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Sign me up: the continuing boom of subscription business models

SUBSCRIPTIONS HAVE KEPT US GOING DURING LOCKDOWN

During lockdown, like many people, I’ve depended on Netflix and Spotify to get me through. Amazon Prime deliveries have brought a diverse array of goods promptly to my door while I was prevented from shopping in person. I earned six free months of Disney Plus via my O2 contract renewal and signed up to an Audible free trial so that I could catch From the Oasthouse, the Alan Partridge podcast series. It is fair to say that without my various subscriptions my lockdown would have been very different, and significantly less tolerable.

Turns out I’m not alone in this belief. Pre-COVID, the subscription market was growing, both in terms of size and diversity of product categories where subscription options are available. If anything, COVID seems to have strengthened the appeal of a subscription model, for some sectors.

While we do also see the counter-trend of some (GiffGaff, pay ad you go gyms, etc) moving away from subscriptions, on balance, this business model has been doing very well and look likely to continue to do so. The recent Subscription Economy Index report from Interbrand and Zuora (link) suggested that subscription brands had shown much higher sales growth (+303% from a baseline set at 2012) compared with either US retail sales overall or sales amongst the S&P 500 Sales. The reason for this success is surely that subscription offerings operate in a sweet spot of both brand relevance and consumer appeal.

WHY DO BUSINESSES WANT CONSUMERS TO SUBSCRIBE?

It’s something of a no-brainer really. As a brand, would you rather lock in customers to a fixed commitment or take your chances purchase by purchase? For retailers the benefits revolve around keeping momentum in the market, maintaining cashflow, building long-term relationships with customers and building valuable consumer datasets.

Eight in ten (82%) retailers believe the popularity of subscription services increased during lockdown. Over a fifth (22%) of UK retailers have developed a subscription service or product during lockdown, adding to the three in ten (28%) who already offered these services beforehand.  75% of retailers believe subscription services offer a more reliable and predictable source of income than a one-time charge model. 82% agree subscription services allow them to build customer relationships through increased contact (link).

WHY DO CONSUMERS LIKE SUBSCRIPTIONS?

Research (link) shows that consumers spend an average of £46 a month on subscriptions (£552 a year) and have an average of seven contracts per household.  

Looking longer-term we feel that the key drivers for consumers are saving money, saving time, lessening the “ownership burden” and discovery of new products.

SUBSCRIPTIONS SAVE US MONEY

Some subscriptions (such as the YourPret Barista subscription or Split the Bills) motivate consumers by helping them to take control of their spending. With money being tight for many during lockdown, this has been a key motivation and with economic uncertainty likely to be with us for years rather than months as the triad of economic threats represented by Brexit, COVID and climate change dominate the markets for the foreseeable future, it is a concern that won’t fade anytime soon.

SUBSCRIPTIONS SAVE US TIME

Some subscriptions (such as the Harry’s Shave Club or the MealPal lunch ordering app) motivate consumers by streamlining their lives or by using AI algorithms to predict usage and pre-order replenishment of products as they run out. While lockdown has generally given people more time not less, no-one wants to spend longer than they need on boring processes.

SUBSCRIPTIONS STRETCH OUR FILTER BUBBLE

The classic subscription “box” (such as Graze and newer versions like KiwiCo or Atolla) curate choices based on data from the user, either from their responses to previous deliveries or from another source like a questionnaire, social media posts, or uploaded information like a skin photo. They tap into the prevailing trend for personalisation and give users a chance to discover new products within the relatively safe confines of a brand environment.

SUBSCRIPTIONS FREE US FROM THE “BURDEN OF OWNERSHIP”

Lastly, subscriptions like media streaming services (such as Netflix and Spotify or car access solutions such as Sixt Plus) give users all of the benefit of ownership without many of the hassles, such as depreciation, maintenance, replacement, etc. Over the past decades we’ve seen the so-called “death of objects” as our homes have become more minimalist and many of the pillars of identity (the CD or DVD rack, the shelf of photo albums or the groaning bookcase have been replaced by digital alternatives.

WHAT DO SUBSCRIPTIONS OF THE FUTURE LOOK LIKE?

Maintaining the growth of subscriptions or capitalising on it will depend on striking the right balance between consumer and retailer benefits – for example, adopting the right approach to monetisation models and free-trial periods, etc.

Retention of customers – avoiding churn

“Churn” – or the proportion of customers who decide to cancel – is one of the biggest challenges facing subscription box businesses. 57% of those cancelling or not renewing their subscription citing the fact that they prefer to buy products when needed.

Renewal processes

Evergreen/automatic renewals clearly make a great deal of sense for businesses but cause significant antipathy amongst consumers, particularly at the end of free-trial periods.

  • Free-Trial Surfing is a service which automatically cancels subscriptions at the end of the free trial period
  • Lloyds Banking App recently added a subscription management service to allow their customers are be able to view, manage and amend their services directly from the app

Enabling subscription optimisation

As consumers have more and more subscriptions we will see (are already seeing) the emergence of tools that allow the management of subscriptions.

The longer-term trend for auto-replenishment

The long talked of age of the smart fridge that can order replacement products for us is (finally) close to being realised

This article was written by Nick Chiarelli, Head of Trends at UNLIMITED.