The shift from ownership to services

 
 
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Behind the seemingly minor shifts in modern society are the tectonic economic shifts, where ownership is pushed into the background, and services and subscription business models that benefit consumers as well as the economy, are taking over.

 

In former Yugoslavia, many longingly looked to the land of plenty across the ocean. But the American dream is not what it used to be. Once, everyone wanted to own a car, a house, a pile of things, but in recent years, an important shift took place in the minds of the people, and subsequently in company business models. The obsession with ownership was replaced by the obsession with access to services – and the subscription economy flourished.

With the exception of staring into touchscreens, our daily lives still largely resemble how we lived a few decades ago. In the morning, most people put on a suit, sit in a car, and drive to work. At the end of their workday, many will relax while watching TV. Changes are entering even these daily habits, in the background of which, tectonic economic shifts are forming. Not so long ago, ownership was the only way to ensure access to a car at any time, and wanting to watch a film without bothersome commercial breaks meant having to own a DVD or video cassette. But no longer ...

 

Upgrading Some »Old« Idea

These days, young people especially, have completely different ideas about ownership. Consumers are no longer willing to pay in advance for certain items and services. They want to rent a car or a bicycle for a few hours, when they feel like it, without having to take on all the costs of ownership. If they are paying for video content, they want to be able to access it on various devices, in different locations, at any time they please. The subscription economy business model has spread to practically all industries, from food, fashion, car, media, to health and many others, where anything can be had – for a monthly fee.

 

The main focus and drive of subscription economy are the buyers, the subscribers. And their numbers grow each year. 

The subscription economy by itself is nothing new or revolutionary. It has been around for decades. In exchange for a monthly fee, we get lighting, cooling, and everything that is powered by electricity, hot water for taking showers, home maintenance, and trash collection. Some terraced houses in Ljubljana still have the hatch where the milkman used to take empty bottles and replace them with full ones every day. Newspapers still come to our mailboxes every day. 

But times are changing. Ages ago, home milk delivery stepped aside to make room for shopping in shopping centres, printed newspapers are giving ground to online media content, often subscription-based, which young people then browse while pedalling in fitness centres, for which they are also paying a subscription fee.

 

How Well do You Know the Champions of the Subscription Economy?

Subscription to which products is the foundation of Ipsy's commercial success? *

 

The rapid growth of the subscription model was most likely heavily influenced by the use of everyone’s most loyal companions throughout the entire day – mobile phones. For example, telecommunication providers in Slovenia have more user subscriptions than there are people in the country. Will other providers, other industries also want similar successes in the future?

 

The Liberation of the Consumer

Subscription economy means a shift to a business model of recurring revenue. »Companies should no longer view business models through the prism of selling products, but as the sale of services to which buyers subscribe«, Tien Tzuo, the self-proclaimed author of the neologism »subscription economy« and founder of Zuora, a company that created a subscription management platform, said recently. The company, which raised 154 million dollars with its initial public offering (IPO), annually processes around 35 billion dollars’ worth of transaction for around 800 clients, including companies such as Ford, Dell, and the Wall Street Journal.

The subscription economy is becoming one of the main drivers in the consumer world, promoting new consumer patterns. »It liberates consumers who can replace the shackles of ownership for a business relationship that enables them to try out, buy, or upgrade things, in any configuration, with the delivery model that best suits their needs,« says Tzuo. 80 percent of companies are seeing changes in how their clients want to access and pay for their products and services, the Economist finds. As a result, approximately half of the companies are already changing their pricing models.

 

According to the analytics firm McKinsey, the online subscription market has grown by over one hundred percent each year over the past five years. 

But that is only the beginning. With further development of subscription models and technological progress, businesses will have more and more information on the buyers, along with more artificial intelligence, which means more opportunities to reliably offer exactly what they need or want. Smart fridges will monitor the consumption of food and restock the supplies in connection with the provider – all in exchange for a fee. The underlying logic is fairly simple: why waste time swarming in shopping centres when companies can deliver everything we need to our homes in exchange for a subscription fee? When supplying subscribers with wardrobe pieces, fashion companies will know their precise individual body measurements and style preferences.

Netflix, the video content provider with nearly 130 million users, bored of switching between commercial breaks on television channels and searching torrent sites, has probably come closest to this model. The ever-increasing number of users is building Netflix's extremely large database on what content users prefers at what time, providing the foundation for its model of video content recommendations. Apple Music and Spotify use a similar method to recommend music content, while Amazon uses this approach to serve suggestions to purchase products in its online store, whose main subscription sales moment is currently bound to fast delivery (Amazon Prime).

 

The Rise of the Subscription Economy

The main focus and drive of the subscription economy are the buyers; the subscribers. And their numbers grow each year. In their joint report, YouGov and Zuora estimate that 58 million Brits (that is nine out of ten) already subscribe to at least one service. In 2016, the average Brit spent 18.5 pounds per month (around 21 euros) on subscriptions, which only a year later almost tripled to 56 pounds.

Attracting new subscribers is one of the main objectives and costs of subscription economy companies. The most potential is generated by consumer-company relationships, which bring the latter the opportunity to sell additional, e.g. premium services, monthly fee applications, or simply new products and services.

Companies should no longer view business models through the prism of selling products, but as the sale of services to which buyers subscribe.
— TIEN TZUO, ZUORA

Even though companies are still discovering the expanse enabled by the subscription economy, they are already growing faster than the giants of the global economy. Companies included in the Subscription Economy Index, led by Zuora, have increased their revenue in the USA by 22 percent in the 12 months before the end of 2017. The average annual growth since they started keeping track in 2012 was 17.6 percent, which is eight times faster than the revenue growth of the world’s largest corporations in the S&P 500 index (average of 2.2 percent). In 2017, revenues from the European subscription economy (EMEA index) grew even faster, by 22.3 percent.

The analytics firm McKinsey estimates that the online subscription market has grown by over one hundred percent each year in the previous five years. The largest online retailers that use the subscription model have created 2.6 billion dollars in revenue in USA in 2016, which is 45 times the amount from the five years previously.

However, experts believe that true growth is yet to come. Years ago, Tien Tzuo called the subscription economy an »8000 billion dollar opportunity«, which more companies and people believe in each year.

 

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Mija Gačnik
Business Development Director at FUTURA


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Published in the Futurlist,
the magazine to uncover the future