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Ben covers the property industry and has a keen interest in entrepreneurship and travel writing. He speaks Mandarin and previously covered housing and urban affairs for The Australian Financial Review.

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Subscription models: How well do you know your customers?

Published 10 April 2013 09:01, Updated 10 April 2013 13:14

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Subscription models: How well do you know your customers?

The marketing genius of fast-growing music streaming service Spotify is stark when you look at the numbers. It has persuaded more than 5 million consumers around the world that it is good value to pay $10 a month for unlimited access to the company’s vast library of music.

Spotify’s research shows that the $120 a year these consumers spend is double the average spend of those who buy and download music from sites such as iTunes. Its consumers not only spend twice as much, they also don’t even own the music and lose the right to listen to it if they unsubscribe.

The comparison is an awkward one because Spotify has many more users who don’t pay anything at all and put up with some advertising interruptions in exchange. But it is part of a shift towards renting over owning that spans many industries. The focus on relationships over one-off sales gives businesses the responsibility to deeply understand their customers, but also the ability to leverage a much more lucrative engagement.

The managing director of Spotify’s Australia and New Zealand operations, Kate Vale, believes a subscription is a win for both consumers and businesses.

“To me the future is what people want and how they want to consume their music,” Vale tells BRW. “I look at this personally, I got on Spotify four years ago . . . it was about being able to have access to any single track in the world and access it instantaneously.”

But what is interesting is that although consumers pay less in advance, they often end up paying more.

Spotify says on its website: “The economics of streaming are very different than those of digital downloads. A proper comparison requires considering the long-term value of a consumer. In other words, the question we ask is: how much revenue does a streaming subscriber generate, compared with a paying downloader.

“A popular song or album can generate far more revenue for an artist over time than it historically would have from upfront unit sales.”

Some artists, Vale says, are earning $300,000 a month.

Try before you buy

Spotify’s model is not unique. Insurance companies, telcos and utility providers have long used a subscription model, ideally giving them a predictable and growing revenue stream. This can be more efficient than selling a product which forces businesses to expend effort acquiring customers over and over again with new and often expensive marketing campaigns.

But what is new is the inroads this model is making into many other areas of business. City dwellers, particularly in the inner suburbs, are choosing to rent cars from providers such as GoGet rather than buy them outright, saving them the hassle of paying for maintenance or parking.

Media companies sell website subscriptions over newspapers and you can no longer fob off charity spruikers with a few coins – they want your credit card details.

Cloud computing is leading consumers and businesses to license the use of software at a much greater scale than in the past, instead of buying the programs and dealing with the bugs.

In some areas, it is leading to conflict when the rental of an asset eats into the profits of businesses that sell that asset, such as the stoush between the publishers of university textbooks and textbook rental company Zookal. Zookal blames the publishers for denying them wholesale rates, while the publishers have counter-attacked with copyright infringement claims.

Customer preferences are shifting such that they want to sample the usefulness of products cheaply first. Instead of expending money on upfront marketing campaigns and employing high-pressure sales tactics, businesses are hoping their products will go viral with freemium or trial models, and the focus is on monetising the relationship after the sale. Businesses need to not only keep their customers happy, but lure them towards paying, or paying more. Cynics will say it’s simply the old cheap-printer-expensive-ink trick, on a fast-growing scale.

Subscription economy

The boom in services over goods leads to a fundamental change in the way businesses are run and profit is calculated, and global software giant Zuora has capitalised on providing accounting programs that can handle dynamic, continuing revenue relationships. Its customers in Australia include MYOB, Macquarie Telecom, MCM Entertainment, Fairfax Media and Telstra Sensis.

Alongside traditional financial metrics such as accounts receivable, cash and revenue, there are now new metrics. Subscription businesses need to monitor things such as the number of active customers, their deferred revenue and annualised recurring revenue, while trying to make their renewals more lucrative and decreasing customer churn.

If you have a traditional product view of the world, you have a very traditional income stream view of the world.

“If you have a traditional product view of the world, you have a very traditional income stream view of the world,” says Zuora chief executive Tien Tzuo. “I sold 10 units at $100 so that’s $1000 and here’s my revenue.

“But what we find is the goal of these new [subscription] businesses is to say I want to grow the value of my in-store base. Instead of saying I shipped 100 units for 10 bucks last quarter, I say I started this quarter with 100 customers, and every customer is worth $10 to me. So I’ve got a $1000 book of business, and how do I grow that?”

And just like Spotify, businesses are discovering a continuing relationship can be far more lucrative, he says.

“A good example that really brings it out is when the iPhone 2 came out in the US, AT&T dropped the price of the iPhone by $100 but increased the monthly fee by $10,” Tzuo says.

“They knew that by dropping by $100 the cost of the physical phone, they would get more customers. Then they realised customers were sticking around for 24 months.”

Zuora CEO Tien Tzuo says companies are finding that an ongoing subscription relationship can be more lucrative than a big up-front sale.Photo: Zuora

Knowledge is money

Another advantage for businesses is the information they can gather from a subscription system. Businesses have always tried to build long-term relationships with their customers, but the information now available to them is opening up channels for much deeper interaction.

Musicians who give their music to Spotify are able to learn more about their fans than ever before. Because Spotify users hand over their Facebook accounts, musicians are able to learn the age and demographic of their users, and which songs are popular in any given region. When they plan to perform in a location, all the digital listeners in that place can be notified. They can use the information they have about their fans to plan their tours, target their merchandise and potentially even tweak the lyrics or tunes of their music.

“The data that we can provide artists is quite incredible,” Vale says, “especially now that we are at scale and in so many markets around the world.”

The ability to collect vast amounts of information about potential customers is giving an advantage to businesses that move quickly in testing their products, over those who spend time researching conceptual ideas.

Cameron West runs internet start-up Pro Training Programs , which offers online training courses in five sports. While his is not a subscription model, he demonstrates how responsive online businesses need to be to their customers. He now gets about 10,000 views a month from only a limited range of programs, and is profitable (but doesn’t reveal figures) despite only launching the site in June last year.

He puts his fast growth in popularity down to a lean start-up mentality of using real customer feedback rather than long development cycles to test the business.

In choosing which sports he would feature, he began with data from the Australian Bureau of Statistics on the top participation sports. Beyond that, he built a business around web-search habits. He used Google Keyword Tool to analyse the volume of searches for specific sports-related keywords, and studied his competitors’ traffic using Compete.com, Google Ad Planner and Quantcast. He set up a simple website and used Google Analytics to track where people were coming from, what pages they visited and what they did on those pages. Other tools allowed him to have different website formats and pricing schemes displayed to different customers, and track which had the greatest take-up. On-site surveys and social media engagement brought more feedback.

“I didn’t want to invest a lot of my time in this until I could confirm it would work,” West says.

“You don’t need to spend hundreds of thousands of dollars these days. I could set up a website for a few thousand dollars, spend my afternoons and evenings doing a bit of optimisation to drive traffic to the websites and as soon as you have the traffic then you can test.

“Once I had traffic it was no longer about me guessing [pricing] . . . Now I can set 30 per cent for $30, 30 per cent for $50 and 30 per cent for $90.”

“You build, push it out, people come back and say yes or no or build this or add that. You’re doing lots of fast releases and iterating very quickly and very often.”

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