Frequent vs Singular: Subscription Services
I have paid 100 bucks for Ben Thompson’s Stratechery newsletter. I also pay for Spotify and Netflix as well. One payment is upfront while other is recurring. One looks bigger and the other looks smaller. In terms of annual dollars, the one that looks bigger is actually smaller.
If you buy a cup of ☕️ for 3 bucks four times a week for the entire year, you spend a grand total of 576 bucks on coffee. A lot of people buy coffee on their way to work. This amount is a whole lot bigger than 100 bucks I pay for a newsletter. Even reducing it by $300 ( 100 less cups of coffee in a year) keeps the total coffee amount much higher than the newsletter amount. Despite this, if I ask people interested in tech to pay for that newsletter, they most likely will be hesitant. The same people will most likely buy coffee daily.
We tend to look at a payment in isolation. Paying a recurring amount of 10 bucks feels like nothing when compared to one-time payment of 120 bucks. While reducing the friction to get people to make a big payment upfront is hard, once they get past that payment stage, they are more likely to get the best bang for their buck. Now, why is that?
We tend to value bigger sums at a given moment more than smaller sums. When I make a big commitment of paying 100 dollars to someone for an article every two days for a year, I make sure I read them well. I often read them multiple times. I make myself accountable. I look forward to getting that service. I lookat the situation positively. I try my best to get the most value out of it. I think about it more than I ever would if the same service was a recurring payment. I would feel bad for not using the service. I start developing an emotional connection with the service. I start talking about the service to other people and spread goodwill.
So why do we not see more products and services charging a big upfront amount? I believe it is so because it is very hard to get people to pay for a service upfront. And, this is understandable. If the payment is recurring, I can just stop paying if I don’t like it. It is easy and affordable to not stay committed. In a recurring payment cycle, we wont have a good short-term incentive to try to extract maximum value out of a service. This will reduce our overall satisfaction with a service. A lot of times, continued use is what’s needed for extracting value in the long run. But we tend not to take something seriously when we know there is nothing to hold us accountable. It is very difficult to justify a need for recurring payment when there is no instant gratification or short term value. We end up discontinuing the service before we to the stage of getting the full value. Upfront payments make a lot of sense for services and products with value offering spread out over a long period of time.
About 6 months ago, I was in the coffee camp too. I would pay for coffee but not for the newsletter. I even read a few free articles of that newsletter. While I found them very interesting, I was keen on not paying for them. I was skeptical. I didn’t want to dish out a big amount. I wondered what if I don’t like it? There was no going back. But, later, I started seeing a lot of influential folks in tech talk about the newsletter. I saw them getting enough value out of it for them to not only keep renewing annual sums but also sharing how great it was publicly. This pushed me over the edge. I took a leap of faith because people I knew of or admired trusted the quality and lifetime value of the product. And, making a payment made me loyal and forgiving enough to constantly use the product even when I didn’t see any short term value.
So, trust and word of mouth are two things that reduced the friction for making the upfront payment. Once the payment was made, it was not only the product quality but also my commitment to using the product that made me a loyal user. My continued useage, self-imposed accountability, and patience helped me not only get the long term value from the product but also made me talk about it to others.
So, now, how does one get the initial set of users to make a big payment? I think identifying the people who are in severe need of the product will be the key. For that newsletter, the initial set of people who made the payment were very passionate about the tech industry and were looking for very deep insights on tech companies. And, that was the initial market. How does such product move from an early adopters market to people like myself sitting on the fringes of such market? The key here is having a connective tissue between the early adopter market and mainstream people. The tissue needs to make it easy to facilitate word of mouth. And there needs to be a relationship of trust.
The most common business model for services is letting users use a free service and then transition them to a paid service. I think that works better for services with immediate value. If using a service helps me understand its value immediately, I am more likely to keep using it and I am ever more likely to start paying for it for using it for a longer time or for advanced features. But what happens when using a service once or twice has no short term value? What happens when the utility of a service is predicated on me using it for extended periods of time?
And, that’s where the upfront payment business model comes in. This works only when the product quality is top-notch, of course. Thompson is brilliant.
