This story original published in WWD and written by Tien Tzuo, chief executive officer and cofounder of Zuora and the author of “SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future — and What to Do About It.”
The signs are everywhere — ownership is on the outs. From Spotify’s IPO to Amazon Prime hitting a hundred million memberships to Lyft’s new monthly pass, more and more people are opting for fluid services rather than static products. In fact, our physical world seems to be rapidly diminishing all around us. Companies aren’t buying buildings, they’re renting from WeWork or Servorp. Teenagers aren’t saving up to buy cheap cars, they’re catching rides with their phones. Even the malls are disappearing. The world is switching from capex to opex.
Our physical world seems to be rapidly diminishing all around us. Why is this happening now? Many people point to the shifting consumption patterns of Millennials, but at this point, we should probably give the poor Millennials a break. They’ve suffered enough analysis. This is an increasingly cross-generational shift. If you’re not interested in care and upkeep, preferring access to ownership is just basic common sense. The bigger picture here is that the dominant economic model of the last 150 years is coming to a close, and it’s about damn time.
Since the rise of industrial production, we’ve operated under a straightforward asset transfer model. Companies built and sold physical products. The fundamental goal was to create a hit. Once that was achieved, then a company could spread its fixed costs over as many units as possible, so it could compete on the all-powerful margin. At least that’s what I was taught in business school back in the Nineties (it was really bad advice, even back then).
Of course, this entire system was predicated on planned obsolescence. The revenue model depended on us repurchasing products that were specifically engineered to expire after a fixed period of time. Back in the days of Thomas Edison, lightbulb companies actually competed on how many hours their lightbulbs could last (no doubt some MBAs soon corrected them). We were expected to fill up our lives with disposable stuff on a regular basis. Is it any wonder that people are starting to get tired of this approach?
Our new “subscription economy” is far better for everyone for all sorts of reasons. For starters, the explosion of all these digital platforms has enabled consumers and businesses to effortlessly extract the services that sit behind the products we use on a daily basis: music from records, mobility from cars, software from servers. Sweden’s Husqvarna, for example, runs a network of automated storage units that allow people to rent garden tools by the hour. We get to experience the value without bothering with the expense and hassle of maintenance. We get to enjoy the milk without having a cow.
Secondly, in this new model, sustainability and environmental responsibility change from a “nice to have” to an actual economic imperative. In service models, the manufacturer handles the logistics and the equipment (General Electric famously pioneered this concept by offering their jet engines on a “power by the hour” basis). If they don’t make sure that their equipment lasts as long as possible, and that the materials used to build that equipment are recycled or repurposed effectively, they will lose out to their competitors. It’s that simple. When companies become more efficient, the planet benefits.
Third, when companies work smarter at offering the best services possible, all sorts of opportunities open up. There’s more discovery on the consumer side — we get to uncover new music to play, new meals to cook, and new clothes to wear, without throwing more junk into landfills. On the enterprise and manufacturing side, new analytic services are enabling companies to work smarter and “unlock” billions of dollars of unrealized value. The global economy has been desperately searching high and low for growth for years — as it turns out, we’ve been sitting on top of it the entire time! All these remarkable new acronyms we’re hearing about (AI, IoT) are turning into utilities like power or water, that companies can access at the flip of a switch. Services turn economic potential into kinetic commercial activity.
Which leads me to my final point — services bring growth. And not just growth, but sustainable growth. Today’s economy is rife with all sorts of foment and arbitrage. Take a look at taxi medallions, or Gillette stock. Product companies based on discrete, anonymous transactions are particularly susceptible to the whims of the market. Companies that have direct relationships with their customers avoid boom and bust product cycles and greater macroeconomic havoc. A happy subscriber base is the ultimate economic moat.
There will always be conspicuous consumption. Large numbers of people will always try to define themselves by what they own, as opposed to how they act. And how can you blame them? That’s how the old model worked. But a new economic model built around access and services is catching fire across every industry on the planet, because of access, sustainability, discovery and growth. And that’s why this new model is here to stay.