Adobe – Pioneer of the Subscription Economy

Adobe – Pioneer of the Subscription Economy
08.04.2019 Rainer Wiedmann
Subscription
Adobe was the first company to transform product sales into a service business. A pioneer of the Subscription Economy. Adobe’s share price rewarded this decision with unprecedented highs after a significant downward turn. Since then, usage-based business models have sprung up in all industries. Ownership is no longer important to a large part of the clientele, which is why consumption-based billing is used. We own a Netflix subscription, pay a monthly fee to Dropbox and receive dog food and diapers from Amazon at regular intervals.
„By 2020, all new entrants and 80% of historical vendors [in the software market] will offer subscription-based business models,“ Gartner estimated in May 2018. A blatant contrast to earlier times, when a new software update had to be sold every 18 months.

Adobe creates a subscription model

Adobe has always been a successful software company that has made its mark with a number of products, including Photoshop, InDesign and Dreamweaver. But at the beginning of the 2010s the first difficulties became apparent: the user base remained stable for a long time and growth could only be achieved through price increases. At the same time, technological developments accelerated to such an extent (e.g. in online publishing) that the previous update cycles every 18 to 24 months (linked to a new product) no longer met customer requirements.
Subscription Vergleich
Comparison between „old“ Sales Model and „new“ Subscription Economy
Source: iq! Management Consulting 
This prompted Adobe to take an extremely bold step. The important products were converted to a monthly subscription model. Investors and the stock market were shocked. Of course, sales slumped at first. And the principle of „software-as-a-service“ had not yet proven itself. But usage-based sales are only shifted backwards and soon become more stable, so after a while things started to pick up again. And not only that: as the number of subscribers grew, the new business model quickly became more lucrative than the old one. In the book „Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business“ by Thomas Lah and J.B. Wood, this development is succinctly presented in the FISH model.

Adobe has „swallowed the fish”

It is a blatant step to replace a Cash Cow that has been working for 30 years with a new subscription model that has not been tried and tested very much. On the one hand, the high up-front payments of product sales are collapsing. Not a very nice idea for managers, who are mainly measured on the basis of short-term results.

On the other hand, the introduction of the new model creates new costs. Accounting must be converted to the billing of monthly subscription fees. Sales teams that are prepared to negotiate with large retailers now have more and more end customer contact. Product update cycles are dramatically shortened. The entire organization must learn and be retrained. New technological support is necessary.

FISH Model

The Fish model explains the financial mechanics of the Subscription Economy
Source: Technology-as-a-Service Playbook: How to grow a profitable Subscription Business

This initially results in a rather depressing „Loose-Loose-Situation“: Sales collapse and costs rise.

But after a certain transition period, the picture changes: initially high investments are replaced by a leaner cost structure: the high development and marketing expenses of the product launches give way to a moderate investment in the operation of CRM systems and a continuous development of the Software.

White_Paper_EoT_Download_Button

Not only will revenues become more stable and „secure“, they will also exceed product revenues as the number of subscribers increases. In addition, it will be easier to cross-sell and up-sell, as there will be direct „always-on“ contact with users.
Those who have swallowed the fish are rewarded by the stock market: subscription-based companies are now valued 2-3 times higher on average than product-based companies. And thus Adobe’s stock skyrocketed after a while, too.
Adobe's stock performance

Adobe’s stock performance after the introduction of a subscription model
Source: stockmarkets.com

Conclusion

In just a few years, the software industry has successfully adapted to the service business. But this change in business model and user preferences affects all industries equally. Every manufacturing company should ask itself how it can sell the use of its products instead of the products themselves. Because all markets will be affected by this massive shift.

iq! supports many B2B and B2C manufacturers with this transition. Experience has shown that a usage-based model can not only significantly increase sales related to the main product (e.g. a printer). Consumables (e.g. the printing ink) are also easier to sell. In many industries, for example, customers  purchase just 10% of their consumables, who have highly interesting margins, directly from the manufacturer. Switching to subscription sales dramatically increases the proportion of consumables sold per customer.

 

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