Subscriptions that took over the world

 
 
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A surprise once per month, films at your fingertips, mobility within your reach...subscription models are taking over the world.

 

Do you have a smartphone, computer, internet access? If yes, then there is a big chance that you at least occasionally shop online and that you subscribe to at least one service or product for which you pay a monthly fee.

A recent study of the American market by McKinsey & Co., revealed that 15 percent of consumers are subscribed to at least one service, and the findings indicate that subscriptions offer consumers – especially young people from urban environments – a handy, personalised and often cheaper way of buying what they need and want.

 

The Focus is Now on the Consumer

Subscriptions have always been around, in various forms. Your grandparents paid monthly bills for electricity, water, newspapers, magazines, and television channels. At the turn of the millennium, most people started using mobile phones, and new monthly bills started appearing in their mailboxes. But in 2007, new trends entered what was then a stabilised market segment, which certain companies soon recognised as an extraordinary business opportunity – and named it the subscription economy.

Companies such as Netflix, Amazon, Salesforce, and Box paved the road in the »life per month« industry. The focus shifted to the consumers, whose needs and desires dictated the changes in how the companies should communicate with them and deliver products and services.

These days, beauty brands don’t decide what products are cool: Instead, it’s beauty bloggers and other creators that are controlling the conversation
— MARCELO CAMBEROS, CEO AT IPSY

If a decade ago, retailers were on the hunt for sales hits they could try to get to the buyers, through as many sales channels as possible – today, this business model is on the decline. That is because it does not fully take into account the consumer, or at least not the modern consumer. From an anonymous »cash cow«, the consumer has turned into a source of data and insight for the provider – into a subscriber that the subscription economy companies know intimately, and can therefore cater to his or her needs. 

Life per Month Champions

The number of companies that want to offer their customers a subscription model is growing every year. The subscription economy is growing exponentially; Credit Suisse estimates that in 2015, it was worth 420 billion dollars in the USA. Among the best-known names is undoubtedly Amazon, which offers its subscribers better prices with repeat orders of the same products through its Subscribe & Save programme, faster and cheaper delivery, various other benefits, and access to an ever-growing video library with Prime.

The video content sphere is still dominated by Netflix, which became a synonym for watching films and series on demand. This provider of streaming video content has almost 130 million users across the globe, and well above 11 billion dollars in revenues. Apple Music and its main competitor, Spotify, which boast over 70 million users, are also successful in the streaming market, in their case, music streaming.

The list must certainly also include Google, whose Drive service allows users to store anything in the cloud, from documents to photographs or video, all for a monthly fee.

 

Modern consumers are proverbially promiscuous and will give in to the competition the very moment they catch sight of a better service or product.

 

Google, Amazon, Netflix, Apple, and others, quickly found that what their customers want is comfort. Netflix started sending DVDs to subscribers’ homes, drastically simplifying their path to entertainment. Today, they don’t need to leave their sofa to binge watch their favourite series. Amazon uses the same principle to stock cupboards with goods that subscribers regularly use.

Subscriptions simplify customers’ lives, they’re one thing less to worry about, they save time, and most often also money. They also provide businesses with recurring revenue, which is of vital importance for survival in the market. For this, good customer relationships are key. The subscription model, therefore, in a way allows companies to build lasting relationships with their customers, which is mutually beneficial for both sides.

The abovementioned giants used the subscription model to sell services, but the subscription economy is much more than that. Subscriptions to product packages, which tripled in size each year between 2011 and 2014, are an especially intriguing area. FastCompany estimates that in 2014, American subscribers alone paid over five billion dollars for subscription boxes. The growth in subsequent years has reportedly only increased.

 

The first golden rule: Looking after subscribers

In the subscription economy, only the companies which can build long-term relationships with their subscribers can be successful. New clients typically represent only 15 to 25 percent of revenue.

 

Digiday analysts buried themselves in the figures showing monthly website visits of subscription box providers, and found that their numbers have grown almost thirtyfold (or, to be more precise, by 2963 percent) between January 2013 and January 2016. In 2018, the studied sites recorded 40 million visits in April alone. By the end of 2017, there were 11 million subscribers in this market segment in the USA – that is as many as the number of inhabitants in Belgium, Greece, or the Czech Republic.

Each year, hundreds of companies that wish to exploit the growth of subscription economy are established. According to an estimate made by the portal entrepreneur.com, between two and three thousand companies exist in the USA in the subscription box segment.

The range of products and services is comparably diverse. The boxes that postal workers deliver to subscribers’ homes each month can contain anything from cosmetics, shaving kits, children’s toys, educational videos, sweets, pet food, meat, organic products, pickles or flowers, to cigars, alcoholic beverages, jewellery, even sex toys or gift boxes filled with complete surprises.

 

Something to use on your face, something for shaving...

In 2010, Birchbox was one of the first players in the subscription box market; today, it is one of the biggest. »We get it. You want products that make you feel your best, without devoting your life to finding them«, is the motto they use to address customers on their website. For 10 dollars a month, Birchbox sends its subscribers samples of makeup, creams, perfumes, etc. By the end of 2017, during which it sent 1.5 million beauty boxes all around the world, an increase of 63 percent from the previous year, it had 150,000 subscribers.

Ipsy, whose mission started two years after Birchbox, offers pretty much the same for the equal price, but has twice as many subscribers today. The difference? Birchbox always emphasised the contents of the box: Ipsy decided to sell a story. »These days, beauty brands don’t decide what products are cool: Instead, it’s beauty bloggers and other creators that are controlling the conversation. We wanted to be at the forefront of the new way that consumers would interact with beauty brands«, Marcelo Camberos, the CEO at Ipsy, explains his reasoning and shift in strategy.

 

The second golden rule: Subscription price

Prices are one of the most important strategic tools for companies working in the subscription economy, because they are directly connected to the three basic strategies: acquiring new customers, strengthening the value of individual subscribers, and decreasing the number of customers who cancel their subscriptions.

 

Social networks are extremely important to companies that want to build their brand’s reputation through stories. This applies especially to the subscription economy, which has been embraced most strongly by the younger generation, whose daily lives usually involve at least a few minutes of browsing content posted on social media.

Among those that sold the story well is Dollar Shave Club, whose founder Michael Dublin grew tired of paying for expensive razors from established brands. Their video advertisement, which has over 25 million views on YouTube, was a hit. »Just a dollar a month. Are our blades any good? No, our blades are f***ing great!« The giant Unilever shared this opinion – in 2016, it bought Dollar Shave Club for a billion. Today, it has over three million subscribers.

 

...Something for the Dog and Something to Snack On

Subscription boxes are also popular among dog owners. BarkBox packages for man’s best friend have everything from dog food to toys, and find their way to half a million addresses each month, even though the subscription at 21 dollars is relatively high. Much like parents, dog owners are evidently prepared to pay more to make their pets happy. Last year, BarkBox made 250 million dollars in revenue and generated net profit.

 

How Well do You Know the Modern Consumer?

What share of global consumers shop on a weekly basis with the help of smartphones? *

 

On the other hand, the same cannot be said for Blue Apron, which uses boxes full of fresh ingredients and recipes to bring joy to enthusiastic chefs. In 2017, they had over a million subscribers, but this number fell by 25 percent in the first quarter of next year, to »only« 786,000. Revenue in the first three months decreased from 245 million dollars in 2017 to 197 million dollars in 2018. However, investors remain optimistic: Blue Apron learned to spend less, among other things on advertising, the costs of which was decreased by a third, to under 40 million dollars.

Even though the potential is undoubtedly great, it will continue to matter, how Blue Apron uses its advertising dollars and how many new subscribers they will win in the market, as well as how many existing subscribers they will manage to retain. The key factors here are the quality of the service and products, and monitoring market trends. In the subscription economy, companies that fall behind the competition are doomed to fail: modern consumers are proverbially promiscuous and will give in to the competition the very moment they catch sight of a better service or product.

 

The third golden rule: Prepare for fast growth

Who doesn't want to grow into a truly large company from the very beginning of their business journey? From the very start, companies must be designed with safe infrastructure that will not impede rapid growth. At the same time, they must be capable of continuously adjusting and further developing their business model.

 

Regardless of the cruel reality of the market battle in the subscription economy, it still offers plenty of opportunities for success. Different studies tell different stories: according to some, the subscription economy model will be adopted by 40 percent of the countries in the developed world in the future; according to others, the number is closer to 100 percent. What is clear is that most predict the industry to grow.

The first years bring many challenges, like in the case of Blue Apron, which is still trying to find the balance between the amount spent on advertising and containing the fall in subscription numbers. But that is normal. The potential of the subscription economy is enormous, which is proven by the fact that the investors continue to trust and support these companies, despite regular losses of some of the most prominent players, such as Blue Apron and Netflix.

 

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Gregor Firbas
Digital Director at  FUTURA


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Published in Futurlist,
the magazine to uncover the future