge about them, and deliver a tailored mix of services that achieve the desired outcomes. The modern business model revolves around a dynamic, ongoing relationship with subscribers, with a customer-centric approach at its core. Tien Tzuo, a thought leader in the business world, warns of the impending changes. He predicts that companies that fail to understand their customers within the next five to ten years will face extinction. Start-ups are already outmaneuvering large enterprises by having a clear grasp of their target audience. The entire global economy, valued at $80 trillion, is up for the taking. Companies that adapt to follow their customers, rather than expecting the reverse, will emerge victorious. The transition from the old to the new business model is primarily driven by the wealth of data generated by digital subscriptions. This data enables companies to tailor their services to individual needs, moving away from a one-size-fits-all approach. This transformation is evident across the $80 trillion global economy. For instance, while traditional brick-and-mortar retail stores face closures, e-commerce is flourishing, and some online brands are even opening physical stores to offer unique customer experiences. Fender, the iconic guitar manufacturer, has transformed its business model from merely selling guitars to nurturing musicians. With the introduction of Fender Play, a subscription-based online learning platform, the company engages customers in an ongoing dialogue through education. This strategy has not only doubled the company's market size but also its revenue. The media industry is experiencing a renaissance as streaming services like Netflix and Spotify revolutionize content consumption. These platforms have rapidly amassed millions of subscribers and now account for a significant portion of industry revenues. Similarly, the transportation sector is embracing subscription models, with companies like Uber and Surf Air offering innovative travel solutions. Even traditional industries such as newspapers are finding new life in the digital age. High-quality publications are gaining subscribers, and companies like The New York Times are diversifying revenue streams with digital products like crossword and cooking apps. The tech industry has also shifted towards subscription models, with companies like Adobe and Microsoft offering cloud-based services that provide predictable and scalable revenue. The Internet of Things (IoT) is propelling subscription models to new heights by integrating digital intelligence into various industries. For example, Komatsu's Smart Construction service uses drones and radar technology to improve efficiency in the construction industry. The manufacturing sector is also poised for transformation, with IoT enabling manufacturers to sell outcomes rather than products, as seen with General Electric's networked industrial machines. The IoT is expected to generate approximately $14 trillion in revenue by 2030, which will account for a significant portion of the global economy. This technological advancement is leading manufacturers to rediscover their customers and learn what they truly want, thereby enabling them to thrive in the Subscription Economy.