Once the relatively sole purview of magazines, cable TV and book of the month clubs, subscription business models are now popping up all over. Software, once purchased and installed on one computer at a time and repurchased when a new version became available, is quickly being replaced by monthly subscriptions. Ownership of the product remains with the provider and access is subscribed to consumer users over time. The expansion of subscription service is being driven mainly by advances in technology where barriers to forming and maintaining ongoing consumer/marketer relationships are eased or eliminated.
For a monthly fee, consumers can now contract with providers for everything from personal care, fitness, movies and entertainment to financial services. Many believe that the larger market is seeing the beginning of the end of personal ownership. A McKinsey report found that the value of online subscriptions rose from $57 million in 2011 to $2.6 billion in 2016. While the subscription e-commerce market has grown by more than 100% percent a year over the past five years, the growth of the model has been accompanied by a significant amount of trial and error and as much pain as gain.
With subscription business models, revenue is generated from individual customers making recurring payments for continued access to a good or service over an extended period of time. The challenges to success are many, but matching customer demand for utilization with a price for the service is perhaps the most critical calculation. MoviePass, the subscription movie ticket upstart, paid each movie theaters’ full price for their subscribers’ tickets. The price was predicated on estimating how many times each month customers would utilize the service. When it was discovered that 15 % of customers were visiting theaters more than what was predicted each month, the difference between projections and reality resulted in a $147 million loss for the emerging business. Getting the price right is critical.
If the price isn’t perceived by the consumer to be a good value then the service will fail to launch. However, set the price too low and sustainability and growth of the provider company will be elusive at best. Ultimately pricing should be flexible enough to respond to unanticipated volatility in demand and new competitive market entrants. Longer term pricing rates will provide opportunity to level market demand over time and give providers more time to form stronger connections with individual customers. Building strong, ongoing customer relationships are important to every business but are particularly critical to subscription services where referral from family and friends generates three to five times higher conversion rates than any other channel of marketing.
Subscription service, once thought to be nothing more than a threat to profit margins by many traditional business model executives, is finding converts even among the most skeptical. The trend appears to be gravitating towards each brand offering their own unique pricing plan rather than third party player offerings across multiple brands. The rate of acceptance and transition also is dependent upon the maturation of consumers, particularly among those who still find comfort in one-time payment for ownership. As the fine-tuning continues in delivery and more consumers cross the divide between traditional ownership to shared usership, it is likely that subscription services may just find their way into every imaginable type of product or service business. Just another case where fundamental market disruption results in the demise of the “it won’t work here” premise.