Subscription Models: The Gift that keeps on Giving
- Alexander Reissiger
- Mar 6, 2020
- 4 min read
Updated: Mar 16, 2020
In 2013 Adobe took a momentous decision to shift from its licence based model to a subscription based model for its creative app suite.
The result. Astounding.
A quick look at Adobe’s stock prices over the last 20 years is a quick indication that this shift was not a bad move. At all.
Source: Yahoo Finance (2020)
In this post I am going to be looking at why a shift to a cloud based subscription model was an excellent move for Adobe and led to its valuation sky rocketing.
Founded in 1982, Adobe is a US software company that could be considered the backbone of the creative industry, supplying a wide range of tools able to assist the creation of a wide range of projects. In 2013, Adobe introduced a subscription model known as ‘Creative Cloud’ (CC), a service replacing its licensing model and introducing a broader range of tools and services (Warren, 2013).
This short summary of an event hosted by Adobe is great taste of the possibilities that CC can offer:
Despite the benefits offered through reengineering their product, the shift in business model addressed three of Adobe’s strategic challenges: encouraging repeat customer purchases; innovating faster and better; and growing their user base (McKinsey, 2015).
Drawing upon its wide resource base, Adobe was able to reengineer its product and redesign its business model to capture the most value from these changes, resulting in a disruptive innovation in the market. To pull off such a move and offer a superior product, Adobe needed to complete rethink ‘how we engineered the products, our operations, and our go-to-market and business models’, demanding an investment and fundamental change throughout the company (McKinsey, 2015, para. 18).
As highlighted by a number of contributors to Harvard Business Review, organisations that are able to implement a big change, utilising their dynamic capabilities, presents a significant challenge for competitors to respond to (Ovans, 2015 & Magretta, 2002). The competitive advantage offered by such a comprehensive move has longevity and is an opportunity to stride ahead of competitors, especially in the creative technology industry where innovation is a surefire approach to winning over customers and investors.
As well as being a disruptive innovation, changing to a subscription business model provided Adobe with a revenue structure based on regular monthly income. Compared to expensive, one-off sales, subscriptions have a number of benefits.
Subscriptions are much better solution for smaller businesses and freelance creatives because it spreads the cost over time, making it a much more attractive option to use as it doesn’t demand an upfront investment. As a photographer, the lower initial cost was a huge benefit and reason why I use creative cloud. Having already invested in a good camera and laptop, starting out as a photographer was very expensive to begin with. Despite these costs, being able to pay for the service over a 12 month contract allowed me to keep the initial cost of starting down and I was able to invest more in my equipment, helping me expand more quickly.
However, it is worth noting that customers who had been with Adobe prior to the subscription model were resistant to changing to a subscription model as products such as Photoshop have not been seen major changes in the last few years (Shankland, 2013).
That being said, I think it is important to note that CC offers a whole host of other benefits such as cloud storage, apps, and other apps, which greatly improves and are essential to my workflow as well as many other photographers, suggesting that the subscription model is likely to also have a high retention rate.
Additionally, the regular monthly income greatly improves Adobe’s cashflow by providing a regular and more predictable stream of income. Having a stronger and more predictable cashflow has numerous benefits, one of the key benefits is clarity in finance, which aids investment. A clearer financial picture can encourage more investment in Adobe and also allows Adobe to make medium and long term investments.
On that point, moving to a digital space removed the need for a physical product and distributors, significantly improving the efficiency of the value chain. As Teece (2018, p. 48) highlights “a good business model, through astute make/buy choices, frees up resources that can be devoted toward developing future business and can help to achieve overall strategic priorities”. Removing the need for physical product simplifies the entire creation of the product, allowing a sharper focus on delivering value to a customer.
Ultimately, the shift to a subscription model allowed Adobe to generate great success with its new products. Leveraging new key technologies proved to be an essential part of implementing a disruptive business model. The combination of the two models presented consumers with a powerful product, looking forwards to innovate and shape the creative world.
References
McKinsey (2015) Reborn in the cloud. Retrieved March 5, 2020 from https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/reborn-in-the-cloud#
Magretta, J. (2002, May) Why Business Models Matter, Harvard Business Review, Retrieved March 5, 2020 from https://hbr.org/2002/05/why-business-models-matter
Ovens, A. (2015, January 23) What Is a Business Model?, Harvard Business Review, Retrieved March 5, 2020 from https://hbr.org/2015/01/what-is-a-business-model
Shankland, S. (2013, May 28) Dislike Adobe's Creative Cloud subscriptions? Tough beans, Cnet, Retrieved March 5, 2020 from https://www.cnet.com/news/dislike-adobes-creative-cloud-subscriptions-tough-beans/
Teece, D (2018) Business models and dynamic capabilities, Long Range Planning, 51(1) 40-49. doi.org/10.1016/j.lrp.2017.06.007.
Warren, C. (2013, May 6) Adobe Goes All-In on Subscription Pricing Model, Mashable, Retrieved March 5, 2020 from https://mashable.com/2013/05/06/adobe-subscription-pricing-only/?europe=true
As an Adobe user myself, I am highly benefited from their softwares and the new Cloud subscription mode. If it was in the past, I would not be able to afford the entire software package because each software cost about £120. Thanks to this change and the student membership, I can access the full set of software and apps across all platforms. Having the access drove me to learn new softwares, thus I developed new IT skills for digital content creation. Besides, the cloud storage service is very convenient and it saved my laptop a lot of storage space.
Very informative! I had no idea what kind of impact this shift would have! I just have a couple of questions about subscription-based models. Has the change to subscription models actually boosted the number of their customers, or has it just "manipulated" the numbers to make Adobe more profitable without growth? In addition to this, and this is something you touched on, customers may be hesitant to pay a regular fee if nothing on the product actually changes. What happens when Adobe can't refine its services any longer and it becomes stagnant? Would customers still be willing to pay a subscription for the same product time after time?