In the run up to the pandemic, Business Wire estimated that the subscription economy had grown by over 300% in 5 years, way ahead of economic growth overall. And that same survey indicated that the average American household had four subscriptions overall, again a dramatic increase. Anecdotal evidence suggests that the trend has only accelerated during the two years of lockdowns and social distancing.
What surprises me is that these numbers aren’t bigger already. Most of us already pay for a mobile phone via subscription, listen to our music via Spotify, or watch the latest releases on Netflix. Most of these are services in nature, where paying for their use makes perfect sense. Yet it’s odd that we don’t really subscribe to many things that involve a physical product.
Although technically not a subscription, an increasing number of us ‘own’ our cars via some kind of leasing deal. It means we get to drive fantastic new(ish) cars for what seems like a very affordable monthly payment, whereas we’d most likely baulk at the cost of buying the car outright. If and when we don’t need it any more, or our circumstances change, we just give it back. Couched in those terms it sounds perfect.
A few years ago, I was CMO of a consumer electronics business that specialised in baby tech like smart baby monitors. We tried a subscription model with only limited success, despite it making perfect sense from a consumer point of view. And more recently, I was introduced to a wonderful business called Bike Club, where parents can subscribe to a service that provides them with a bike that always fits their child as they grow, rather than have to go and buy a new one every couple of years. And while it’s a brilliant idea, it clearly only accounts for a tiny fraction of the £2bn UK cycling market.
There are undoubtedly plenty of reasons why consumers are reluctant to pay for subscriptions. As WEF amongst others has pointed out, we are still a society that’s very much benchmarked by what we own. We typically don’t like to see things come out of our bank accounts every month either. Yet while shifts in consumer attitudes move slowly, it does seem to me that many organisations are simply not making the most of what subscriptions could offer them in terms of new revenue streams and customer lifetime values.
My own experience of this at Binatone was that we never took subscriptions seriously. For fifty years, the business made a healthy profit by selling stuff. It was highly effective at supply chain management but not service provision, not least because those post purchase services were typically given away ‘free’ with little incentive to invest in them. Yet the perceived value of a subscription is determined by the service received each month, not the bullet points on the box of the product.
Further, we calculated the subscription price through simple cost plus metrics, rather than thinking through a meaningful customer value proposition. McKinsey research from 2021 suggests that price is only one of several factors in determining the attractiveness of any subscription offer, alongside a series of great experiences. Subscribers should feel rewarded when compared to those who simply use the product for free, yet all too often not enough thought is given to this element of the deal. They concluded that while you might recruit new subscription users with attractive pricing, you’ll only keep them by providing a great experience.
Churn is a killer metric in any subscription business. When we sold products, we got all the profit in one go up front. In a subscription business, you need to keep users engaged for at least a year in order to generate any kind of meaningful return.
As I can attest, managing a subscription business is not easy. If it’s just an experiment, your chances of success are even lower. Stelios Haji-Ioannou, the founder of EasyJet, once said that he loves it when he hears businesses say that things can’t be done in a certain way, because to him that implies opportunity. Models that allow for consumers to pay for what they use and experience, rather than own things outright, fall squarely into that category.