First, let’s abolish the “recession-proof” misnomer. Just like watches are no longer described as “waterproof,” subscriptions are not completely recession-proof, and thinking they are could lull you into a false sense of security Subscription businesses are, however, recession-resistant. They can and do survive downturns much better than their more traditional counterparts.
Imagine you are the financial decision-maker in your household. What happens when your income goes down? You start cutting expenses. The first to go is anything that’s not critical. You likely won’t be buying a new car or new furniture. Those new drapes can wait until times get better. The kids’ clothes? Maybe they can get a little more wear out of what they have. Of course, you still buy food, but perhaps you change what you buy to reduce the grocery bill. Going out to eat is out of the question.
Now think about your subscriptions. Are you cutting your internet access? Your cable or satellite TV access? What about your electric bill? Trash pick up? Pest control? Maybe you find ways to reduce them, but you probably don’t cancel them.
Why is that? Because they are selling you a stream of benefits, not an item.
Selling a stream of benefits
In most traditional models, businesses sell you an item. When that item is old or becomes worn out, you shop for a replacement. You can probably wait a little longer if you need to, eking out some additional benefits from the older item. A car exemplifies this. You get to choose when to trade in an old car for a newer one.
This is true in B2B as well. Companies buy a stream of benefits, not products. To keep the company running, they need to continue receiving those benefits. Maybe they can cut back a little, but they still need some level of the benefit. And if they stop paying completely, that benefit goes away whereas an item does not –– it just may not be as shiny or fast as it once was.
Think about Salesforce. They charge by the user and have different levels of service they sell as packages. If one of their customers enters a recession and has to lay off some of their salespeople, they might reduce the amount they pay to Salesforce by eliminating some seats. Also, the customer may choose to forego a few features, opting for a lower-level package to reduce their bill. However, the customer will not abandon Salesforce.
Switching costs are too high. The consequence of not using or having the product is too high. Salesforce may take a small hit in revenue, but they won’t lose the customer unless that customer goes out of business. This is an excellent example of recession resistance.
What do your customers buy?
Customers of traditional businesses buy products. Customers of subscription businesses buy streams of benefits. That bears repeating because it is critical to realize if you’re thinking about switching to a subscription model.
Buyers are buying a stream of benefits, not a product. Subscription is not a payment plan; it’s a business model. The product is different and the customers’ expectations are different.
Before Salesforce entered the arena and shifted the CRM world to the cloud, companies would buy on-premises perpetual-license CRMs. In other words, they paid for all of the CRM benefits upfront. Those traditional CRM companies (like many companies I see today) may have thought they could just change the way they charge for their product –– easily converting to a subscription model. Instead of charging a single fee, they could charge a monthly one.
Technically that may be right, but that strategy has a pretty low chance of success. To shift to subscription, a traditional company needs to consider the recurring benefits it can deliver to its customers.
Think about the additional benefits Salesforce delivered to its customers over the traditional CRM companies. Salesforce managed the IT infrastructure. The product’s cloud nature allowed salespeople to interface with it conveniently when out of the office. They regularly upgraded the software without requiring customers to undergo new, large installations. There were myriad capabilities they could deliver that traditional companies couldn’t.
What benefit do you deliver?
One of my favorite consumer examples is Porsche. In Atlanta and other cities, you can subscribe to a Porsche. That’s right. “Subscribe” to a Porsche. This is not just a payment plan.
Take a moment and think about the benefits people want when driving a luxury car like that. Comfort and performance? Perhaps an ego boost? These seem reasonable. Do they have to own the vehicle to get those?
Now consider the disadvantages of buying a Porsche. Yes, the price, but also the hassle of insurance and maintenance. If the buyer is the type to drive one for a few months then trade it for a different one, this can also get expensive quickly.
With this in mind, how would you design the Porsche subscription? Maybe it’s obvious. For a monthly fee, you can drive a Porsche. You get the comfort, performance, and ego boost of being seen driving one. The subscription covers the insurance and maintenance. And, possibly the best feature is, you can trade in what you’re driving for another Porsche any time you want.
Is the Porsche subscription recession-resistant? As a luxury good, maybe not as much as a less expensive product. If a family had other cars, they might just stop the subscription. However, if this was their only car, they might keep paying the subscription rather than buy a new one.
For Porsche, the subscription is probably more recession-resistant than selling new Porsches. It’s easier to put out $2,000 to $3,000 per month than $100,000 for a new car, particularly during downturns.
But the key thing to remember is, neither Salesforce nor Porsche simply changed the payment plan. Both companies changed their product to offer a stream of benefits. In both cases, the benefits exceeded the benefits a buyer could get from buying something similar. And these benefits stop when the customer stops paying.
Besides being recession-resistant, there are many benefits to adopting this new business model. Subscriptions yield higher customer lifetime value, higher valuations, and more predictable revenue streams. Every company in every industry should deliberate if it’s possible to offer a subscription to solve your customers’ problems differently. But remember, a subscription is not a payment plan. It’s a new way of delivering a stream of benefits.