Episode 31 – Ownership is dead : A SaaS first future and what you can do about it

Netflix, Spotify, and Salesforce

What are the common threads among these three groups of companies?

They are all succeeding because they recognized that we now live in a digital world, and in this new world, customers are different.

Customers he says want a new way to engage with business.  Over the last 10 decade, the world he says is shifting from products to services.

Subscription companies are growing nine times faster than the S&P 500.

These business models all designed to keep customers consistently engaged in long-term relationships—think Netflix, Amazon Prime, Uber, Spotify, Salesforce, Zendesk, Box.

The book almost can be thought of as two parts – the first that talks about the fascinating facts about the subscription economy and the latter, steps one could take to get there

Here are 5 questions we will try answer in this video

[1]What do customers today want in the new digital economy?

Customers want outcomes not ownership. 

He talks about how at the heart of the subscription economy is the idea that customers are happier subscribing to outcomes they want, when they want them, rather than purchasing a product with the burden of ownership.

[2] Can any company move from a product to a relationship mindset?

Move away from the product economy to a relationship based one – Subscription experiences built around needs are better than static offerings. Focus is on finding values to deliver on-going value to customers

• Caterpillar uses subscriptions to help solve problems – it’s not about how many tractors you can rent, but how much dirt you need to move.
• Fender evolves from selling guitars one at a time to creating lifelong musicians by teaching beginners to play, and keeping them inspired for life.
• Today’s consumers prefer the advantages of access over the hassles of maintenance, from transportation (Uber, Surf Air), to clothing (Stitch Fix, Eleven James), to razor blades and makeup (Dollar Shave Club, Birchbox).

[3] How does this new model impact the revenues?

Subscription models create a predictable recurring revenue stream

For this we need to understand ‘swallowing the fish’ – the transition period in moving from a traditional to a SaaS model. This is when the revenue curve temporarily dips below the operating expense curve before climbing back upward again. The fish is what happens when a traditional company shifts it revenue mix from an asset purchase model to a subscription model. The company experiences a string of quarters where topline revenue shrinks without the large upfront payment.

Ex – when SFDC reports its annual revenue figures and notes that its deferred revenue figures are 60% of that number that means it gets to start next year with more than half its revenue target in the bank. Wall street appropriately might give them much higher multiples than it would a company without that second figure.

[4] How have the traditional companies reinvented themselves to be SaaS first?  The Adobe case study

Adobe transitions from selling enterprise software licenses to offering cloud-based solutions for a flat monthly fee, and quadruples its valuation.  In the perpetual model, there were a number of red flags, Adobe was driving revenue growth by increasing selling price – product updates were delivered only once in 18 months but the customers’ requirements were more frequent.  When they switched over to the SaaS suite, they gave customers some time – giving themselves a year of parallel sales models. These were followed by sustained evangelization of the new model, walking their customers through the reasons and explaining benefits -including f2f meetings with 50K customers. In 3 years Adobe creative cloud went from no subscription revenue to 100% subscription model. It inspired MSFT, Intuit, Autodesk and PTC. It has 5B USD in ARR from practically none in 2012.

Over 70% of its revenue is recurring!

[5] Why does SaaS allow companies not to cater to the lowest common denominator. The reason we have such quality media content – movies, music and shows and how is it ties to the new business model?

Netflix that started streaming movies from 2007, went from 0 to 100 million streaming subscribers in 10 years. This is a new golden age of media – there is so much more music, movies and shows to discover. Freed from a block-buster mindset [which is akin to preparing and releasing a big product], new streaming services do not have to worry about streaming and chasing lowest common denominator budget and can afford to take on edgier projects. Netflix apparently spends 8B USD/year on original content. So how does Netflix justify spending on a TV show or movie that doesn’t sell – regardless of whether the show is successful or not, investing in sharp new content allows Netflix to

a] Attract new subscribers and

b] Extend the lifetime of current subscribers. Together they are increasing overall value of the portfolio

P.S :  Can academics be subscribed?

Eventually, yes. It might.

McKinsey says SaaS has become the default software delivery model.

The ‘next normal’ established by COVID will accelerate the footprint of SaaS, given the growth of remote working, the rapid deployment of digital solutions and lower-up front costs.

Let me know if you have other book recommendations around this topic

Hope you enjoyed this review