September 2, 2021

Digital Products Pioneer Subscription Models

Subscriptions to digital services have boomed over the past decade. Now, companies that sell physical goods face a similar opportunity.

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How Digital Products Pioneered Subscription Models For Physical Goods

Though subscriptions date back to the 15th century with the creation of newspapers, it was the birth of the Internet that drove the exponential growth of the subscription economy. As digitization exploded, businesses that could offer their products digitally and on a subscription basis made the shift, seeing the massive potential. 


The transformation began in B2B software, back when Salesforce.com pioneered its CRM software as a service (SaaS) in 1999. At that time, most other software providers, like Microsoft and Adobe were selling licenses to their products with fees charged for version updates. But true growth didn’t occur until the 2008 financial crisis, when companies had no choice but to be more discerning about their software investments. As a result, to avoid decline, providers seized the opportunity to take their solutions to the cloud and offer them on a more affordable, subscription basis. The model caught on—today, software as a service is on its way to being a $300 billion market


But B2B service providers weren’t alone. Around the same time, in 2007, Netflix shook up the movie rental business model by introducing streaming as a service. By 2010, rather than buying expensive DVDs or dealing with the hassle of renting and returning them, consumers fully embraced the convenience and affordability of this model. An endless library of content was suddenly available on-demand for a low monthly fee, and a new era had begun. 


From music to magazines and everything in between, subscriptions to digital services have skyrocketed over the past decade, enabling brands to cultivate long-term relationships with users, experience data-driven growth, and increase working capital, all while delighting their customers. Now, companies that sell physical goods face a similar opportunity to transform their business models. As digital channels create an avenue for any company to be a service provider, every company can be a subscription business—and experience the same benefits.


Subscriptions Foster Relationships, Data and Reliable Revenue 

Adobe pivoting its Creative Suite to subscriptions saved its business. Today the company makes billions in revenue on a quarterly basis. But the financial incentive was just the tip of the iceberg. 


Building a relationship with customers was more important and rewarding, according to the company’s CTO. "The single biggest transformation that it has enabled us to do is have a much more direct relationship with our customers," Adobe CTO Abhay Parasnis told Business Insider. This direct access to customers on a monthly basis was critical because it drove improvement in many areas, from user experience to cost. 


Analyzing subscription behavior, for example, enabled Adobe to make key business decisions on pricing, such as bundling subscriptions to standalone tools. The result? Data-driven growth and reliable revenue. "If it's good for your customers and if you continue to innovate, it's not surprising that as a net result, your revenue, your business growth continues to be very healthy."


Netflix has similarly leveraged its relationships with customers not only to improve their user experiences, but also to grow their business through data. In 2016, the company shared that it would start running hundreds of A/B tests each year to assess the effectiveness of its recommendation engine in an effort to keep improving its content-delivery algorithm and boost retention. Between 2016 and 2020, it doubled its number of users worldwide, indicating that it was not just attracting new viewers, but also retaining existing ones. It’s this combination of healthy customer relationships, data-driven growth, and subscription-generated working capital that enables Netflix to keep innovating, consistently producing new and exciting content.


Physical Goods Hold a Wealth of Untapped Subscription Potential

A subscription model can unlock these same benefits for brands selling physical goods, from household to high ticket items. Some of the earliest examples of direct-to-consumer (DTC) subscriptions to physical goods have been niche brands zeroing in on consumers’ essential needs, like personal hygiene products. Frustrated by the high cost of razor blades, Dollar Shave Club’s (DSC) founders developed a model that reduced the price by eliminating the middleman: the retailer. And because the product was something consumers already knew they needed, convincing them to buy it in a cheaper, more direct and convenient way, wasn’t hard. 


Revenue flowed in, but more importantly, the relationships DSC built with its members offered insight that retail competitors like Gilette couldn’t dream of. The company used quizzes and data from monthly interactions to provide personalized product recommendations to its customers regularly, even launching new product lines, including hair care. “Dollar Shave Club doesn’t launch stuff just to launch stuff,” co-founder and CEO Michael Dubin said in 2015. By 2016, when Unilever acquired it, Dollar Shave Club had 3.2 million subscribers. The company rattled the industry so much that incumbent Gilette had no choice but to follow suit, launching its own subscription service in 2017


Though brands across other industries—from beauty and wellness, to food and fashion—have taken notice, skeptics remain, unsure that subscriptions are right for their company. But subscriptions truly do have the potential to strengthen any business. Consider automobiles. Buying a car is a big investment and after that initial conversion, there’s typically not much room for further monetization until customers are ready for a new vehicle years down the line. Even then, there’s no guarantee they’ll come back because the relationship was confined to the sale and, therefore, short-lived. 


Subscriptions can reinvigorate this declining business model. Unlike a lease, which only includes the car itself, emerging auto subscriptions encompass the total cost of car ownership, with sellers assuming the responsibility of car maintenance. Just like replenishment in the CPG space, the appeal for consumers is that product and service become a package deal. And for businesses the rewards are once again plenty: relationships, data, and reliable revenue.


We’re Only at the Start of the Subscription Economy

Of course, auto makers and CPG brands aren’t the only ones that can tap into this potential—subscriptions are becoming a key driver of growth for all kinds of brands. As lifestyles change, so too must business models. Before 2020, the idea of a furniture subscription may have raised eyebrows but today, it’s appealing. As consumers embrace remote work, they’re moving around more, too. But moving is costly, and a furniture subscription offers savings on moving and storage costs. 


The modern consumer craves convenience, flexibility and personalization—these desires are at the core of every decision they make. A subscription based model enables brands to cater to these needs, providing services customers want, while growing their businesses in once-unimaginable ways. 


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