1.
From Fighting
Fires to Fire
Insurance
Transforming to a subscription-based
business model

2.
Exercise • Why would you
subscribe to:
A. Roofs
B. Refrigerators
C. Drills
D. Guitars
E. Cars
F. Birthday Parties
G. Shoes
• What are the
advantages and
disadvantages to the
customer?
• What are the
advantages and
disadvantages to the
provider?
• Tease out the value
proposition.

3.
Why subscription?
Why now?

4.
Hotel California
Columbia House

5.
“In five years, you
won’t buy anything,
but subscribe to
everything.”
Tien Tzuo, CEO of Zuora

6.
“In five years, you’ll have
the option of subscribing
to everything—and every
business will have to
accommodate that fact.”
Anne Janzer, Subscription Marketing

7.
Four trends ushering in the subscription
model
Reduction of transaction
costs
Light-switch reliability
Delicious Data The Long Tail

8.
McKinsey Says
Subscription ecommerce market has grown by more than 100% a
year for past 5 years
Subscription-based companies growing 8x faster than S&P 500
(17.6% vs. 2.2%, and 5x than US retail sales (17.6% vs. 3.6%)

9.
Smile Curve for implementations
Determine
Cost/Benefit
Develop Project
Plan
Implementation
Go Live
Access Level
Agreement
ValuetoCustomer
Duration

10.
Design Build
Solutions Deliverables
Ideation Execution
MAGIC LOGIC
Low-value Low-marginHigh-value High-margin

11.
MAGIC LOGIC
Low-value Low-marginHigh-value High-margin
“The easier it is to
quantify, the less
it’s worth.”
Seth Godin
Marketing and Business Author
“There is margin in
mystery.”
Tim Williams
Marketing and Business Author
#SageSummitUS - @edkless Be Sage. Build On.
MAGIC LOGIC
Low-value Low-marginHigh-value High-margin
“ The easier it is
to quantify, the
less it’s worth.”
Seth Godin
Marketing and Business Author
“ There is margin
in mystery.”
Tim Williams
Marketing and Business Author

12.
Implementation – Magic v Logic
Step Magic Work Logic Work
Determine Value to Solve
Requires providing insight into the data gathered and
assimilated and developing tangible goals
Is mostly about just gathering and assimilating data
from the customer
Develop Project Plan
Requires a focus on tight objectives, resource and quality
requirements
Is mostly about just describing the deliverables and
functional requirements
Implementation
Requires a high level of collaboration with the customer
including a well executed communications plan and
adherence to the scope or change request process
Is mostly executed by the Partner by using a checklist.
(Usually in someone’s head, but nonetheless.)
System Commencement
Requires a detailed understanding and use of the change
and transition model
Is mostly about getting the data right and can the
customer personnel function
Access Level Agreement
Requires a deep understanding of the on-going
knowledge requirement of the customer
Is mostly about fixing problems the crop up in a timely
manner

13.
Transaction Costs
• Triangulation—Matching buyer with seller, agreeing terms
• Transfer—Of product/service and payment terms
• Trust—Honesty, performance (ratings and brands)
“In the past 20 years entrepreneurs have for the first time been
able to specialize in selling not more stuff, but reductions in
transaction costs for access to existing stuff.” –Michael Munger

14.
Advantages of
the
subscription
model – 1
Predictable revenue
Customer lock-in and switching costs
Not selling services, but creating annuities with a lifetime
value that far exceeds whatever you paid to acquire them
Collective knowledge of your customers is a competitive
advantage that can’t be duplicated
1:1 Marketing: Changes the 4 Ps of marketing. We’re not
pricing a service, we’re pricing an transformation, insurance
(peace of mind), and the portfolio

15.
Advantages of
the
subscription
model – 2
Shift to a long-term relationship focus rather than
delivering tasks—the very definition of a professional
Attract new customers (rather than just selling more to
current customers)
You can plan cash flow and capacity more effectively
Moving beyond efficiencies and into possibilities
Breaks down silos, and molds the firm around the needs
of customer
Truly a “one-firm” model: Portfolio approach to analyzing
profit, rather than silo P&Ls, and realization rates

16.
Advantages of
the
subscription
model – 3
Dynamic cycle customer interaction: renew, suspend, upgrade,
downgrade, etc.
They increase the value of your largest asset (Amazon Prime
carved out of Amazon would be worth billions; the New York
Times would be a Unicorn)
Get paid automatically, less financing, collections costs
Increases customer loyalty
Recession-proofs your business

17.
Nine Subscription
Models
The Automatic
Customer
by John Warrillow

18.
Web-site membership

19.
All-you-can-consume content

20.
Private club

21.
Front-of-the-line

22.
Consumables

23.
Surprise box

24.
Simplifier

25.
Network

26.
Peace-of-mind

27.
Hybrid Examples

28.
Fender
Guitar

29.
Amazon Prime
1 x 7 ≠ 7 x 1

30.
Ascend HR
Corp
• Four reasons why contingency
recruitment is not good for most
companies
• Acts too much like self-
insurance
• Increases unpredictable
budgeting
• Misaligns incentives – take on
lesser qualified candidates
• Doesn’t promote
effectiveness toward more
hires

31.
Exercise 2 • Which of the models
apply to your firm?
• Give an example of at
least three.
• Report out.
1. Web-site membership
2. All-you-can-consume
content
3. Private club
4. Front-of-the-line
5. Consumables
6. Surprise box
7. Simplifier
8. Network
9. Peace-of-mind

32.
You are what we
charge for
• If you charge for stuff, you are in the commodity business
(fungible).
• If you charge for tangible things, you are in the goods
business (tangible).
• If you charge for the activities you execute, you are the
service business (intangible).
• If you charge for the time customers spend with you, you
are in the experience business (memorable).
• If you charge for outcomes the customer achieves, then
you are in the transformation business (effectual,
personalized).

33.
If a member retains membership and engagement
for a year = 90% chance member for life

34.
AICPA: Cost 11x more to acquire a new
customer than retain one

35.
Customer success
management
An integration of the functions and activities
of marketing, sales, professional services,
education, and support into a new profession
to meet the needs of recurring revenue
model companies.
Marketing after the sale!

36.
Adoption
models
The subscription trial—low risk, low reward,
lack of commitment may doom transition
The segmented approach—offer only
selected services, or only to selected
customers
The all-in pivot—Adobe Systems most visible
example, in 2011, “won’t this lower our
margins? How will sales sell this stuff?” By
2016 revenue $5.85B, 78% from
subscriptions

37.
Three Macro
Pricing
Strategies
Penetration: Wal-Mart,
Southwest, Costco, Dell, Timex
Neutral: Toyota, Sony, Casio,
UPS
Skim: Apple, BMW, FedEx,
Nordstrom, Disney

38.
Three actuarial axioms
• If what you sell entails risk, you are not
a commodity.
• There is not such thing as a bad risk,
just a bad premium.
• There is no model for pricing risk by
the hour.

39.
What is Systems
Thinking?
A system is a whole that cannot be
divided into independent parts. Its
properties and behavior derive from the
interactions of its parts, not their actions
considered separately. A disassembled
auto cannot carry people.
–Russell L. Ackoff, Creating the Corporate
Future, 1981

40.
Ultimate Car, or…

41.
The 11 Laws
of Systems
Thinking

42.
#1
Today’s problems come from
yesterday’s solutions.
(e.g., dozens of disparate
spreadsheets). There are no
solutions, only tradeoffs.

43.
#2
The harder you push, the harder
the system pushes back.
Known as compensating feedback,
best illustrated by the story of
Boxer the horse in George Orwell’s
Animal Firm.

44.
#3
Behavior grows better before it grows
worse.
Treating the symptom, not the cure?
The “old” system always appears to
have been better in retrospect and
people will question the change,
even if they had complained about
the old system previously.

45.
#4
The easy way out usually leads
back in.
Drunk looking for his keys
under a streetlamp. Comfort
zone challenge: Satisficing
(satisfy + suffice).

46.
#5
The cure can be worse than the
disease.
Iatrogenic illnesses are caused
by the doctor. First, do no
harm. The cure can become
addictive (opioids).

47.
#6
Faster is slower.
A fast fix can equal a slow
cure. Tortoise and the hare.
Every system has an optimal
speed.

48.
#7
Cause and effect are not closely
related in time and space.
Pushing the elevator button;
adjusting the cold water in the
shower; ROI; and Homer
Simpson.

49.
#8
Small changes can produce big results—
but the areas of highest leverage are often
the least obvious.
Understand dynamic complexity, not
detail complexity (e.g., the 4 Ps of
marketing are a dynamic system). To
control insects in greenhouses, wasps
were introduced—brilliant, effective, and
counterintuitive.

50.
#9
You can have your cake and eat it too—but
not at once.
Tradeoffs are key. You cannot increase the
quality of a product AND simultaneously
decrease the cost. Over time, though,
higher quality CAN lead to decreasing
costs. Either/or thinking vs. both/and
thinking.

51.
#10
Dividing an elephant in half
does not produce two small
elephants.
It produces an ugly, bloody
mess. Nine pregnant women
can’t produce a baby in a
month.

52.
#11
There is no blame.
Dr. W. Edwards Deming
looked to the system, not
people, for the blame.

53.
Measurements v. Metrics
Measurements Metrics
Net Income Using
Average LIFO FIFO
2018 $16,080 $18,980 $11,940
2019 $17,980 $20,800 $14,020
2020 $19,920 $24,890 $17,050

54.
All result in
different
amounts
Standard costing
Total absorption costing
Average costing
Lean costing
Marginal costing
Activity-based costing

55.
The F-16 had a unit cost of US$18.8 million (1998). Operational
cost per flight hour has been estimated at $7,000 to $22,470 or
$24,000, depending on calculation method.

56.
Gedankenexperiment #1
1. Do we pay $25 when we make one more?
2. Do we save $25 when we make one less?
3. Apple made 4 billion to get unit cost down to $25.
4. But what if demand is only 1 billion?
5. A higher gross margin will be calculated, but total
cash costs will be higher (see GM).
6. When you produce more units with same capacity,
you’re being more efficient, not saving cash.
7. Are there are any costs not adding value to the
customer?
Cost per Pencil = $25
What does that tell you?

57.
Gedankenexperiment #2
1. 10,000 books costs $10,000, or $1/book
2. $14 Gross margin
3. Digital print option cost 5,000 books for $8,000,
$1.60/book
4. But what if demand is only for 5,000 books
5. Option 1: Revenue = $75,000 - $10,000 = $65,000
6. Option 2: Revenue = $75,000 - $8,000 = $67,000
7. Lesson 1: Don’t let calculated unit cost influence
operations
8. Lesson 2: Model cash flow, not accounting calculations
Sales price = $15
What does that tell you?

58.
Traditional vs Subscription P&L
Traditional
Net sales $ 100
Cost of goods sold (40)
Gross income 60
Sale and marketing (20)
Reasearch and development (20)
General and administrative (10)
Net income $ 10
Subscription economy
Annual recurring revenue $ 100
Churn (10)
Net annual recurring revenue 90
Recurring costs
Cost of goods sold (20)
General and administrative (10)
Research and development (20)
Total recurring costs (50)
Recurring profit 40
Sales and marketing (30)
Net operating income 10
New annual recurring revenue 30
Ending annual recurring revenue $ 120

59.
Subscription
metrics
MRR – Monthly Recurring Revenue
ACV – Annual Contract Value
CAC – Customer Acquisition Costs
Churn rate = MRR beginning of month divided by amount of lost MRR
in the month
Recency (last visit), Frequency (how often do they visit), and Volume
(how many articles read)
LTV > 3 x CAC (3:1 ratio of lifetime value must be 3 times greater than
cost to acquire. Most successful sub business have 8:1 ratios)

60.
Calculating Customer Lifetime Value
Where GC is yearly gross contribution per customer, M is the
(relevant) retention costs per customer per year, n is the horizon
(in years), r is the yearly retention rate, d is the yearly discount
rate.

61.
Calculating Simplified Customer Lifetime Value – (No
really!)
Where GC is yearly gross contribution per customer, r is the
yearly retention rate, d is the yearly discount rate.

62.
Calculating Simplified Customer Lifetime Value – Example
Example: If the gross contribution (profit) of a customer is $500 per year,
your retention rate is 95 percent, assume a discount rate of 2 percent
(using interest rate as a proxy), this would yield a CLV of $6,786.
So what and who cares?

63.
How Retention Rate Affects CLV
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000
80%
90%
95%
98%
$1,818
$3,750
$6,785
$12,250
Customer Lifetime Value

64.
Three reason cost
accounting is a bad practice
• To get a cost, you have to create and force math
and relationships that do not exist.
• By doing this, you lose touch with your
operations.
• You create meaningless numbers that people
consider as gospel (a single representation of an
artificial reality).

65.
Dr. Reginal Tomas Lee
“Costs and profits are not absolute;
they change based on the model you
use to calculate them. The largest
expenditure for most companies is
capacity; space, labor, materials,
equipment, and technology. Unless
you model and manage capacity
effectively, you will not achieve the
cash flow results you seek.”

66.
Business domain
management
Operations and Cash Domain > Accounting Domain

67.
Dr. Reginal Tomas Lee
“There is too much focus on
accounting data and not enough on
understanding the factors that
influence the data. The idea that
you can calculate different costs
from the same data and
information should suggest that
costs do not represent cash. Cost
accounting confuses measurement
with metrics. Companies spend
millions to manage costs that have
nothing to do with money.”

68.
What replaces
cost
accounting?
VALUE-BASED PRICING BUSINESS MODEL
CHANGE
VALUE COUNCIL & CHIEF
VALUE OFFICER
CAPACITY & CASH FLOW
MODELING (UNIFYING
FINANCE, ACCOUNTING,
AND OPERATIONS)
PROPER PROJECT
MANAGEMENT
KEY PREDICTIVE
INDICATORS
SYSTEMS THINKING AFTER ACTION REVIEWS

69.
Resources
Subscribed, Tien Tzuo, founder of Zuora
The Automatic Customer: Creating a Subscription Business
in Any Industry, John Warillow, 2015
Subscription Marketing, Anne Janzer, 2017
Retention Point: The Single Biggest Secret to Membership
and Subscription Growth, Robert Skrob, 2018
Subscription Economy Index: www.zuora.com
Tomorrow 3.0, Michael C. Munger