The subscription model becomes relevant
The software as a service (“SaaS) model has become popular with investors globally – so how can you become a SaaS business if you don’t make software? North Ridge Partners’ Christin Burns discusses how the subscription model is being applied to a variety of industries.
As my colleague Michael Gethan put it in his recent article – the “SaaS” business model derives its revenues from the licensing of a software platform via subscriptions. To facilitate this article, I am going to add to the plethora of acronyms out there as “XaaS” was already taken. “XaaS” stands for “anything/everything as a service” but I feel it is too computing / internet focussed and therefore misses the opportunity. So today I am officially coining “LaaaS” or “literally anything as a service”. Under this model a business derives subscription revenues from… literally anything.
Consumers have been trained by some very notable companies that ownership of a product isn’t everything and it is outcomes that matter. Netflix (tv/movies), GoGet (cars) and Spotify (music) have all been built on what pioneers in the software space have known for quite some time. We just want to consume the benefits a product offers and leave the rest to someone else.
Here’s some interesting things going on out there to get the creative juices flowing:
Creating a new type of consumer: the Husqvarna Group is a Swedish manufacturer of power tools. They wanted to capture people who won’t commit to buying tools and instead borrow their products from thy neighbour (and often not return… thanks Homer!). So they are now piloting a monthly subscription to borrow the tools whenever you need (ZDNet calls it “CaaS” or “chainsaw as a service”. Regularly serviced and fully charged. Who knows – you might decide you love your loaner so much that you buy one after all.
Flexibility / convenience: Surf Air – just another airline. Except they charge a flat monthly fee to hop on and off their flights whenever you want. You save time by being pre-screened to simply walk on the flight, your monthly travel costs are capped, and you aren’t punished for making last minute travel plans.
Support your core business: Fender, the guitar company, know how many people buy their products and then don’t use them after a few months due to lack of musical progress. So they created a subscription-based online video teaching service. A new revenue stream that also keeps you playing that guitar and remaining a loyal customer.
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The point of this article isn’t just to give you a sense of what’s happening out there in the subscription space. It is to prompt you into thinking about whether or not there is an opportunity to rethink how you better service your customers while at the same time deliver the following benefits to your business:
Predictability: wouldn’t you prefer that 80% of your revenues for next year were already locked in before it starts? Salesforce does.
Growth: I read recently that companies running on subscription models grow their revenues nine times faster than the S&P 500.
Resilience: there’s a lot of talk about tough economic times ahead. Subscription models with highly engaged consumers committed to paying you on a monthly basis is one way of insulating yourself.
It’s these three attributes that make subscription businesses valuable to investors and acquirers.
A final note to consider – it’s not just about applying a recurring revenue stream to the same old thing you have always been doing. It’s about partnering with your customer in an ongoing arrangement that recognises what it really is they want out of your business.
Credit to all the forward thinkers in this space – particularly Tien Tzuo. Highly suggest reading his book “Subscribed” if you are keen to delve into the detail.
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Christin Burns is a Sydney based Partner at North Ridge Partners.