The Subscription Economy: Why Every Business Wants You to Subscribe

It has often seemed that, in the last decade, everything from movies to music, meal kits, and shaving razors have jumped to subscription models. This is something that many refer to as the subscription economy. In this model, companies think of revenue, customer loyalty, and growth in a different light. Both consumers and businesses alike have jumped onto the subscription model, turning it into a multi-billion-dollar industry without any sign of slowing down.

But what's driving this shift? And what does it really mean for consumers and businesses alike? Let's dive in: why companies are increasingly leaning into subscriptions, and why this model has become so lucrative in the business world today.

What is the Subscription Economy?

In simple words, it's the transition from single transactions to recurring revenues by subscription services. This shifts the revenue model from a single purchase of a product to periodic access-in most cases, monthly or yearly access-to the service or product.

We see this all around us:

• Streaming Services: Netflix, Spotify, Disney+, among others. You are selling nothing such as a movie or a song, but subscribers subscribe to use a library.
• SaaS: Microsoft 365, Adobe Creative Cloud, and even Google's G Suite moved from one-time licenses to recurring subscriptions.
• Consumer Goods and Lifestyle Products: Everything from razors to meal kits, from Dollar Shave Club to HelloFresh, can be subscribed and delivered on a recurring basis with the convenience of consumer demand.

For example, studies have shown that the subscription economy has grown nearly six times faster than the overall S&P 500 over the past decade. With a projected value of more than $650 billion, it would seem that subscriptions are here to stay.

Why Do Businesses Love the Subscription Model?

Companies flock toward subscriptions for the unique advantages they offer:

• Predictable Revenue Stream: Subscription models create a steady, recurring revenue stream for the business, which is more predictable. Besides relying on a one-time purchase, companies can count on a base of customers who continuously provide them revenue every month. This stability enables them to plan better and invest in long-term growth.
• Stronger customer relationships and loyalty: Subscription models create ongoing engagement with customers. Instead of one large transaction, businesses have a cadence of touchpoints with subscribers and can build loyalty over time. Because the model often relies on ease of use and convenience, it's also designed to reduce the kind of constant comparison shopping that might tempt customers away.
• Reduce Customer Acquisition Costs: The cost of acquiring new customers is expensive. However, it usually costs less to keep subscribers. Companies are in the best position to enhance value for customers instead of scrambling to find new buyers on every street and corner. Since subscribers constitute predictable revenue, companies can afford to invest more in customer satisfaction and product improvements.

Subscription models allow companies to capture valuable data around user preferences, usage habits, and needs. This information will not only be beneficial for enhancing the existing product or service but also for product development in the future and other marketing strategies. Using that information, businesses can tailor-make offerings, making the service more convincing for individual users.

Why Consumers Get Hooked

For many consumers, subscriptions offer a level of convenience, value, and flexibility that the traditional models of purchasing do not offer.

• Convenience and Consistency: Subscriptions make life easier by delivering products or services right to the consumer on a consistent schedule. This consistency appeals to people desiring hassle-free access to things they use on a regular basis, whether skincare products, software, or streaming content.

This especially holds good with the young consumer who increasingly values access over ownership. For example, they will like to have access to an unlimited library of music or films than owning themselves. In fact, this preference for access will fall perfectly in place with the subscription model.

It's all about customization and privileges. Many times, when one subscribes to things, there are privileges that come along with it that do not come with buying just one. The streaming services will use data to recommend personalized content; subscription boxes will curate a selection of products based on user input regarding preferences. It's these little extras that make the subscription seem such a much better value.

• Lower upfront costs: With subscriptions, the bound one typically has lower monthly payments that are easier to handle, compared to one large purchase. The flexibility provided allows high-quality products or premium services to fall within consumers' price ranges that might want to "try before they buy" or perhaps adjust their subscription according to changing needs.

Challenges of the Subscription Model

Whereas the subscription model does have definite advantages, it also has its particular challenges.

Churn and retention stand out as one of the biggest pains for subscription-based businesses; it has to do with how many customers cancel their subscriptions. While in the case of traditional sales, a customer purchase is a done deal, subscription businesses have an eternal quest to keep customers engaged and satisfied.

• Subscription Fatigue: With subscription-based models increasingly thrown at consumers, subscription overload may well be felt. The management hassle involved with so many subscriptions-let alone the cost for subscriptions of so many things-has its own phenomenon now, what is called "subscription fatigue." These consumers may begin to stop services, making competition even more fierce for retention.

• Content and Service Quality: Theoretically, subscription services have an incentive for continuous content addition or product improvement to support a recurring cost. As an example, Netflix invests billions annually in the production of new shows. Without new content, subscribers will start to question the value proposition and consider cancellation.

• The Subscription Business is Complex: It is not as simple as it sounds to manage a subscription business. Businesses need sophisticated billing systems that can afford recurring payments and manage revenue recognition. This is complex bookkeeping that needs to account for customer upgrades, downgrades, cancellations, and free trials-large companies with subscribers into the millions.

The Future of the Subscription Economy

While it might feel like everything is becoming a subscription, we're probably only scratching the surface. As subscriptions continue to rise in popularity and more businesses look to start tapping into the business model, entirely new applications are sure to begin to appear. Some even say industries such as health, education, and mobility could also go on to subscription models. Just think about subscribing to a car-sharing service rather than owning a car or accessing healthcare services through a subscription fee.

Can We Expect More Hybrid Models?

The hybrid model is going to be very common, as most firms are embracing the hybrid model by infusing one-time purchases with subscriptions. Take the case of Amazon: you can buy books once and subscribe for audiobooks on Audible. This helps a firm reach out to all kinds of customers or to find out what works best for the business.

In turn, the subscription economy opens access and convenience to a consumer-but they need to keep up with the subscriptions and decide if value is actually there. Meanwhile, companies competing for customers' dollars will continuously innovate and put forth the most compelling services to retain subscribers over longer periods of time.