The subscription model has infiltrated several verticals in recent years, from automobiles to clothing. This has enabled these industries to update the car-leasing experience and find ways to transform living rooms into dressing rooms — and it’s brought them significant revenue streams. In the second quarter of 2018, Stitch Fix pulled in $296 million in revenue, outpacing analyst predictions; by 2017, subscription box companies had acquired 5.7 million shoppers.
The subscription model has been a sleeper hit, transforming from Jelly of the Month clubs to bona fide success stories in the digital age. While many other industries have been impacted by the business model during this tech-savvy era, tech itself represents the “final frontier.”
Software subscriptions have existed for years, but the subscription mindset could offer value to many product-driven tech companies. Companies that don’t fit the SaaS model can develop subscription packages that boost the usefulness of their hardware, enhance their customer service, and develop lifelong converts. Just ask Apple.
How Tech Can Benefit From Subscriptions
Matt Cronin, president and founding partner of House of Kaizen, a company helping brands acquire and retain subscriber revenue through optimal digital experiences, is surprised more tech companies haven’t capitalized on the value of subscriptions. He notes that marketing strategies for subscribers provides big advantages over marketing for buyers in terms of econometrics, quality, and relationships.
“The economics of a subscription model is based upon an established customer lifetime value that justifies a more competitive investment in each new subscriber, rather than limiting the cost of acquisition to an immediate ROI — but it’s one realized over the duration of the subscription,” Cronin explains. Doing so allows for more customer-centric marketing tactics that reflect the subscriber journey; though they may be more costly at the outset, they result in greater efficiency and higher ROI in the long run.
Cronin explains that acquisition programs can be optimized based on subscriber quality rather than cost alone. “Ensuring that marketing tactics are bringing in, and keeping, the subscribers that are most valuable to the business contributes immensely to the bottom line,” he says. “It also mitigates the need to deal with massive churn events that often come after a marketing effort drives a high volume of low-value acquisitions who unsubscribe shortly after joining.”
And therein lies the expectation of a relationship between the company and the subscriber: A subscription’s value constantly hinges on the quality of this relationship. Companies offering subscriptions have to regard their subscribers as “members,” with all the benefits that status accrues. From a marketing perspective, the subscriber can’t be overlooked in favor of the next new acquisition. An existing customer is often more valuable to a business than a new one, meaning subscription marketing strategies offer the unique opportunity to consider how investments should ebb and flow between acquisition and retention tactics.
Planned Obsolescence Shouldn’t Apply to Customers
In other words, subscriptions empower tech brands to focus on driving loyalty with customers. While planned obsolescence has been a smart tactic for tech firms in terms of fueling product sales — making customers feel they should replace or abandon older models for newer ones — the same mentality can’t be applied to customers themselves.
Shifting their perspective could have a real impact on tech companies’ bottom line. Cronin notes that industries operating with shorter-term transactions and consumption in mind can benefit from a subscription model when it comes to category differentiation, value creation, deferred revenue, and customer loyalty.
“Technology subscriptions are taking shape as ‘servitization,’ where money can be made through the ongoing support and enhancement to a product purchase, like when Best Buy tries to sell you a service plan when ringing up your charger cable at the register,” Cronin explains. “This concept has long existed, but it’s only recently been considered by technology companies as a direct-to-consumer opportunity.”
There’s peace of mind in knowing that a purchase made with Apple or Tesla can be supported or even enhanced directly by the company through programs like AppleCare or over-air software updates. This represents a significant growth opportunity for many technology companies — they can offer increased value to their customers-cum-subscribers with small, incremental ongoing costs.
That ongoing aspect offers value in terms of deferred revenue. Companies can bank on revenue to be realized as those subscribers continue to pay indefinitely into the future. And delivering value to subscribers consistently is the absolute best way to foster loyalty. “Evolving the tech economy model from sell-and-resell-a-replacement to sell-and-renew emphasizes the opportunity for fostering loyalty and even evangelism that grows a business,” Cronin says.
Brands have leveraged this mindset in a variety of ways, getting creative in how they’ve offered value to consumers. T-Mobile, for instance, is expanding its phone plans and venturing into the cable and satellite space, enabling customers to bundle services via a single subscription; it also covers a standard two-screen Netflix subscription with its T-Mobile ONE plan. Microsoft launched a hardware-as-a-service program aimed at replacing ownership of technology itself with device updates for organizations. This enables Microsoft, the current leader in the SaaS and enterprise software spaces, to become a one-stop shop for businesses.
Designing a Subscription Plan
Many companies can find success with the subscription model, even if it doesn’t seem like an obvious fit. It’s all about designing a subscription model that embraces an additional point of sale.
“As catalogue, brick-and-mortar, and e-commerce appeal to customers of different segments or in different times of need, so can a subscription model,” Cronin says. “Embracing each of these models grows the opportunity for a tech company to embrace an incremental customer segment.”
The challenge, he finds, is mitigating concerns about cannibalizing established channels — unlike the significant erosion of brick-and-mortar retail following e-commerce’s growth, subscriptions tend to be more incremental because they appeal to a different type of customer journey. But that’s where the opportunity lies: Customer journey mapping that evolves to include a subscriber journey can reveal the opportunities inherent in the subscription model: capturing new markets, evolving product offerings, cross-selling, and upselling.
It can also allow brands to adjust their pricing for a different consumption pattern. “Pricing is the most direct way to improve the bottom line, and subscription models present lots of opportunities to experiment with pricing for growth,” Cronin explains.
House of Kaizen worked with Brainlab, a medical device company creating both software and hardware and selling many on a subscription basis. The experience shone a light on the lessons other tech companies can take away. The first is that product and revenue diversification, even within a specific customer niche, is key to growth. Subscription models present tech companies with the opportunity to diversify their product offerings and revenue streams, often without disruption to their core business.
The second is that if tech brands start thinking of customer relationships as ongoing, rather than one-off experiences, the subscription model opens the door to new kinds of customers who may have the same needs but a slightly different sense of value. “Neither is inherently better in every case, but both are often complementary in a growth strategy,” Cronin says.
While tech may not have embraced subscriptions as fully as other industries have, it’s for lack of comfort — not for lack of fit. By getting to know their customers’ needs and mapping out their journeys, tech brands can find the sweet spot between being seen as disposable and being seen as innovative. Brands shouldn’t fear cannibalization — they should fear not keeping their customers around as long as they need to.
