Sunday, April 23, 2017

What the Subscription Economy Means for B2B Marketers

One of the most profound business developments of the past few years has been the proliferation of companies using subscription-based business models. Of course, subscription-based businesses aren't new. We've been subscribing to newspapers and magazines for decades. What is new is that more and more kinds of goods are being repackaged as services and sold on a subscription basis.

The rapidly growing number of companies that offer "software-as-a-service" is probably the most prominent example of this phenomenon. Software applications that were once sold for a fixed price and distributed via CD's or Internet downloads are now sold on a subscription basis and accessed and used via the cloud. Think Salesforce, Office 365, and B2B marketing automation solutions. The media industry has also been disrupted by companies using subscription-based business models. Think Spotify and Netflix.

What really makes the subscription economy a profound business development is the range of products that can be sold on a subscription basis. GE offers a subscription model for its jet engines. Caterpillar is said to be moving toward selling metric tons of earth moved rather than earth moving equipment. I (and you) can "subscribe" to razors (Dollar Shave Club), groceries (Blue Apron), and even automobiles (Zipcar).

The subscription economy appears to be growing rapidly, and many subscription-based businesses are performing well. A recent study by MGI Research suggests that the subscription economy could exceed $100 billion by 2020. And a recent analysis by Zuora (a provider of software for subscription-based businesses) found that since the beginning of 2012, the sales of subscription-based businesses are growing nine times faster that sales of companies in the S & P 500, and more than four times the rate of US retail sales (including e-commerce).

So, what does the shift to subscription-based business mean for B2B marketers? First and foremost, it means that marketers should focus more of their time and attention on customer retention and growth.

In a subscription-based business, most of the economic value of a customer is realized in installments, over time, rather than when the initial "sale" is made. Because of customer acquisition costs, new customers are invariably unprofitable, and they will not become profitable until they have been "subscribers" for some period of time. So in essence, customer profitability depends directly on the length of the customer relationship, as the following diagram shows.

Most marketers will acknowledge the importance of customer retention and growth, but most companies are still focused primarily on customer acquisition. In a 2016 global survey of more than 1,000 marketers by Econsultancy in association with IBM Watson Marketing, respondents said that, on average, 55% of their revenues are delivered by customer acquisition activities, and 45% are achieved through customer retention activities.

Delivering great experiences to existing customers is obviously critical for companies that have subscription-based business models because of the dynamics of customer profitability. But the same pattern of customer profitability is also found in many kinds of companies that don't use a true subscription model.

In many types of companies, for example, the first sale to a customer will not be sufficient to make that customer profitable because of the marketing and sales costs that must be incurred to acquire the customer. Most of the profits will result from the customer's subsequent purchases of additional or ancillary products. Epson may have earned some profit when I purchased a new printer about a year ago, but they've almost certainly realized significantly more profits from the multiple ink purchases I've made over the past year.

These dynamics of customer profitability mean that marketers in virtually all kinds of B2B companies should be more focused on nurturing relationships with existing customers.

Top image courtesy of Rob Enslin via Flickr CC.

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