Unpacking the All-You-Can-Eat Subscription Model

As any Netflix user or Disneyland visitor can attest, all-you-can-eat subscription models are nothing new. With a monthly subscription, Netflix users can browse a seemingly endless archive of movies. Similarly, after paying an entrance fee, Disneyland visitors can access lots of rides.

However, this business model has its limits. Streaming a movie or visiting a ride impose low marginal costs, which allows a subscription model to work (more thorough explanation provided in a previous blog post). In contrast, an all-you-can-eat subscription model wouldn’t make sense for inventory that has high variable costs per unit (imagine paying a monthly subscription to Target: for $X a month, you can get anything you want).

Lately, lots of companies have emerged in the tech scene touting the all-you-can-eat subscription model. The only problem? They’re offering users products that have deep variable costs. Once the user uses the service enough, the company will start to lose money.

For example, ClassPass offers a fantastic service for consumers, but a problem inevitably emerges. They charge subscribers ~$100/month to access unlimited fitness classes. For every CP member that takes a class, CP has to pay the studio ~$10. So if any member uses CP >10X a month (or 2.5X a week), CP will start to lose money. Therefore, CP’s revenues are maximized if subscribers attend no classes, quite an inconsistency for a fitness company. The problem is exacerbated as CP scales. As more studios sign-on to CP, users will enjoy the convenience of having more studios that are closer to them, incentivizing them to use CP more frequently. But this, as we know, cuts into CP’s revenue.

On the flip side, there also exist companies that have successfully utilized the all-you-can-eat subscription model despite carrying inventory with deep marginal costs. One such example? Amazon, where users pay an annual subscription fee. A Prime membership is many things, one of which is a fee that allows you to spend more money buying the individual items. In this case, the all-you-can-eat portion is the service of free 2-day shipping, not the actual SKUs. Prime subscription works because more scale means lower shipping and fulfillment costs.

Amazon serves as an example for marketplaces carrying inventory with marginal cost structures: serve as free platforms to facilitate supply and demand, and then upsell a subscription to their most high-value users for access to exclusive inventory, free shipping, or other perks.

Originally published at aoxuetang.tumblr.com.