The subscription economy is changing the mindset of a generation
As promised on my LinkedIn video-series #PrePaidTalks (with slight modifications), I want to dig a little bit deeper into the rise of the everything-as-a-service economy and talk about how the subscription mindset is affecting today’s generation.
Riding the tech wave
According to a thorough study done by McKinsey&Company, the subscription e-commerce market has grown by more than 100% a year, over the past five years. This is a staggering number. And if you think this is happening only in the e-commerce space, think again. Pioneered by start-ups and backed by serious venture capital, the subscription model has penetrated a wide variety of industries, from video-streaming (Netflix, Hulu) and news (New York Times) to file sharing (Google Drive) and fashion (Stitch Fix). Even CPG giants such as Unilever have made significant investments in the space — Dollar Shave Club acquisition in 2016 for $1 billion dollars.
But wait a minute, this subscription thing is not new, it has actually been here for a while in kind of a “stealth” mode. Remember cable and your phone bill, what were those? Subscriptions, just not the exciting ones that would make you wear a t-shirt with the company’s logo. So, what turned subscriptions from utilities to trend setters and why consumers love them? Well, a couple of reasons:
Convenience. With mobile and internet penetration being better than ever, 68% and 53% respectively in 2018, the consumer now has access to the ubiquity of the digital world. Infrastructure is no longer an issue. Therefore, the need for simplicity and easy of use is becoming more critical. If you had told the MP3 generation that in the future, they can have all the songs in the world and listen to them whenever they desire in exchange for the modest $9.99 per month, they would have been ready to prepay at that exact moment. Enter Spotify.
Community. Perhaps the key and most powerful differentiator in the space. Unlike your traditional subscriptions for example, having an Adobe Creative Cloud not only grants you access to top-notch graphic design software, but it also makes you part of a world-wide community of incredible creators. You get the chance to share and collaborate on creative assets, take part of competitions (eg. Make the Cut) and showcase your talent to a like-minded audience. Much more adventurous than lining up to pay a cable bill, right?
So, what is the problem?
You see where I am going with this, the subscription model has been re-branded in an extremely successful way, which has helped grow a lot of businesses. No doubt about that. However, the mindset of a generation is currently being turned upside-down to match the circumstances of a rapid technological change. Nowadays, paying a subscription for almost any product/service is becoming the norm, which could cloud your judgment in the long-run.
…and here is why:
Owner vs Renter. Having a Netflix subscription (or any digital content-based service) allows you to access an incredible amount of content in an instant. It is quite remarkable and so much better than hunting down DVDs in different stores. Therefore, as long as you are paying, the door is open. But then… once you end your subscription, you go back to square one without owning anything. For some services, that might have a detrimental effect on your life (tied to how you make a living) and for some it might not matter much (yes, you could survive without Netflix), so be mindful of what is worth owning versus renting.
Cash flow. According to a study done by the Federal Reserve(2017), 40% of adults in America said that they could not cover a $400 unexpected expense and had to either borrow or sell something to get out of the situation. Even though the number has been improving over the year, this is still a significant percentage of the population that is not necessarily liquid. In a scenario like this, when savings are scarce, having a ton of subscriptions that predefine your cash flow puts enormous pressure on your finances. Imagine if you get all your products/services via subscription of some sort, then when you are faced with a financial challenge, you would have to completely give up that service, which could start another series of problems. Of course, subscriptions may look tempting in the short-run, but most of them actually end up being more expensive over time (in more details). Not to mention, subscriptions are paid in perpetuity.
All in all, subscriptions are here to stay and we are going to see even more industries experimenting with the model. At this stage, it is up to the consumers to decide how to get the most out of their subscriptions or whether they need one. Therefore, when considering a purchase, look into the function and purpose of what you are buying, not necessarily whether it is a “steal” deal or a popular product/service.
Hope this was useful, there will be more to come. Feel free to connect on LinkedIn or drop a comment below, if you have any questions.
