Corporations are discovering the joys of subscription commerce

Microsoft and Adobe are having banner years, but if you think those impressive financials are thanks to relentless commitment to innovation, think again. A recent piece in Barron’s suggests that good, old-fashioned subscriptions are to thank.

“While Apple investors fret over the latest iPhone sales,” Alex Eule writes, “the market has rewarded Microsoft for locking in a regular stream of revenue tied to the cloud and its Office 365 franchise. Those old Windows software boxes? They’ve been replaced by shiny mobile apps tied to monthly payments.”

Adobe too has breathed new life into their business thanks to their own subscription service, Creative Cloud. Where products like Photoshop once retailed for in excess of $2,500, Adobe now sells access to the latest software in a variety of subscription packages.

And it appears to be working. “In 2012 — the last full year it sold boxed software — Adobe earned $2.35 a share,” Barron’s notes. “This year, the company is projected to earn $6.82, going to $7.98 next year.”

90% of Adobe’s revenue is now classified as recurring, up from 5% before the transition, Adobe CEO Shantanu Narayen has noted. And the rest of the industry is quickly catching up — Autodesk and Intuit have also found success with subscriptions.

Tribe Subscribe

There’s one thing Adobe and Microsoft have in common, of course — they’re not selling physical inventory. But that’s not to say the world of material retail hasn’t also embraced the subscription model, the fashion industry chief among them.

In 2016, Rent the Runway launched Unlimited, a monthly subscription that allows users to keep up to four items of clothing at home at the same time.

“Since Rent the Runway introduced Unlimited, the service has amassed tens of thousands of subscribers,” The New York Times reported in October. “This year, Unlimited… will account for the majority of [Rent the Runway’s] revenue.”

That early success should not belie the massive infrastructure and logistic build-out that often accompanies such an operation. For RtR, some of that infrastructure was already in place — the company famously operates the largest dry cleaning operation in North America — but the technical backend and in-store strategies required a complete overhaul.

Early success with subscription services should not belie the massive infrastructure and logistic build-out that accompanies such an operation. For Rent the Runway, some of that infrastructure was already in place.

That hasn’t stopped old-school entrants from trying their hand at the sartorial subscription, however — Ann Taylor, J.C. Penney, Under Armour, BabyGap, Express, and New York & Company have all launched subscription services within the last two years.

The Subscription Prescription

While there is no doubt that subscriptions are heading into the world of B2C retail, there are significant challenges ahead for companies trying to do it cold: inventory management (for physical goods), working with potentially razor-thin margins, and online/in-store logistics coordination.

These concerns, however, are offset by the considerable upside that subscription services offer consumer-facing corporations: predictable revenue, better supply chain management, and a built-in consumer base.