How to build a good subscription product

I chatted with Tien Tzuo, CEO of subscription management company Zuora, on this week’s podcast. After the conversation, I started thinking about what it would mean to end the ownership economy, as he called it. The idea that we will go from buying and owning a product to paying for access to one on a monthly subscription basis (or based on use) is a hard sell for many.

Still, consumers anticipate this will happen in the future. In our recent Stacey on IoT audience survey, over 20% of respondents said they already have some sort of IoT-related subscription service. Nearly a quarter of those that don’t yet have a subscription think they’ll add one sometime this year. Many of these subscriptions enhance the value of existing hardware, and others are subscriptions for products instead of paying the full upfront cost for the devices.

The business world wants to move people to a subscription model for a number of reasons, but it’s not always clear what consumers will get out of this shift, and what they might be giving up. So I’ve come up with a list of things that I think any good subscription should include. If a company wants me to pay a monthly fee for a device, or pay every time I use it, they need to provide a service that is designed for my benefit, not just because it makes sense for the company’s bottom line. Here are some of the things I’m looking for.

Convenience – If I choose to purchase a subscription, it’s likely because I want convenience in some form or fashion and am willing to pay a premium for it. For example, I once wrote about a company that offered a dog food subscription and a connected food scoop. The company ended up dumping the scoop, but the overall idea was good. Users would pay for the convenience of knowing that their dog was fed each day and for the automatic replenishment of the food before it ran out. If we want to think about turning an asset into a subscription, the June oven offers a fun thought experiment. I purchased the oven and currently have the option of subscribing to a recipe service. Let’s take this a step further. I could see June offering a food delivery service that takes the angst out of meal prep by shipping or delivering from my local grocery store the food I need for a week’s worth of meals that can be assembled and automatically cooked in the oven. At that point, the oven isn’t the focus, it’s the convenience of having a service take meal planning, some of the prep, and all of the cooking out of my hands.

Continual improvement – In the interview, Tzuo made a good point about how subscription companies innovate. They move from where the goal is to create a big hit upfront to the continuous improvement of the product over time. When you have the software and enough hardware, it’s possible to refresh the features of a connected device with every update.

Managed maintenance – This ties back to convenience, but if you buy a service instead of owning an asset, you expect that the actual owner of the asset will fix problems when they arise. One of the most valuable aspects of renting is that when something breaks, you call someone and they fix it. My friend just had his smart door lock fail. If he was buying access as a service for his home or the lock was part of a security service, he may have avoided the problem of replacing it himself when his service provider sent someone out to fix or replace the failing lock. If I subscribed to my June oven (see above), I would have expected the company to fix the handle when it broke a few months ago.

Replace and recycle – Some companies are already doing this today, but the management of a product throughout its lifecycle is an essential value-add of moving to a subscription model. I’d pay a lot to avoid having to toss a device when it inevitably stops working. Any company that wants to turn physical assets into a service needs to think about the asset’s physical embodiment, including how to replace it when necessary and take responsibility when it’s at the end of its useful life. As Tzuo explained in the podcast, these companies have the scale and resources consumers simply don’t have, which makes managing the lifecycle for physical goods plausible.

Upfront accounting – When you buy something on credit you get a statement showing how much you will pay over the life of the loan for that particular item. It took years to make that information transparent to the consumer. As we move to more services, I think a clear and easily understood upfront disclosure of the costs and any other expectations associated with each service is essential. After all, one of the benefits of subscriptions is not having to fork over so much cash upfront. But how much will we pay for these services over time?

Obviously, consumers will have to pay for some of the convenience and value-adds that they don’t get when they buy a product outright. Human resource costs will be a problem for many of the businesses trying to develop these models. Much of the real value will be delivered by convenience, and that convenience requires people to handle the physical products onsite.

Sure, the IoT can help with anticipating problems and efficiently scheduling people, but ultimately a service that has a physical component will need people to install it, maintain it, and replace it as time passes. Wrapping staffing costs into a subscription and explaining that cost to consumers will be tough.

There’s a ton more to say on this topic, and I don’t think we’ll get to the end of ownership anytime soon. I do think we’ll see connected products delivered as services, but I think those services will be larger than a single doorbell or kitchen appliance. These will take time and standards to develop. And not everyone will buy into this model.

Listen to this week’s podcast for more thoughts about subscriptions.