Why is the world moving towards subscriptions?
Gone are the days when subscriptions were limited to magazines and TV channels. In today’s world, everything revolves around subscriptions — from groceries to software. In the last decade, the subscription economy has grown by 6x and subscription businesses are seeing a 5x growth rate compared to others. Why has the subscription model become so favourable in the business world as well as among consumers?
Benefits of Subscriptions to Consumers
Micro costs and Savings
For several products and services, a monthly subscription is more appealing to the customer as opposed to a higher one-time expense. While analysing the numbers on a screen, $4 per month appears to be a steal over a $50 one-time payment. The attractive discounts and free trials also mitigate the risk of regretting a wrong purchase. Membership plans of retail companies like Amazon and Costco offer unique and high-quality products at low prices, often contributing to a customer’s savings.
No-cost or Low-cost upgrades
Software companies such as Microsoft and Adobe have switched to the subscription models after existing as one-time purchases for years. The fact that you do not need to pay extra to upgrade to the latest version of the software is also an advantage from a savings point of view. Several telecom companies offer mobile phone subscription plans and low-cost upgrades to the newer versions of the model. Customers can now own the latest products spending far less than they would have for a one time purchase.
Convenience and Customisation
Why go out for groceries and essentials when you can get them delivered to your door? Subscribing to recurring supplies of essentials has improved convenience by allowing customers to ‘set and forget’
The value-based pricing concept gives the customer the option to choose subscription plans allowing them to pay for only what meets their requirements.
Variety
With the variety that platforms such as Netflix and Spotify offer, the subscription model has enhanced customer experience. You no longer need to rent out one movie or buy the whole album for one song. Add the surprise element of subscription boxes to the list, and this experience is now on a whole new level.
Benefits of Subscriptions to Businesses
Overall Predictability
When the number of subscribers is known, it becomes easier to track customer lifetime value and retention rate, thus predicting revenue. This makes it a very attractive business model to shareholders and investors and hence, it’s a no-brainer why subscription businesses command a premium in valuations.
For product subscriptions, the uncertainty about replenishing inventory is eliminated, making inventory management easier and helping the business focus more on acquiring and retaining customers.
Recurring Customer Data
Since customer interaction is not limited to one-time purchases, the company can regularly collect insights and create a nuanced understanding of customer preferences and behaviour. With frequently incoming data and feedback, they can improvise on the product or service by tailoring it to the customer’s needs.
The Subscribe-Use/Buy Cycle
When customers pay for a subscription service, they usually overuse it to get the cost back. For example, an Amazon Prime customer might shop more to feel that they have earned back the cost of the subscription by saving more on each purchase. Since they have shopped excessively, they renew the subscription thinking that Prime membership will be more beneficial to frequent buyers, thus entering the Subscribe-Buy cycle.
Higher Revenue
The increased customer interaction and loyalty create an opportunity to upsell and cross-sell products that contribute to increased revenue. Customer loyalty also enhances the return on customer acquisition costs, allowing companies to focus on acquiring new customers.
With the world becoming more connected and the consumer mindset shifting from ownership to access, subscription models, are becoming popular from conglomerates to startups, from consumers to investors and across products and services.
