I was recently reading an article by Steve Blank on how startup is not a smaller version of a large company. One of the important points that he mentioned was around value system and the differences in a way a large company evaluate business opportunity than a startup.
Now think about a business model like subscription. A subscription based business model increases predictability in revenue on an ongoing basis. This is because subscribers pay for the duration of subscription and if they like the services, subscribers are highly likely to renew their subscription. This typically happens in advance as subscribers provide payment information in advance. Wikipedia says –
“Businesses benefit because they are assured a predictable and constant revenue stream from subscribed individuals for the duration of the subscriber’s agreement. Not only does this greatly reduce uncertainty and the riskiness of the enterprise, but it often provides payment in advance (as with magazines, concert tickets), while allowing customers to become greatly attached to using the service and, therefore, more likely to extend by signing an agreement for the next period close to when the current agreement expires”
This is unlike perpetual/one-time transaction model, still uncertain. Now business managers can predict quarterly revenue with increasing accuracy with subscription. This means that the value system being built is one to reduce uncertainty and riskiness which is what a new product idea does not have. A new product idea by definition is in a phase of discovery and building sustainable business model. And hence unpredictable and risky.
This conflict can have serious negative impact on innovation culture of an organization – more so for large organizations as they want to reduce risk and have smaller variations in their quarterly and annual results. Subscription is a new business model and many large organizations are experimenting with it. It will be a while before this value system gets deep rooted and impacts innovation culture. Organizations need to watch out!
In my next article, I will describe what companies can do to leverage this change and still be innovative.