The entire business world has shifted beneath our feet. Companies are rushing to focus on the needs of locked down, immobile consumers, who are now forced to go totally digital to carry on with their lives. Exercise at home, educate at home, entertain at home, eat at home.
It’s a weird new gold rush. And it won’t last. There will be a winner or two, sure. Zoom comes to mind. But as quickly as these initiatives spin up, most of the players will disappear when life returns to normal.
That said, one evolution that was already underway and will trend through and beyond the coronavirus crisis is a shift to subscription pricing models to pay for services. The impact from the current crisis is accelerating that trend, and subscription pricing is now much more likely to become the norm sooner rather than later.
That’s very good for service and SaaS startups who can use subscription pricing as a differentiator and a weapon against their industry incumbents.
So let’s take a look at why service subscription models make so much sense in this new normal, and then talk about how to do them right.
From mobile data to cloud computing to gig developers
A good way to get your head around subscription models for services is to look at how mobile phone data pricing has changed over the last decade. We used to pay for mobile data by the byte, literally, like a product. At the end of every month, our phone provider would add up our tab and send us a bill.
Not only was this a clunky and expensive way to price, it caused huge amounts of friction for the customer. It was up to the customer to maintain a rough idea of how much they were spending, and the pricing model created all sorts of artificial limits on how much mobile data the customer consumed.
Eventually, the providers realized that mobile data wasn’t a product to be sold by the byte, but a service to be sold by the month. The subscription model was adopted, and it evolved to where we are today. We don’t think twice about listening to music, watching movies, sharing videos — all the things we weren’t doing years ago.
There are those who will tell you, and I think they’re right, that the tech startup boom over the last decade can be directly attributed to Amazon Web Services. When AWS started selling computer processing power as a service, developers started designing applications based on the flexibility to be able to offer what we now call Software as a Service (SaaS).
With SaaS, the entire build-release-enhance software purchasing lifecycle model shifted to subscription, eliminating untold costs in the chain and removing almost all friction from the purchasing experience. SaaS customers consume what they need, when they need it, and how they need it. Product becomes service becomes subscription service.
This is possible because we’re now able to track and forecast usage of everything from mobile phone data to how much maintenance and repair your new vehicle will need once you drive it off the lot.
Imagine then that we start looking at other services, developing and applying the same kinds of tracking and forecasting models, and selling those services with a subscription.
For the entrepreneur, the circle is then complete. Your consumers have a subscription to allow them to access what they need when they need it. Your cloud host gives you the processing power to serve the smallest and the largest customers with tiers. What if you could just buy a subscription for the software development needed to build and maintain your software?
Or buy a subscription to any other service, for that matter.
That last idea is where traditional service models are heading, and startups are springing up to figure those models out.
The goal: Flatten the service demand curve
We hear a lot about flattening the curve lately, this is different. The strategy for flattening the service demand curve has been around for decades.
Most services have peak periods — busy times of day, busy days of the week, seasonal peaks and valleys, even usage-based peaks and valleys.
The goal of a service subscription model is to flatten that demand, in other words, fill the off-peak periods with overage from peak periods. Customers at off-peak demand subsidize their peak demand by paying a little more for their off-peak time. The benefit they receive in return is total removal of the friction of having to monitor their usage.
But service subscription models can’t be sold this way. Most consumers, especially those not thinking outside of the traditional service box, will decide that they’d rather pay less and take on the burden of using only what they need when they need it.
The pitch: Change the way the service is consumed
To get the customer to accept a subscription model, you need to create a shift in mindset about the service itself.
Let’s use hiring as an example. Traditional recruiting firms charge based on a percentage of the salary of the employees their customers hire. There’s a ton of wasted time and money in that model, on both sides. The most obvious way to remove all the waste and friction is to be able to offer a pool of steady supply of talent at all times, to be drawn from when the customer has demand.
That demand is then split into tiers, and if the service provider does their job correctly, customers won’t mind overpaying in down periods if they’re getting what they need when they need it.
How does the recruiting service provider do their job correctly and add value? By breaking down the elements of what makes a smooth and successful hire, and for that matter, the long-term effectiveness of the employee for the employer.
Take the axes of the candidate, the company, and the position. Start with the basics: Which candidates are qualified for the position? Then move to the general: Which candidates work for the company and will the company be pleased with them? Then move to the value: Which candidates will be successful as an employee in that exact position for that company for years to come?
That’s all usage and forecasting. It can theoretically be measured for doctors and patients, or lawyers and clients, or plumbers and homeowners, or tutors and students.
Freelancer two-sided markets are a nice start, but eventually someone is going to package more robust on-demand pairing of service customer and provider in a cohesive, useful way. And then someone is going to Amazon it and own it.
The incumbents are terrified because they don’t provide value
So why doesn’t every traditional service provider do this? Why are most of them locked into per hour or per visit or per task models?
Because most of them aren’t interested in providing said value.
Yeah, they’ll say they are, but what they’re really interested in is moving the most product at the highest possible margin, just like mobile phone providers used to do with data. This usually means pushing the most expensive option to the market with the lowest common cost denominator.
Think about a car dealership. Their dream scenario is to find a fan of the automaker’s badge, preferably someone with good enough credit to easily lock into one of their own financing deals, but not enough cash-on-hand to pay outright. They want to sell that person the vehicle with the highest margin, quickly, but not so quickly that they have to give up a lot to close the deal. Oh, they also want these people to walk in at the end of the month or quarter or whatever because quota.
Automakers have been experimenting with subscription models for years, and mostly failing, because they’re just selling the same consumption model under a different pricing model.
Where’s the value?
Some startup is going to turn buying a vehicle into driving as a service. Uber and Lyft are already a nightmare for the future prospects of traditional car ownership, because those companies are changing the way the vehicle is consumed. Turo is filling the outlier gaps. It won’t be long before someone completes the circle.
All the friction needs to be removed
A lot of the direct-to-consumer companies have already kind of messed-up subscription models in product. Their subscriptions are usually one size fits all, it’s always more than you need, and they haven’t done enough to take the burden off of repeat buying.
Even with Amazon, I used to subscribe to my coffee until I found myself too often with a shortage or a glut, because it was still up to me to manage my “bench” of coffee. All their subscription did was ship me more coffee at an interval that was too dynamic for me to guess at. No value-add there. But I’d bet they’re working on it. The dash button was close, but ultimately not close enough.
If you don’t remove all the friction, the subscription model won’t survive. It was the same thing when mobile phone providers offered data plans with burstable caps that triggered the same product-like pricing charges. Half a solution is not a solution.
Bonus: Stabilize your own business
As an added benefit, the companies that offer subscription models get levers they can pull to flatten their own demand curves, provided they handle outliers and stay on top of external changes that impact their customers.
Subscription is not a set-it-and-forget it model. It takes work to get it running and more work to keep it efficient and profitable. But when done right, the company that offers the subscription model can scale like a product company, and thus earn a much higher valuation than a service company.
Plus it’s win-win. Your customers get a better experience, and you get a weapon to use against the industry incumbents.
In a follow-up post, I’ll talk about making that subscription model profitable.
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