Subscription Model Quotes

There are two sides to the battle in front of us, and on one side is Black Friday discount, Wi-Fi hotspot, this year's model, subscription only, now with more stretch, noise-canceling-noise-creating headphones, one car to every green, this lane ends. The other side is magic.

If you’re just managing expectations, instead of creating new opportunities, you’re not doing it right.

Inside our gift-wrapped packages there was a doll, kitchen utensils, modeling clay, a recipe book, crayons, a year’s subscription to France Loisirs, a princess outfit, and a magic wand.

Other benefits: As a company Adobe struggled for many years with people using pirated copies of its software, particularly for costly Creative Cloud applications like Photoshop. The subscription model automatically reduces piracy, since the company no longer ships packaged software that can be copied. Further, organizations on tight budgets with single projects can pay to use the service for only a month or two.

But even when Facebook isn't deliberately exploiting its users, it is exploiting its users—its business model requires it. Even if you distance yourself from Facebook, you still live in the world that Facebook is shaping. Facebook, using our native narcissism and our desire to connect with other people, captured our attention and our behavioral data; it used this attention and data to manipulate our behavior, to the point that nearly half of America began relying on Facebook for news. Then, with the media both reliant on Facebook as a way of reaching readers and powerless against the platform's ability to suck up digital advertising revenue—it was like a paperboy who pocketed all the subscription money—Facebook bent the media's economic model to match its own practices: publications needed to capture attention quickly and consistently trigger high emotional responses to be seen at all. The result, in 2016, was an unending stream of Trump stories, both from the mainstream news and from the fringe outlets that were buoyed by Facebook's algorithm. What began as a way for Zuckerberg to harness collegiate misogyny and self-interest has become the fuel for our whole contemporary nightmare, for a world that fundamentally and systematically misrepresents human needs.

The reason subscription (and RSS) was abandoned was because in a subscription economy the users are in control. In the on-off model, the competition might be more vicious, but its on the terms of the publisher. Having followers instead of subscribers - where readers have to check back on sites often are barraged with a stream of refreshing content laden with ads - is much better for their bottom line.

There are other models to explain Cygnus X-1 that do not include a black hole, but they are all rather far-fetched. A black hole seems to be the only really natural explanation of the observations. Despite this, I had a bet with Kip Thorne of the California Institute of Technology that in fact Cygnus X-1 does not contain a black hole! This was a form of insurance policy for me. I have done a lot of work on black holes, and it would all be wasted if it turned out that black holes do not exist. But in that case, I would have the consolation of winning my bet, which would bring me four years of the magazine Private Eye. In fact, although the situation with Cygnus X-1 has not changed much since we made the bet in 1975, there is now so much other observational evidence in favor of black holes that I have conceded the bet. I paid the specified penalty, which was a one-year subscription to Penthouse, to the outrage of Kip’s liberated wife.

It was in Cleveland that Magic Slim became the most successful pornographic film producer in America. His training center was a key link in a human trafficking supply chain stretching from the former Soviet Republics in Eastern Europe to the United States. Trafficking accounts for an estimated $32 billion in annual trade with sex slavery and pornographic film production accounting for the greatest percentage. The girls arrived at Slim’s building young and naive, they left older and wiser. This was a classic value chain with each link making a contribution.  Slim’s trainers were the best, and it showed in the final product. Each class of girls was judged on the merits. The fast learners went on to advanced training. They learned proper etiquette, social skills and party games. They learned how to dress, apply makeup and discuss world events.  Best in-class were advertised in international style magazines with code words. These codes were known only to select clients and certain intermediaries approved by Slim. This elaborate distribution system was part of Slim’s business model, his clients paid an annual subscription fee for the on-line dictionary. The code words and descriptions were revised monthly.  An interested client would pay an access fee for further information that included a set of professional  photographs, a video and voice recordings of the model addressing the client by name.  Should the client accept, a detailed travel itinerary was submitted calling for first class travel and accommodation.  Slim required a letter of understanding spelling out terms and conditions and a 50% deposit. He didn’t like contracts, his word was his bond, everyone along the chain knew that. Slim's business was booming.

Internet subscription for $59—seemed reasonable. The second option—the $125 print subscription—seemed a bit expensive, but still reasonable. But then I read the third option: a print and Internet subscription for $125. I read it twice before my eye ran back to the previous options. Who would want to buy the print option alone, I wondered, when both the Internet and the print subscriptions were offered for the same price? Now, the print-only option may have been a typographical error, but I suspect that the clever people at the Economist's London offices (and they are clever—and quite mischievous in a British sort of way) were actually manipulating me. I am pretty certain that they wanted me to skip the Internet-only option (which they assumed would be my choice, since I was reading the advertisement on the Web) and jump to the more expensive option: Internet and print. But how could they manipulate me? I suspect it's because the Economist's marketing wizards (and I could just picture them in their school ties and blazers) knew something important about human behavior: humans rarely choose things in absolute terms. We don't have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don't know how much a six-cylinder car is worth, but we can assume it's more expensive than the four-cylinder model.) In the case of the Economist, I may not have known whether the Internet-only subscription at $59 was a better deal than the print-only option at $125. But I certainly knew that the print-and-Internet option for $125 was better than the print-only option at $125. In fact, you could reasonably deduce that in the combination package, the Internet subscription is free! “It's a bloody steal—go for it, governor!” I could almost hear them shout from the riverbanks of the Thames. And I have to admit, if I had been inclined to subscribe I probably would have taken the package deal myself. (Later, when I tested the offer on a large number of participants, the vast majority preferred the Internet-and-print deal.)

How do you decide what video game to choose in the vast ocean of online gaming nonsense? There are 100s if not thousands of options permeating the internet. They range from honestly free, pay to win, and all the way up to an actual subscription based model. One of the first decisions you need to make is quite simply, what kind of game do I enjoy? Are you more of a first person shooter type person? If so you will most likely want to ignore role playing games or real time strategies. conversely if you are more of a role playing or real time strategy fan perhaps first person shooters are not for you. Once you have the type of game you are looking for nailed down games the next step: do you want to pay money? This is a big one and a tricky one. So many games out there present themselves as 'free'. I assure you, they are most certainly not free. Think a simple little game like Candy Crush is free? Next time you are in the Google Play or iTunes store Improve WoW PvP check on top grossing apps. You will very quickly change your mind on that. On a more relevant note some games are both free and pay, but maintain a respectful balance. By this I mean you do not HAVE to fork out hard earned cash in order to compete. League of Legends is an amazing example of this. A player cannot obtain any upgrade which will make their character better through monetary expenditures. What you can do; however, is purchase cosmetic items or other no stat gain frill. On the other end of the spectrum you have a game such as the behemoth World of Warcraft. World of Warcraft has managed to maintain a subscription based model for 10 years now. Multiple 'WoW Killers' have risen up since the inception of World of Warcraft using the subscription base as well. Damn near every one of them is now free to play. Rift and Star Wars are the two that really stick out. Leading up to their release forums Wow XP Off PvP Stream across the internet proclaimed them the almighty killer of World of Warcraft. Instead Warcraft kept on trucking and both of those games changed style to f2p not long after their release. These are just a few different games and styles of games for you to choose from. Remember, you get what you pay for in almost every case. (LoL being the exception that proves the rule)

Digital subscriptions are transforming the broader publishing industry in profound ways, and a new breed of reader-supported titles are enjoying newfound popularity. In the technology industry, for example, Jessica Lessin’s sharp, pointed (and subscription-only) The Information now has the second-largest team of tech reporters in Silicon Valley. Ben Thompson has thousands of readers who are happy to pay him $100 a year for his excellent Stratechery newsletter, and Bill Bishop writes an email newsletter about current affairs in China called Sinocism that has more than thirty thousand readers paying $118 a year. Meanwhile, all sorts of splashy, venture-funded, “digitally native” titles like BuzzFeed, Mashable, The Daily Beast, and Vice are struggling to hit their numbers. Any guesses why?

When Adobe announced its transition, its stock was trading at around $25. Its income fell by almost 35 percent the following year. Today Adobe’s stock is trading at over $190, it’s growing at 25 percent a year, and it has roughly $5 billion in ARR (up from practically none in 2011). Over 70 percent of its total revenue is recurring. Amazing.

Ownership is dead. Access is the new imperative. International Data Corporation (IDC) predicts that by 2020, 50 percent of the world’s largest enterprises will see the majority of their business depend on their ability to create digitally enhanced products, services, and experiences. Focusing on services over products is also a sound business strategy. Zuora’s Subscription Economy Index, which you’ll find at the end of this book, shows that subscription-based companies are growing eight times faster than the S&P 500 and five times faster than US retail sales.

Once customers can get the outcome they want, without having to worry about owning the physical assets, that’s where the demand goes, and that’s where new revenue streams are created.

What are the common threads among these three groups of companies? Whether it’s GE, Amazon, or Uber, they are all succeeding because they recognized that we now live in a digital world, and in this new world, customers are different. The way people buy has changed for good. We have new expectations as consumers. We prefer outcomes over ownership. We prefer customization, not standardization. And we want constant improvement, not planned obsolescence. We want a new way to engage with business. We want services, not products. The one-size-fits-all approach isn’t going to cut it anymore. And to succeed in this new digital world, companies have to transform.

The expectation that any desired information or service is available, on any appropriate device, in context, at your moment of need.” Customers have new expectations (and yes, those expectations have certainly been driven by millennials, but at this point, almost everyone shares them). They want the ride, not the car. The milk, not the cow. The new Kanye music, not the new Kanye record.

Today successful companies start with the customer. They recognize that customers spend their time across many channels, and wherever those customers are, that’s where they should be meeting their customers’ needs. And the more information you can learn about the customer, the better you can serve their needs, and the more valuable the relationship becomes. That’s digital transformation: from linear transactional channels to a circular, dynamic relationship with your subscriber.

And as Mary Meeker noted in her latest Internet Trends report, digital consumer subscriptions are exploding because of massive new improvements in digital user experiences, particularly for mobile phones. It feels like we’re at the beginning of something very big.

One in every ten transactions in a US Starbucks store is handled by its mobile app, which tells you when your order will be ready and how long it will take you to arrive at the closest store. Starbucks is working toward getting rid of lines entirely. But it all starts with that ID.

Here lies one of the biggest differences between traditional and subscription businesses. In a traditional business, the cost of sales reflects how much I spent to get that dollar of revenue. But in a subscription business, sales and marketing expenses are matched to future revenue. Why? Because the sales and marketing I spent this quarter adds to the ARR, but the revenue I will see from that ARR growth will come in future quarters. In traditional accounting lingo, your sales and marketing now acts more like a “capital expenditure,” or capex. Essentially, these are costs you spend to grow the business, either from existing customers or from acquiring new customers.

At this point you may be asking, why not spend all of the recurring profit on growth? Why not, indeed? If you believe you have a big potential market and have control over your churn, you can run this play year over year, and you’re growing by 30 percent annually. And when the time comes to finally start taking profits, you’re working off a much bigger recurring revenue stream.

When I was at Salesforce, we spent a lot of time and energy educating investors and analysts on the vast performance differences between subscription software companies and traditional software companies. Lots of them remained fixed on the price-earnings ratio, and could not fathom investing in a company trading—at that point—200x future earnings. We knew that operating profit was essentially meaningless to measuring our value.

Here’s the key takeaway—it is perfectly rational for subscription businesses to spend all their profits on growth, as long as their bucket doesn’t leak. Remember, as long as you are growing your ARR faster than your recurring expenses, you can step on the gas.

Anything you do on your website, a competitor can steal pretty easily. But you can actually create really cool experiences in stores. Experiences that can’t be found anywhere else.

Its February 1, 2018, earnings call was almost exclusively dedicated to highlighting its service revenue, which was $31.15 billion in 2017 and could constitute a Fortune 100 company itself. That revenue is growing at 27 percent a year and represents more than half of Apple’s growth. And while its hardware business is seasonal and subject to wide peaks and troughs, its service business shows consistent, predictable growth quarter over quarter. But guess what? Some people still don’t get it! The Q&A session of that last earnings call was dominated by analyst questions around iPhone supply and demand. It’s enough to make you slam your forehead on your desk.

Cutting abandonment rate became a key priority, and solving for that meant thinking beyond a “connected guitar.” So Fender launched a new subscription-based online video teaching service called Fender Play, which teaches guitarists to perform their first riff or song in a half hour or less. (I’m a fan—so far I’ve learned three open string chords: C, D, and G. Let’s hope I don’t plateau.)

Inspired by these meetings, Franklin created a scheme in which the Junto members would contribute funds toward buying books that all members could use. This model soon grew beyond Franklin’s Friday evening gatherings, leading him in 1731 to write the charter for the Library Company of Philadelphia, one of the first subscription libraries in America.

As a result, the most important recommendation for organizations of all shapes and sizes moving forward is to anticipate worst case scenarios at a minimum. Even in cases where organizations cannot or will not make some of the operational changes recommended below, the exercise of focusing on nonsoftware areas of a given business can help identify under-realized or -appreciated assets within an organization. Particularly ones for whom the sale of software has been low effort, brainstorming about other potential revenue opportunities is unlikely to be time wasted. One vendor in the business intelligence and analytics space has privately acknowledged doing just this; based on current research and projecting current trends forward, it is in the process of building out a 10-year plan over which it assumes that the upfront licensing model will gradually approach zero revenue. In its place, the vendor plans to build out subscription and data-based revenue streams. Even if the plan ultimately proves to be unnecessary, the exercise has been enormously useful internally for the insight gained into its business.

Netflix’s algorithm has a deeper (even if still quite limited) understanding of your tastes than Amazon’s, but ironically that doesn’t mean Amazon would be better off using it. Netflix’s business model depends on driving demand into the long tail of obscure movies and TV shows, which cost it little, and away from the blockbusters, which your subscription isn’t enough to pay for. Amazon has no such problem; although it’s well placed to take advantage of the long tail, it’s equally happy to sell you more expensive popular items, which also simplify its logistics. And we, as customers, are more willing to take a chance on an odd item if we have a subscription than if we have to pay for it separately.

Porter’s aerial palace, complete with twenty-six windows, a long exhaust pipe for steam sticking out the rear, and a giant American flag fluttering over the rudders, was designed to ride beneath an immense cigar-shaped dirigible. The engineering was lunacy, but Porter’s marketing was brilliant. He proposed dispensing entirely with the notorious jumping-off hassles along the Missouri River by launching his “aerial locomotive” from New York. The coast-to-coast trip, Porter’s calculations showed, could be made in just three days—five days if the prevailing headwinds were particularly bad that week. Porter aggressively advertised his “Air Line to California” in eastern newspapers and magazines. Amazingly, over two hundred suckers paid a subscription price of $50, which included three-course meals and wine, for the inaugural balloon hop to the gold fields. That winter, a large crowd gathered in a Long Island cornfield to watch Porter test a model of his airship. But the craft never left the ground because the steam engines were far too heavy for the balloon. The would-be Porter aeronauts, however, were the lucky ones—they never had to leave in the first place. The 125 paying passengers on the first Turner and Allen Pioneer Train were not so fortunate. The Turner and Allen expedition of 1849

And when you finally discover your customers, it changes everything about your company. It affects every role. With a subscription model, suddenly your development team is spinning up new services based on usage data, as opposed in response to the loudest voices in the room.

where a = accumulated future value, p = principal or present value, r = rate of return in percentage terms, and n = number of compounding periods. All too often, management teams focus on the r variable in this equation. They seek instant gratification, with high profit margins and high growth in reported earnings per share (EPS) in the near term, as opposed to initiatives that would lead to a much more valuable business many years down the line. This causes many management teams to pass on investments that would create long-term value but would cause “accounting numbers” to look bad in the short term. Pressure from analysts can inadvertently incentivize companies to make as much money as possible off their present customers to report good quarterly numbers, instead of offering a fair price that creates enduring goodwill and a long-term win–win relationship for all stakeholders. The businesses that buy commodities and sell brands and have strong pricing power (typically depicted by high gross margins) should always remember that possessing pricing power is like having access to a large amount of credit. You may have it in abundance, but you must use it sparingly. Having pricing power doesn’t mean you exercise it right away. Consumer surplus is a great strategy, especially for subscription-based business models in which management should primarily focus on habit formation and making renewals a no-brainer. Most businesses fail to appreciate this delicate trade-off between high short-term profitability and the longevity accorded to the business through disciplined pricing and offering great customer value. The few businesses that do understand this trade-off always display “pain today, gain tomorrow” thinking in their daily decisions.

Once the financial incentives are changed - through subscription, or public ownership, or another model - then the nature of these sites can change, in ways we can actually begin to envision already. Aza [Raskin] told me that 'it's actually technically not hard' to redesign the major social-media sites so that, instead of trashing your attention span and our societies, they world be designed to heal them

Belly went against the trend of flash sales to create a more sustainable business model for their small business customer. They developed an affordable subscription-based product that helped these merchants cultivate longer, more meaningful, and more profitable relationships with existing customers—turning them into loyal shoppers who produce a sustainable and more valuable customer base.

The simplifier model promises two things: not only will you take to-do items off your customer’s list, you will also be the one reminding the customer that the task needs doing.

By early 2014, WhatsApp users were sharing more pictures than were posted on Facebook and the service had twice as many users as Twitter. WhatsApp was adding a million users a day when Facebook decided it had to buy them for $19 billion. WhatsApp is a classic network model subscription, in which the value of being a subscriber increases as more people subscribe.

Like many subscription models, Amazon Prime is a Trojan horse that is expanding the list of products consumers are willing to buy from Amazon and giving the eggheads in Seattle a mountain of customer data to sift through.

These four factors—the access generation, light-switch reliability, delicious data, and the long tail—have led some of the world’s most successful companies and promising start-ups to shift their business models to a focus on subscriptions.

Research firm Gartner estimates that “by 2015, 35% of Global 2000 companies with non-media digital products will generate incremental revenue of 5% to 10% through subscription-based services and revenue models.”12

Gogol flips through the book. A single picture at the front, on smoother paper than the rest of the pages, shows a pencil drawing of the author, sporting a velvet jacket, a billowy white shirt and cravat. The face is foxlike, with small, dark eyes, a thin, neat mustache, an extremely large pointy nose. Dark hair slants steeply across his forehead and is plastered to either side of his head, and there is a disturbing, vaguely supercilious smile set into long, narrow lips. Gogol Ganguli is relieved to see no resemblance. True, his nose is long but not so long, his hair dark but surely not so dark, his skin pale but certainly not so pale. The style of his own hair is altogether different—thick Beatle-like bangs that conceal his brows. Gogol Ganguli wears a Harvard sweatshirt and gray Levi’s corduroys. He has worn a tie once in his life, to attend a friend’s bar mitzvah. No, he concludes confidently, there is no resemblance at all. For by now, he’s come to hate questions pertaining to his name, hates having constantly to explain. He hates having to tell people that it doesn’t mean anything “in Indian.” He hates having to wear a nametag on his sweater at Model United Nations Day at school. He even hates signing his name at the bottom of his drawings in art class. He hates that his name is both absurd and obscure, that it has nothing to do with who he is, that it is neither Indian nor American but of all things Russian. He hates having to live with it, with a pet name turned good name, day after day, second after second. He hates seeing it on the brown paper sleeve of the National Geographic subscription his parents got him for his birthday the year before and perpetually listed in the honor roll printed in the town’s newspaper. At times his name, an entity shapeless and

however, the round trip was a very long one (fourteen months was in fact well below the average). It was also hazardous: of twenty-two ships that set sail in 1598, only a dozen returned safely. For these reasons, it made sense for merchants to pool their resources. By 1600 there were around six fledgling East India companies operating out of the major Dutch ports. However, in each case the entities had a limited term that was specified in advance – usually the expected duration of a voyage – after which the capital was repaid to investors.10 This business model could not suffice to build the permanent bases and fortifications that were clearly necessary if the Portuguese and their Spanish allies* were to be supplanted. Actuated as much by strategic calculations as by the profit motive, the Dutch States-General, the parliament of the United Provinces, therefore proposed to merge the existing companies into a single entity. The result was the United East India Company – the Vereenigde Nederlandsche Geoctroyeerde Oostindische Compagnie (United Dutch Chartered East India Company, or VOC for short), formally chartered in 1602 to enjoy a monopoly on all Dutch trade east of the Cape of Good Hope and west of the Straits of Magellan.11 The structure of the VOC was novel in a number of respects. True, like its predecessors, it was supposed to last for a fixed period, in this case twenty-one years; indeed, Article 7 of its charter stated that investors would be entitled to withdraw their money at the end of just ten years, when the first general balance was drawn up. But the scale of the enterprise was unprecedented. Subscription to the Company’s capital was open to all residents of the United Provinces and the charter set no upper limit on how much might be raised. Merchants, artisans and even servants rushed to acquire shares; in Amsterdam alone there were 1,143 subscribers, only eighty of whom invested more than 10,000 guilders, and 445 of whom invested less than 1,000. The amount raised, 6.45 million guilders, made the VOC much the biggest corporation of the era. The capital of its English rival, the East India Company, founded two years earlier, was just £68,373 – around 820,000 guilders – shared between a mere 219 subscribers.12 Because the VOC was a government-sponsored enterprise, every effort was made to overcome the rivalry between the different provinces (and particularly between Holland, the richest province, and Zeeland). The capital of the Company was divided (albeit unequally) between six regional chambers (Amsterdam, Zeeland, Enkhuizen, Delft, Hoorn and Rotterdam). The seventy directors (bewindhebbers), who were each substantial investors, were also distributed between these chambers. One of their roles was to appoint seventeen people to act as the Heeren XVII – the Seventeen Lords – as a kind of company board. Although Amsterdam accounted for 57.4 per cent of the VOC’s total capital, it nominated only eight out of the Seventeen Lords.

While Wyeth handled the technology, Tudor focused on business development. He gave ice cream–making demonstrations to confectioners, he offered coffee shop owners a water-cooling jug of his own design, and he came up with ice-block subscription models—customers could sign up for one or two deliveries a day, on a monthly plan. He even designed and built some of the earliest domestic iceboxes, which he called “Little Ice Houses,” so that customers could store their daily allowance of ice at home. Meanwhile, despite his self-pitying journal entries, Tudor had to admit that the nascent ice industry enjoyed some unique advantages. Ships departing New England ports were generally light on their outbound voyages, and frequently resorted to carrying stones as ballast, which they simply tossed overboard at their destination in order to return with foreign cargo. Once they were convinced that most of Tudor’s ice wouldn’t melt in transit, they gladly carried it at low rates: even a discounted cargo made more economic sense than a pile of rocks.

Patty was a Netflix senior executive for the company’s first fourteen years and helped drive its remarkable growth through 2012. Patty believes the company’s long stretch of success was fueled by this “very deliberate” strategy of “making it easy to leave and come back.” Patty notes that, while “pissing off consumers” may have short-term benefits, “a subscription model creates the most profit over the long term—over years, generations.” Eric, who went on to serve as chief algorithm officer at online fashion retailer Stitch Fix, added that companies that make it easy to quit get better data about how to keep customers satisfied and loyal. That’s because the “time to feedback” is faster for the company and the evidence is less noisy because most customers are keeping the service because they want it, not because they are trapped in a roach motel.

My observation is that far too often, we act out of blind love for technology and see solutions only in software or hardware. Subscription services and flat rates as the new business models?

Identify some of the actual individuals who are your best customers. Evaluate those with the highest customer lifetime value (CLV) and develop hypotheses about their shared traits. Although demographics and psychographics might be the most obvious, you’ll find additional insights if you examine their behavior. What channels did they come through? What messages resonated? How did they onboard? How recently, frequently, and deeply have they engaged? Compare best customers and worst customers—those you acquired who weren’t ultimately profitable or who weren’t satisfied with your offering. Notice people who exhaust your free trial but don’t convert to paid, or who join but cancel within the first few months. The best customers have the greatest customer lifetime value (CLV); they will spend more with you over time than anyone else. Produce either a qualitative write-up of your best customer or use regression analysis to prioritize characteristics. Share these conclusions with your frontline team—retail workers, customer support, sales—to accrue early insights. With a concrete conception of your best customer, you can discern if the customer segment is sufficiently large to justify addressing. Test and adjust as needed. Then make these best customers and their forever promise as “real” as possible to the team. If you have actual customers who fit the profile, talk about them, invite them in, or have their pictures on your wall. You’re going to feel their pain, share their objectives, and design experiences for them. It’s important to know them well.

Membership Economy organizations assume they’re going to deal with the same customers, forever. The well-being of the customer, and the health of the long-term relationship, is the highest aim of these organizations.

But because the timing issues are inherently linked to revenue model and operating issues, it’s worth your while, as you think about analogs, antilogs, and leaps of faith in those arenas, to add timing to your questioning early in your dashboarding process. Changing the timing of cash flows can shake up an industry, as the Costco story indicates. And, as the Dow Jones story indicates, getting subscription money up front is another good way to go. Could your business offer subscriptions for what you or your competitors now sell in another

Forrester Research thinks we’re at the beginning of a new twenty-year business cycle it calls “The Age of the Customer.” Forrester sees a broad, systemic shift in capital models pivoting toward serving a newly empowered generation of customers who have the ability to price, critique, and purchase anytime, anywhere. Here’s how Forrester describes the new customer mindset: “The expectation that any desired information or service is available, on any appropriate device, in context, at your moment of need.” Customers have new expectations (and yes, those expectations have certainly been driven by millennials, but at this point, almost everyone shares them). They want the ride, not the car. The milk, not the cow. The new Kanye music, not the new Kanye record.

about $50 to $60 million on a new season of GLOW or Godless. So how does Netflix justify its spending on a TV show or movie that it doesn’t “sell”? Again, let’s return to that portfolio effect. Regardless of whether a show is successful or not, investing in sharp new content helps Netflix to both (a) attract new subscribers and (b) extend the lifetime of its current subscribers. Those shows don’t go away! Together, they’re increasing the overall value of the portfolio. They are instrumental in driving down customer acquisition costs (as more subscribers sign up) and increasing subscriber lifetime value (as more subscribers stick around for longer). Netflix knows exactly how long it takes for a subscriber to flip from unprofitable to profitable. Spending tons of money on new shows means Netflix is happy to take a hit on the books in the short term in order to increase their profitability in the long run.

For five years, NPGMC (named after Prince’s backing band, the New Power Generation) offered a monthly or annual membership that not only let fans get new releases, but also provided access to prime concert seats and passes for events like sound checks and after parties. We had Sam Jennings, his digital producer, on our Subscribed podcast, and he detailed just how committed Prince was to creating a sense of value around his service: “They were getting about three or four new songs every month, live versions, remixes, all kinds of things. Plus an audio show. We called it an audio show but it was basically a podcast! It was essentially an hour-long radio program that Prince put together in his studio that we provided as a download. The idea was to create an ongoing experience for them, so that they want to be a part of it. They get the music, they get the downloads, but they’re also investing in a larger experience, which is the community of subscribers themselves. The question was how do we make them feel more like members, and less like customers?

in the technology industry we would call The Life of Pablo a minimum viable product. That may sound like a pejorative term, but a minimum viable product is actually incredibly important. Only after it gets something out in the market can a business gather customer feedback and use this data to iterate and improve in a continuous deployment cycle. The MVP is a defining principle of cloud software development, and Kanye applied it to his music-writing process.

Subscriptions also don’t offer the option to buy when they conclude, which I view as a huge positive—that means that it’s in the carmaker’s interest, not yours, to keep its vehicles in great shape.

Essentially, GE operates its own social network for heavy industrial machinery. It’s sort of like all these power grids and oil refineries and MRI machines have their own Instagram accounts, but instead of pictures of beaches or food, they’re sharing fuel consumption, hydraulic pressure, usage hours, decay rates. “First there was the consumer internet, and then the enterprise internet,” as Barzdukas said, “and now we’re moving into the third generation: the industrial internet. It’s not just about having our phones connected or our enterprise applications connected and operating on subscriptions models. Now it’s the big machines.” So far GE has built more than 600,000 of these digital twins. And just as social networks changed our world, this third-generation industrial internet is going to transform manufacturing.

in IoT, there’s no such thing as a straightforward B-to-B or B-to-C market approach. You can have many different kinds of customers. The physical device is just an enabler. Your value lies in your IP, the usage data from your customer base, and your ability to trade information across multiple markets.

In the old world, you could grow by doing three things: sell more units, increase the price of those units, or decrease the cost required to make those units. In today’s world, you have three new imperatives: acquire more customers, increase the value of those customers, and hold on to those customers longer.

Here’s the key takeaway—it is perfectly rational for subscription businesses to spend all their profits on growth, as long as their bucket doesn’t leak. Remember, as long as you are growing your ARR faster than your recurring expenses, you can step on the gas. As Ben Thompson of Stratechery notes, “You’re not so much selling a product as you are creating annuities with a lifetime value that far exceeds whatever you paid to acquire them.

we use it to manage our recurring expenses. In other words, we use it to budget. Every year, we determine COGS, G&A, and R&D spends as a percentage of our ARR. Budgeting used to be a total nightmare, with all sorts of politics and loud voices. Now it’s actually pretty simple. All our department heads know that the best way for them to grow their budget is for them to contribute to growing our ARR. How are they using their resources effectively toward that single goal? When ARR grows, your budget grows.

build a new technology model (on-demand, or delivered over the Internet—now called cloud computing), a new sales model (subscription based), and a new philanthropic model (integrated into the corporation).

connectivity turns products into services, which allows businesses to build around outcomes, not assets.

IoT is about to change the world. But in order to be truly successful at it, we’re going to have to rediscover the people who are buying the things that we make.

Freed from a blockbuster mindset,

Second, and perhaps more important, what are other people out there doing?

Gmail marked the end of seasonal boom-and-bust product cycles and the birth of the never-ending product.

The Manifesto for Agile Software Development was put together by a group of developers at a ski resort in Utah in 2001. It contains four simple but powerful value comparisons: individuals and interactions over processes and tools, working software over comprehensive documentation, customer collaboration over contract negotiation, and responding to change over following a plan. You can apply these principles to any kind of subscription service. Innovation doesn’t happen in a vacuum. It’s the result of iterating a concept over a period of time. Big “boom or bust” product launches can actually be a recipe for burnout: they result in unhealthy peaks and troughs of productivity and inspiration. The idea is to create an environment that supports sustainable development—the team should be able to maintain a constant pace of innovation indefinitely. That’s the only way to stay responsive, to stay agile.

subscriptions are the only business model that is entirely based on the happiness of your customers. Think about it—when your customers are happy, then they’re using more of your service, and telling their friends, and you’re growing.

Jessica Lessin of The Information says: “I still believe it’s much safer to build a business that doesn’t need any advertising to survive. Doing so forces you to focus 100% on your value to your readers. It’s the only way to make sure that what the news publishers deliver to readers in the future is smarter, more informed and more relevant than in the past.

The core of The Wall Street Journal is not its physical newspaper, but rather its journalists, its brand, its culture, its reach, its values. Its real value (and requisite expense) is in its content, not its format. That is something that people will pay for. If you start with the premise that you have loyal customers who identify with your brand, and you see this as a chance to engage them more deeply with a rich digital experience, then your new model becomes less reliant on the whims of advertising and more supported by stable, recurring subscription revenue.

Jon Slade, chief commercial officer of Financial Times, told Digiday, “We dialed up our marketing on a real-time basis. We were looking at buying patterns, opportunities in social, and spending our marketing budgets in pretty aggressive ways in an attempt to try and dominate a story. We then made sure that didn’t conflict with the efforts of our audience engagement team, so there was constant dialogue between audience engagement and editorial, and between marketing and acquisition.” There is at least as much innovation and creativity happening in FT’s acquisition efforts as there is in its exceptional journalism. FT also has a simple but brilliant formula for gauging reader engagement. Borrowing from the retail sector, they score every one of their readers on the multiple of three factors: recency (when did they last visit?), frequency (how often do they visit?), and volume (how many articles have they read?). Low scores indicate churn risks that their promotions group can approach with discount offers.

you used to be able to do fine just by deploying SAP better than the next guy. That’s no longer the case. Today, IT is where you compete. It’s where you spin up new services, new experiences. It’s where you set up test beds and experiments. It’s where you iterate and scale. It’s where you find the freedom to grow.

I think everyone would agree that brands are still very important, but today you communicate your brand through experiences, not ads. The best sales pitch for Netflix is binge-watching a great Netflix show. The same principle applies to buying glasses from Warby Parker. Or conducting a Google search. Or looking up a prospect on Salesforce.

We’ve had three big ideas at Amazon that we’ve stuck with over the years,” said Jeff Bezos. “Put the customer first. Invent. And be patient.” Another favorite Bezos quote: “I don’t know about you, but most of my exchanges with cashiers are not that meaningful.” The Amazon versus Walmart battle has been framed as ecommerce versus traditional retail, but that’s always been a false dichotomy. It’s about starting with the customer instead of the product. It’s about establishing ongoing relationships. It’s about flipping the script—starting with the digital experience, and then building the store.

But just imagine what would happen at the next Apple keynote if Tim Cook announced a simple monthly Apple subscription plan that covered everything: network provider charges, automatic hardware upgrades, and add-on options for extra devices, music and video content, specialty software, gaming, etc. Not just an upgrade program, but Apple as a Service.

As each year passes, Apple cares less and less about how many iPhones it ships, and more about its revenue per Apple ID, lifetime value per Apple ID, and efficiency metrics toward growing the base and value of those Apple

But what was the last thing you bought at Walmart? They certainly couldn’t tell you. To Walmart, you’re basically just a vehicle for dispensing inventory. Once you pass the cash register, you vanish off the map.

As it turns out, stores are still incredibly valuable, and brick and mortar retail is far from dead—traditional retail just needs to flip the script.

says Robbie Kellman Baxter, author of The Membership Economy. “Make it easy for customers to leave if they want to. You can certainly ask them why they’re leaving, or try to win them back, but don’t get in their way—the digital equivalent of blocking the exit with a hulking security guard.

In November 2011, Adobe’s CFO, Mark Garrett, told dozens of Wall Street analysts that he was going to try as hard as he could to make his company’s revenue earnings fall as quickly as possible. It was an understandably tense call. Adobe was going to stop selling its enormously profitable Creative Suite software in boxes and move to a digital subscription model: “The faster earnings fall, the better off we are as a company and the better off you are as investors, because millions of people paying us every single month is very compelling from a revenue perspective.” The overall revenue wasn’t going away, it was simply being pushed out into the future, and Garrett’s team took great pains explaining why and how they planned to accomplish that transition.

This is another classic example of building a successful business by starting with the customer’s wants and needs, attacking pain points with a machete in order to surface the best outcome, and growing a loyal subscriber base in the process.

Today there are airline companies, telecoms, streaming music services, and newspaper publishers all asking the same kinds of questions: What’s the value of this new service (or route) to our subscriber base? Is it receiving the kind of support that we predicted it would? How long are our members staying with us? What does our growth efficiency look like? What do our usage patterns tell us about where to apply more resources? Who might be at risk of churning?

Gartner predicts that by 2020, more than 80 percent of software providers will have shifted to subscription-based business models. As a recent Deloitte paper notes, the big technology firms simply can’t afford not to offer subscription models: “As more and more customers demand more flexible payment models, the continued viability of many companies, and even entire industries, is being threatened. Those that fail to at least explore consumption-based offerings may end up on the path to obsolescence.

Roughly two-thirds of all Americans now subscribe to a streaming video service. And if it’s not screamingly obvious already, every video content provider on the planet, from the biggest national network to the tiniest cable channel, is transitioning to SVOD, or subscription video on demand.

Do you remember the great “showrooming” scare? Retailers used to be terrified of people coming into their stores, browsing around, then buying cheaper versions from competitors online. After a little market research, of course, they found out that the opposite was true—more people research online first, then head to stores to try out products before they buy them.

From a business perspective, we all know that airlines have struggled for years,” says Mac Kern, former vice president of commercial planning at Surf Air. “It’s a very capital intensive business, not to mention commodity-based. Prices get driven downward. It’s very competitive. The subscription model gives us predictive revenue—that’s something that no commercial carriers have. They don’t know if a flight is going to be profitable until the door on the airplane closes (and they still have to fly at that point!). Because of subscriptions, we know exactly how much revenue we’re going to generate at the beginning of every month. So we can scale our operation effectively, because we know exactly how much flying we’re able to execute. That kind of insight is basically magic in the aviation industry. No one has been able to do that before.

We are seeing an evolution toward services rather than physical transactions,” Allison said at our conference. “There’s been a fragmentation of the customer experience. When you bought a car, or you leased a car, that was one interaction. Then as you went and needed service for your car, there’d be a different interaction at the dealership. And for all these years, the cars weren’t connected, so we really didn’t have a view of the journey that you’re on.” Allison is absolutely right about the fragmentation of the customer experience—most of the big auto manufacturers conceded the service aspect of their industry to thousands of dealerships and repair shops a long time ago. Today Ford is actively trying to remedy that. As Allison noted, “FordPass is a portal to a seamless customer experience.” FordPass app users can warm up their cars in the driveway on cold mornings, find and reserve parking spots, schedule service appointments, find nearby gas stations, and make mobile payments. Henry Ford had a famous quote: “If I had asked people what they wanted, they would have said a faster horse.” Today Ford understands that it can’t solve for mobility just by selling more cars.

The business model for a new Netflix show is fundamentally more stable. It spends about $50 to $60 million on a new season of GLOW or Godless. So how does Netflix justify its spending on a TV show or movie that it doesn’t “sell”? Again, let’s return to that portfolio effect. Regardless of whether a show is successful or not, investing in sharp new content helps Netflix to both (a) attract new subscribers and (b) extend the lifetime of its current subscribers. Those shows don’t go away! Together, they’re increasing the overall value of the portfolio. They are instrumental in driving down customer acquisition costs (as more subscribers sign up) and increasing subscriber lifetime value (as more subscribers stick around for longer). Netflix knows exactly how long it takes for a subscriber to flip from unprofitable to profitable. Spending tons of money on new shows means Netflix is happy to take a hit on the books in the short term in order to increase their profitability in the long run.

The result is Surf Air, which is often called the “Netflix of Aviation” or the “Uber of the Skies.” Its members get access to limitless flights for a flat monthly fee—right now they’re in the western United States and Europe, and growing rapidly.

IT buyers prefer opex to capex. Historically software companies have preferred capital expenditures (capex) for technology investments, as this afforded them the ability to take advantage of amortization and depreciation of the capital investments over a period of time. But as technology shifts to the cloud, there’s a complementary shift happening in favor of opex over capex. Operating expenses bear the advantage of a pay-as-you-go model for services used with comparatively little to no up-front investment. Not only is this a greater value prop, as a business is getting exactly what it pays for, but it’s also a strategy for freeing up cash to drive growth, and a way for large enterprises to be nimble rather than locked into expensive IT infrastructure that lacks flexibility and often serves as nothing more than a bottleneck for transformation.

Warby Parker is averaging $3,000 per square foot of retail space (slightly under Tiffany’s number) by knowing that 85 percent of their foot traffic has already done extensive browsing online.

Husqvarna subscribers in Stockholm can take advantage of the Battery Box to access all kinds of heavy, battery-powered equipment like hedge trimmers, chainsaws, and leaf blowers. The tools are serviced daily to ensure that they are always in good condition and fully charged before customers take them home. Subscribers pay a flat monthly fee and simply return stuff when they’re done—no storage, no maintenance, no hassle. It’s also a great opportunity for people to try out tools before purchase. “People are already sharing homes and cars. To share products that are only used occasionally, like a hedge trimmer, makes a lot of sense for some users,

Trains, bike shares, subways, shuttles, and car services are all locked in horizontal competition, but smart partnerships and platforms will help commuters carry their identity across all these networks seamlessly and intuitively.

There is at least as much innovation and creativity happening in FT’s acquisition efforts as there is in its exceptional journalism. FT also has a simple but brilliant formula for gauging reader engagement. Borrowing from the retail sector, they score every one of their readers on the multiple of three factors: recency (when did they last visit?), frequency (how often do they visit?), and volume (how many articles have they read?). Low scores indicate churn risks that their promotions group can approach with discount offers. The

In the old world, you could grow by doing three things: sell more units, increase the price of those units, or decrease the cost required to make those units. In today’s world, you have three new imperatives: acquire more customers, increase the value of those customers, and hold on to those customers longer

The fact is that the majority of software businesses today are leaving money on the table by focusing strictly on the production and delivery of software at the expense of other customer needs in the process, whether that’s operational assistance (services), improved decision-making (telemetry analytics), or the ability to amortize their capital outlay over longer periods of time (subscription models).

There are countless examples of software companies that have successfully made the shift to subscriptions and subsequently driven higher valuations and more shareholder value: IBM, Symantec, Sage, HP Enterprise, Qlik.

Another, less obvious benefit to this model is that once a subscription business achieves scale, the predictability of its revenue streams allows it to be more aggressive with long-term investments, since it isn’t obliged to maintain large cash balances to weather short-term variations in the business.

DVD technology allowed Netflix to create a completely new business model. Rather than renting out individual movies and being charged exorbitant late fees if they failed to return the VHS tape in time, Netflix customers paid $20 per month for a subscription to “unlimited” movies—provided they checked out just one movie at a time. This allowed Netflix to eliminate Blockbuster’s widely loathed late fees and capture the powerful and certain revenue stream from the proven model of a subscription service. Netflix took off, and even went public as a DVD-by-mail service. But Hastings never lost sight of his ultimate vision for Netflix—on-demand television delivered via the Internet

Broadcast television succeeded by providing the same thing to all its viewers—a model driven by the technological innovation of broadcasting content via wireless signals and later coaxial cable. Netflix succeeds by providing a carefully personalized experience to each of its many viewers, giving it a huge advantage over its traditional television competitors. Moreover, Netflix produces exactly what it knows its customers want based on their past viewing habits, eliminating the waste of all those pilots, and only loses customers when they make a proactive decision to cancel their subscription

more than half of the companies that appeared on the Fortune 500 list in the year 2000 are now gone. Poof. Vanished off the list as a result of mergers, acquisitions, bankruptcies. The life expectancy of a Fortune 500 company in 1975 was seventy-five years—today you have fifteen years to enjoy your time on the list before it’s lights out.

Notice how big manufacturing companies like GE and IBM that were on the first list in 1955—and are still on it today—don’t talk as much about their mainframes and refrigerators and washing machines anymore? They talk about “providing digital solutions,” which is an admittedly jargony way of saying that the hardware is just a means to an end. In other words, these companies now focus on achieving outcomes for their clients, rather than just selling them equipment.

12 percent of the companies on the 1955 Fortune 500 list are still on it today, and most of them have similarly transformed.