Why companies like Netflix, Spotify, and Zipcar are the business winners of tomorrow

We see them in every country and in every industry: the subscription winners! New companies with new innovative subscription business models are challenging old-fashioned companies. The subscription revolution is coming! Are you ready?

In 1998 Reed Hastings, a former math teacher and a successful software entrepreneur, launched a new company that would change the dynamics of a multi-billion-dollar industry and topple mighty giants. Hastings had recently had to pay $40 in overdue fines after returning the rental movie Apollo 13 far too late. From that annoyance sprang the idea of a whole new way of distributing rental movies to consumers – and subscription-based Netflix was a reality.

Download “How to build a subscription business” by Morten Suhr Hansen here.

The business model of Netflix is as simple as it is brilliant. Paying a flat subscription fee each month gives you access to as many movies and television shows as you can cope with. Initially, Netflix used the postal service to distribute physical DVDs to customers, but as the internet spread and the speed of broadband increased, Netflix shifted much of its distribution online.

Netflix now has a presence throughout most of the Western world with its subscription-based streaming service; but in the United States, where it all began, many customers still pay to receive films on DVDs through the post. So it is important to grasp that internet streaming itself is not the crucial innovation behind Netflix. It is the innovative business model: the subscription model!

During 2014 Netflix reported that they have reached 50 million subscribers worldwide. Needless to say, the massive success of Netflix has fundamentally shifted power within the film industry, and currently Netflix more than any other company is rapidly changing the way we consume television and movies.

The case of Netflix is a perfect example of what we might refer to as the subscription revolution. But this company is not the only one! In fact, the last decade has seen numerous examples of new, exciting subscription businesses emerging across different business sectors. Spotify in the music industry, Zipcar in car hire, Salesforce.com in the software industry, and Next Issue in the magazine industry, not to mention the many, many different examples of retail products like beers, razors, coffee, shirts, beauty products, and underwear – or services like dentistry, funerals, car washes, and cinema-going – that have been marketed as subscription services within the last couple of years, are all great examples of the same trend whereby new subscription-based companies challenge – and in some cases even out-compete – more traditional, transaction-based companies.

The subscription revolution is not a matter of tiny companies trying to break into the market by selling their products in an oddball way. The subscription revolution is big business. Indeed Gartner, the highly-regarded American research institute, has predicted that by 2015, 35 per cent of the world’s two thousand largest companies will be using the subscription-based business model.

Why are subscription businesses striving?

Now the question is: why do we see this subscription revolution just now? I think the answer is quite simple. It is my strong belief that a prerequisite for the success of any business model is that it must provide tangible benefits to both the customer and the company providing the product or service. And the subscription business model does just that: it provides tangible benefits for both seller and buyer.

Here are some of the most obvious benefits from the consumer’s point of view:

• Convenience from having someone delivering the product or service on a continuous basis

• Reduced complexity from not having to choose from a number of different sellers every time the product is purchased

• Inspiration from sellers who wants to inspire customers to new ways of using their products and services

• Gateway to membership of a community where customers can interact with other subscribers to the same product or service

• Saving money when sellers offer lower prices to customers who wants to subscribe

The subscription business model is equally attractive to companies and it is not difficult to see why: it is simply good business.

On one hand, a subscription business will attract more customers if it provides the kinds of tangible benefit for subscribers that we saw above. On the other hand, there are inherent benefits associated with the subscription business model itself:
• Predictability from knowing how many customers the business will be serving in months to come

• Increased purchasing frequency and customer lifetime when buyers don’t have to make the purchase decision over and over again

• Fostering loyalty and improving competitive position by keeping competitors away from buyers

• Reduced sales costs when the business don’t have to sell the product again and again

• Robust cash flow from prepaid subscriptions and low stock supply

It is no wonder that more and more businesses are adopting the subscription business model. Hopefully, you are as well. If you are not running a subscription business already and not planning to do so in the future, your competitors just might. Because the subscription revolution has begun!

About the writer

Morten Suhr Hansen is an experienced subscription expert and has held executive positions in subscription businesses for more than 20 years. In 2011 Morten Suhr Hansen founded Subscrybe – a consultancy company that works exclusively for subscription businesses within areas like subscription innovation, acquisition strategies, loyalty building and subscription systems and processes. Morten Suhr Hansen is the author of the e-book “How to build a subscription business” that guides the reader through 29 steps of how to build a subscription business. The book is available on bookboon.com.