How to Transform Your Innovation and Analytics Strategy to Win in the Subscription Economy by Heather Kluter
What was your day like today?If it was anything like mine, your busy day started off with a bang and you haven’t stopped running. You kissed your kids goodbye as they jumped into their Zum (Uber, but for kids) to go to school, you thawed out tonight’s meal from Home Bistro, digitally ran some errands for toilet paper and dog food on Amazon, put on your newest outfit from Stitch Fix, worked a full day and, if you’re lucky, enjoyed an evening of this month’s Bright Cellars wine delivery and binged something new on Netflix. If you hadn’t noticed, you’re pretty entwined in “the Subscription Economy.”
Business is shifting swiftly, and the way people consume your goods and services has changed—some say in a permanent way. Industry expert, Tien Tzuo said, “The reality is ownership is dead; now it’s really about access as the new imperative. Everything you purchase—from transportation to entertainment to groceries—will soon come with a monthly plan.” (Tien Tzuo, former Salesforce CM, Founder of Zuora and Best Selling Author of Subscribed. Tzuo was the first to coin [and trademark] the term “the Subscription Economy” to describe the trend of buying and using digital products and services on a pay-as-you-go [or grow] model.)
Challenge yourself to come up with a business that can’t be turned into a subscription. Even if you’re creative, it’s tough to do. Let’s look at the trends. According to Mary Meeker’s “Internet Trends 2018” report, e-commerce grew more than 16% last year, and product purchases are evolving from buying to subscribing, with many of these brands breaking $100 million in revenue in under five years. The subscription field has grown by more than 100% per year, increasing from $57 million to $2.6 billion in just five years.
No one can deny that all of this change puts customer needs front and center, and if you weren’t a customer-centric business before, you’d better be now. The days of not knowing your customers are gone. Subscription businesses, by their very nature, start by attacking unmet customer needs, building a solution to meet those needs, and then growing loyalty with each interaction. The subscription economy has shaped and increased customer expectations exponentially. These expectations extend to all businesses no matter what model they follow, not just subscription-based businesses. Amazon CEO Jeff Bezos suggests focusing on the “divinely discontent customer,” saying, “These divinely discontent customers expect businesses not just to meet, but to anticipate, their needs.”
In order to do this, everyone in your business must speak the new common language of analytics, as data is at the center of it all. Adobe’s leadership is famous for envisioning a culture and commitment to digital and data that (at the time) was viewed as “crazy” by the industry. Adobe CMO Ann Lewnes has said that she knew, “Adobe would acquire a strategic advantage if it was an early adopter of digital marketing using data and technology. That prescient commitment to analytics and customer insights was the ‘secret sauce to measuring content,’ and helped inform the development of Adobe Experience Cloud.Data serves as the lifeblood of everything we do, and one of our biggest goals is to democratize data so that it’s in the hands of every single Adobe marketer, enabling them to better understand everything from the ROI of our marketing investment to what products and features are the most resonant.”
When your business model relies on data-driven relationships with your customers and prospects, it’s critical to be confident in your analytics and the value that they drive. Whether you have just one lone analytics expert in-house or you have an entire team, you need to foster cross-functional relationships with your internal team and your external analytics partners to create a data-driven culture. Your internal and external data science teams can help everyone in the organization focus on understanding consumer behavior and identifying the most effective ways to engage with those customers. We are beginning to see analytics metrics expand and include econometric measures, digital performance, and sales productivity in addition to more standard KPIs, such as media attribution, ad spending, etc.
Traditional measurement is evolving as well. In subscription-based business models it becomes more important to deliver added value with every contact. Old-school CSAT measurement is not good enough anymore. “Hugging your haters,” as some people call it, can often bring much more impact if you are able to identify, measure and then change negative brand experiences. And, if you can, find a way to do this in a collaborative fashion by inviting consumers into a 2-way conversation and allowing them to feel that their stories are being heard by you, not just being simplified into ratings in a survey in basic and old-fashioned ways.
Your approach to customer segmentation likely needs some rethinking too. Let’s start with an overview of what subscribers currently look like. According to a study by McKinsey and Company:
- Subscribers are most likely to be 25 to 44 years old, have incomes from $50,000 to $100,000, and live in urban environments in the Northeastern U.S.
- 46% of respondents subscribed to an online streaming-media service including Netflix. Subscription-box services that deliver products regularly include Blue Apron, Dollar Shave Club, Ipsy and Stitch Fix. Subscription-based media includes Amazon Prime Video, ClassPass, Hulu, Netflix, Spotify, and others.
- Women account for 60% of subscriptions, but men are more likely to have three or more active subscriptions. The median number of subscriptions an active subscriber has is two, and nearly 35% have three or more.
- 28% of access and curation subscribers say having an excellent, personalized experience is the most important reason to continue their subscriptions.
- For replenishment subscribers, convenience (24%) was the most important consideration, though the value for the money (23%) and personalized experiences (22%) were also important.
- 40% of e-commerce subscribers have canceled their subscriptions, further underscoring the importance of delivering an excellent customer experience on an ongoing basis.
Beyond these basics that apply across the board, understanding your best customers and acquisition targets will help you create ardent fans and love for your brand. With better understanding, you can engage, co-create and collaborate with customers in order to celebrate them.
Based on our engagements across a variety of clients, the other key things that your research and analytics must be driving outcome for include:
- How to manage the cost of customer acquisition, which continues to rise while acquisition rates have plateaued.
- How to mitigate churn, which also continues to rise.
- How to allow your best-offer customers to change their subscription whenever they want. A few years ago only 30% of subscriptions were modified after the fact. That percentage, on average, has now doubled. And, data shows that when customers are allowed to make the changes they want, company growth double or triples (depending on how change permission is implemented), and churn can decrease by as much as 25%.
- How to determine usage-based pricing for your revenue mix so that subscribers don’t feel they are paying for something they don’t use. Companies that don’t have a handle on this see slower-than-average growth.
- How to build long-term relationships and drive Life-Time Value (LTV). Thinking deeply beyond customer acquisition is imperative. Understanding LTV will tell you what each customer is actually worth to your business and can drive the level of investment for each in order to maximize LTV and profitability.
Creating a strategy for a subscription model can be tough and it's hard to know where to start. Here are a few suggestions that can help:
- Define Objectives – This is the most critical stage. Alignment meetings and interviews involving senior decision-makers are crucial. Without senior management’s support, your analytics culture will go nowhere. Accurate definition of what your goal is at the outset is essential to success.
- Develop Hypotheses – The challenges in this stage are to learn from those on the firing line, to question everything, and to see things through fresh, unbiased eyes. Outside partnership is often really good at helping lend these perspectives.
- Define Data Sources – What objective data is available that might help explain or illuminate? What other data might be needed? What is the best way to collect and organize this data?
- Explore the Data – Oftentimes the data itself can lead you to new understanding and new hypotheses or help you refine hypotheses. So, typically, a series of exploratory analyses of the data is undertaken to let the data tell its story independent of human biases.
- Build Mathematical Models – The goal of model-building is to simulate or represent a real-world system of interest so that scientific experiments can be conducted. With simulation models, hundreds or even thousands of possible solutions can be explored, in order to identify optimal solutions under differing conditions or constraints.
- Find Optimal Solutions – Out of the thousands of possible solutions, we can identify a small set of optimal solutions to move forward with. Then you can analyze, manage, deploy, and optimize the products, marketing, and content into a set of best-in-class customer solutions.
With a commitment to change as the subscription economy moves along at light speed, businesses can aim to find the success that companies like Adobe have found through visionary leaders like Ann Lewnes. “We established new roles and reskilled in adjacent roles. We created processes to constantly test, analyze and optimize everything we did across marketing. With a lot of work, we created a widespread marketing competency based on customer insights and marketing analytics, becoming a strategic driver of the business.”
About the Author
Heather Kluter (firstname.lastname@example.org) is Vice President, Automotive Research at Decision Analyst. She may be reached at 1-800-262-5974 or 1-817-640-6166.
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