The meteoric rise of subscriptions

25th of November 2019
The meteoric rise of subscriptions

A business model forged centuries ago is morphing into a disruptive force that is changing how we pay for goods and services and challenging our long-held obsession with ownership. Hartley Milner explores the pros and cons of the burgeoning subscription economy.

When you get your next bank statement, tot up the amounts debited for subscription services. You may be horrified to discover you are paying out much more than you thought. But if it eases your pain, you are far from alone.

Most of us fall into the same trap, a study in the US found. Management consultant Waterstone took 2,500 consumers and asked them to make a quick guess at their “recurring monthly expenses associated with digital services, devices and subscription boxes”. First responses averaged out at $79.74 per month.

People were then prompted with a few examples they may not have considered, including mobile data, Wi-Fi, Netflix, Spotify and iCloud, and asked to think again. This time, they came up with a figure of $111.61 a month. Finally, they were told to count up their actual outgoings, and the amounts turned out to be on average $237.33 each month.

So it was shown people were paying three times what they initially thought. Of the survey sample, 84 per cent grossly underestimated how much they spent on subscription services. Only six per cent were on the button with their guesstimate. The other 10 per cent actually overestimated their total
monthly spending.

“We expected many people to underestimate what they spend each month, said managing director Dhaval Moogimane. “We knew from personal experience this was a trend. But we were amazed by just how much people underestimate their spend. We’re talking about hundreds of dollars…we did not see that coming!”

Ownership not important

The subscription model is predicted to dominate how we pay for things during the next decade. Driving this meteoric rise is the canny repackaging of goods as services, marking the most profound reshaping of the model since its emergence as a means of distributing maps, books and periodicals back in the 17th century.

Software developer Adobe, looking to access a wider digital market, was the first to transform product sales into a service business. The move to a monthly subscription model offering software-as-a-service (SaaS) paid off for Adobe. At first only a handful of other software producers, such as Microsoft, followed suit.

Since then, a profusion of usage-based business models have sprung up across a broad range of digital industries…the assumption being that ownership is no longer important to today’s clientele.

Now traditional producers, service providers and retailers in the physical world are increasingly seeing the benefits of switching to online periodic charging. Whether you listen to it (MP3s/audiobooks), view it (TV/theatre/cinema), read it (newspapers/magazines), smell it (perfume/body fragrances), wear it (clothing/shoes), exercise in it (sport/gym clubs), eat or drink it (dining/groceries/wine clubs), ride in it (taxis/buses) or drive it (motor vehicles) you can be sure it is either available on subscription now or will be very soon.

Car subscriptions services are the latest innovation tipped for rapid growth. They are being promoted as a hassle-free way to update our current vehicles and are available to fleet managers as well as individuals. Leading global players BMW, Audi, Volvo, Toyota, Mercedes, Volkswagen and even Porsche offer at least one of their models on pay-as-you-go, including hybrid and electric vehicles. The service is also offered for used vehicles by a growing number of dealers.

While a little more pricey than regular lease or monthly finance plans, car subscription contracts have a more flexible lock-in period and an array of benefits that may include breakdown cover, insurance, servicing and maintenance. On the other hand, the cars typically come with restrictions on their use, such as mileage limits, and some have on-board tracking devices that monitor their location and driver behaviour.

Rapid uptake

The subscription economy grew by more than 300 per cent across North America, Europe and the Asia-Pacific region during the past seven years. Subscription platform provider Zuora found that over 28 consecutive quarters, from January 1 2012 to December 31 2018, subscription businesses grew revenues five times faster than American S&P 500 equity companies and outperformed the US
retail sector. Growth in Europe surpassed that of North America, with Asia-Pacific close behind.

In Europe, about five per cent of consumer spend is subscription-based, according to ING, the Dutch banking and financial services corporation. The bank found that consumers subscribe on average €130 each month for things such as video, music, sport or food…a total of €350 billion a year. ING thinks the amount households spend could grow by an additional €190 billion a year. The most rapid uptake was seen in the UK where an estimated 58 million people subscribed to services in 2018, around 90 per cent of the adult population.

“The subscription model clearly has advantages for consumers and businesses alike, otherwise it would not have seen its fortunes rise so dramatically in recent times,” small business adviser Rod Ingle told ECJ. “Make no mistake though, its growth is not primarily driven by consumer demand as subscription companies would have you believe…the impetus comes mainly from their quest to attract more stable revenue streams.

“Revenue streams from recurring subscriptions are generally greater and more consistent than for one-off purchases because subscribers have committed long-term to a particular product or service they regard as superior or better value for money. This potentially puts a business at an advantage in its sector because it can afford to invest more to secure new customers and replace lost customers more quickly, which means it has potential to grow its client base faster.

“Companies that have made the switch to a subscription model, or added a recurring payments element to their offline offering, report seeing their revenue margins increase significantly, sometimes by 50 per cent or more. Future-proofing revenue and providing a clear picture of a company’s financial health adds value to the business and makes it a more attractive proposition for investors, and would-be buyers when the time comes to sell up.

“Every business knows the value of building good customer relationships. After all, it is much easier to keep an existing client than find a new one. Since subscription customers will ideally be around for a long time, it is easier to get to know them and their needs in greater detail. Their feedback will reveal what they like about a product or service and where they feel it can be improved. Seeking feedback shows the business has its customers’ interests at heart and this engenders loyalty and trust…and, hopefully, payback in terms of a little free word-of-mouth marketing.”

Weak conversion rates

However, Ingle stressed that subscription enterprises need to work hard to acquire and then retain consumers. Conversion rates are weak…little over half of people who consider a service ultimately subscribe to one, showing reluctance to make a long-term commitment. But the greatest challenge is churn, the rate at which subscribers leave a business. Because subscription companies depend on long-term relationships with customers to provide predictable revenue growth, churn can undermine their viability.

“The cost of replacing lost subscribers could not only make it difficult for an enterprise to meet its growth objectives but also quickly drain its cash reserves,” he added.

Reluctance to commit

For consumers and small businesses, one of the biggest benefits of paying by subscription is convenience. Ingle explained: “It takes away the hassle of making purchasing decisions, running out of a product and re-ordering, and, in the case of software, paying for regular app updates and support services. With SaaS, the pay-as-you-go element ensures you do not pay for services you do not use. All these issues are covered under the contract.

“As subscription pricing is spread over a period of time, it can make a product or service seem more affordable. And as brands generate savings from the increased customer retention and revenue predictability, they can – if in a benevolent mood – pass those savings back to their loyal customers.

“The downside is that it is all too easy to be swept away by the convenience of it all. Too many people subscribe to a service and then let it ride, only to much later wake up to the fact that they are paying out more than they would for a one-time purchase, perhaps because they are not using the service as frequently as intended or they didn’t really need it in the first place. Or they simply couldn’t be bothered to cancel it. One of the appeals of subscriptions to corporations is that they are betting on high rates of inertia…that is, you being too lazy to cancel the subscription!

“Studies show that subscriptions are most popular with millennials in the 25 to 44 age range who have deep pockets. For the rest of us with more shallow pockets, the prospect of more and more things being available only on subscription is daunting. Perhaps the lesson from subscription creep is that we all need to monitor our spending a little more assiduously.”


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