The Subscription Economy Enters New Dimensions
Unpacking new subscriptions from service-oriented brands, and what they can tell us about the new rules of cultivating brand loyalty
It feels like subscriptions have been taking over our lives. The subscription economy exploded nearly sixfold from 2012 to 2021, according to the Subscription Economy Index by Zuora. Subscriptions are so commonplace to the point that analysts have warned repeatedly of a widespread “subscription fatigue,” which stems primarily from the ever-increasing number of streaming services available. Yet, subscriptions have shown no sign of receding from our lives. The average U.S. household now holds nine paid subscriptions across videos, music, and gaming, according to a 2021 report from Deloitte. The study notes that while it is true that consumers are increasingly wary of taking on new subscriptions, they are not letting the ones they are already paying for either.
The reign of subscriptions is not limited to digital media only. Over the past decade or so, arguably starting with the viral success of Dollar Shave Club, many digital-native D2C brands have also embraced the subscription model to sell a wide variety of products, such as meal kits, apparel, and cosmetics, to a consumer base that is often overwhelmed by the abundance of choice that modern life offers.
But subscriptions are not a brand new phenomenon; From daily milk delivery to morning newspapers tossed on the doorstep, the American life as we know it has been supported by locally run subscription services long before the digital age arrived. What the internet, along with a maturing ecommerce and logistic infrastructure, has enabled, is breaking subscriptions out of their inherent distribution constraints and reaching a wider audience.
And if you think that every brand that can sell a subscription has already tried it by now, think again. In recent months, the subscription economy has entered new dimensions as several service-oriented brands across travel, hospitality, healthcare, and restaurants started to experiment with the subscription model. In the process, they reveal an interesting new dynamic of customer relationships that smart brands can leverage to build loyalty.
Unusual Subscriptions from Service Brands
Subscription-based business models make intuitive sense for FMCG products that people routinely purchase, as well as digital media where various pieces of content are bundled in “all-access” subscriptions to maximize appeal. In fact, digital media subscriptions have roots in subscriptions of physical goods: newspapers and magazines used to deliver physical copies, and Netflix started out as a DVD subscription service. The underlying value propositions for both sectors follow a similar rationale: you need our product on a regular basis, so let’s eliminate the need for repeat purchases and make things easy for everyone with a subscription.
If there is one sector of our economy that has not been touched by the subscription mania that has developed over the past decade, it would be the experience-oriented service industry. For the most part, offline experiences and services are still sold on a per transaction basis. Thanks to demand-based dynamic pricing, the rates of services tend to vary from transaction to transaction. And most of these services are not routine activities that could justify selling a subscription to the majority of their customers.
However, in recent months, new developments have shown that service brands have grown increasingly curious about the subscription model and the upsides it provides, especially in this digital age of fickle loyalty where competitors are often just a few clicks away. As a result, unconventional subscriptions across a variety of service sectors are starting to make headlines and raise eyebrows. Although none of them are adopting subscriptions as the basis of their primary business model (a la Netflix or Stitchbox), they nevertheless point to interesting insights around how brands are striving to win customer loyalty.
Travel and Hospitality
Let’s start with the travel sector. Airbnb and ride-sharing services have long rhapsodized about the future of on-demand access to accommodations and rides based on a subscription model. Uber and Lyft even went so far as to launching their respective membership programs in recent years, but they are far from the type of “all-you-can-ride” subscriptions that many innovation analysts believe will underline the “Mobility-as-a-Service (MaaS)” future. Instead, it is an airline that dipped its toe in subscriptions first.
Two weeks ago, Alaska Airlines, which acquired Virgin America in 2016 to become the 5th largest U.S. airline, announced a multi-tiered new subscription service called Flight Pass. At launch, subscribers can fly on routes within California or between California and Reno or Phoenix, covering about 100 daily flights. Interested travelers can pay as little as $49 monthly for the cheapest option, Flight Pass, which includes six flights a year that must be booked at least 14 days in advance. A more flexible tier, Flight Pass Pro, starts at $199 a month and allows for same-day booking.
Overall, this flight subscription program presents a great deal for frequent travelers in California. Flight ticket prices notoriously fluctuate on a daily basis due to airlines’ demand-driven pricing schemes. For frequent travelers, subscription plans like this one may just be worth it for the peace-of-mind guarantee. The air travel sector already has plenty of membership services aimed at eliminating the pain points of business travel, but as business travel got decimated by the accelerated shift to remote work, this approach is finally being extended to leisure travelers.
On the hospitality side, although tourism isn’t projected to return to pre-pandemic levels until at least 2024, the shift to remote work has kickstarted a “subscription-living” trend among boutique hotels. Micro-apartment hotel chain Zoku, which opened its first location in 2015 and was designed specifically for remote workers and digital nomads, fully embraced the shift with a monthly subscription plan that allows guests to access accommodation and co-working space in its hotels across Amsterdam, Copenhagen, and Vienna. Similarly, hostel brand Selina launched last year a co-living subscription for stays across Latin America, starting at just $450 a month.
Travel and hospitality are lifestyle businesses that rely on reward programs to build customer loyalty, and subscriptions can be a powerful addition to their arsenal. Spreading out the availability slots to off-season, bundling in additional services and upgrades, and accounting subscription costs towards reward programs — there are many tactics that travel and hospitality brands can deploy on top of a subscription plan to encourage more frequent patronage and increase profit margin. However, the downside of embracing subscriptions would be to forgo the profits generated by demand-based dynamic pricing, which is a common issue that service brands must weigh against when setting the price of their subscriptions.
Healthcare (Primary Care, Dental, and Pet Care)
Healthcare services in the U.S. have a notoriously opaque and complex payment scheme, thanks to the lack of universal health insurance. As a result, medical startups like One Medical, Forward, and Parsley Health have pushed for fixed-price, membership-based primary care services as a way to solve our mounting frustration with the medical status quo. In December, Amazon launched Alexa Together, a subscription-based service helping caregivers provide remote support to elderly loved ones. As the ecommerce giant continues to roll out its Amazon Care primary care service to more markets and rapidly expand in-person care locations, it seems quite likely that it’d start to explore subscription-based primary care before long.
Beyond primary care, subscription-based healthcare is also extending to dental and pet care. In 2019, D2C toothbrush subscription Quip launched a dental care plan that works as a dental insurance alternative to customers in New York City. Basic Quipcare uses a pay-as-you-go model that enables users to find in-Quip network dentists and pay 30 to 40% less than the average dental care in NYC. Meanwhile, Quipcare+ is a preventative care plan that costs $25 per month and covers two preventative check-ups annually. Similarly, Village Dental offers a membership plan for $299 a year that covers basic dental care in addition to discounts on additional treatments, no dental insurance needed.
In pet care, startups like Thrive and Small Door Veterinary are offering similar subscription-based memberships that aim to provide pet-parents peace of mind without resorting to costly pet insurance. Interestingly, they are already facing strong competition from pet care retailers like PetCo and pharmacies like PetCare Rx, who have all introduced their own fixed-price subscription plans as affordable alternatives to pet insurance.
Interestingly, the healthcare industry may start to imitate its cousin: the fitness industry. Gyms and virtual fitness services like Peloton have long relied on subscription as its main subscription model. Gym memberships are famously, and by design, difficult to cancel, because its business model hinges on “breakage,” namely profits from people who sign up but don’t end up going often. A similar dynamic may appear with healthcare subscriptions, which would no doubt pose new challenges on the U.S. healthcare system, but hopefully also push healthcare providers to streamline the process and improve efficiency.
Fast Casual & Quick Service Restaurants (QSRs)
While the restaurant industry is no stranger to prix fixe menus and reward programs, subscription-based plans have remained rare for most QSR brands and typically offered in limited quantities. Olive Garden’s Never Ending Pasta Pass famously sells out every year since its 2014 launch, and KFC released a one-off “seasoned tickets” of chicken wings to 500 lucky customers in 2019. Both subscriptions function more as a marketing tool rather than an integral part of their business model.
In early 2020, Panera Bread made headlines for its $9-per-month unlimited coffee subscriptions. The idea was to use coffee as a cost-leader to get customers in the door and make profits on other purchases. It was soon copied by Pret a Manger, which positioned it as a more upscale coffee subscription. Last month, Taco Bell announced a $10-per-month subscription, Taco Lover’s Pass, for one taco per day. So far, it has proven to be a hit, with subscribers three times more likely than no subscribers to visit a Taco Bell restaurant per month, Restaurant Dive reports.
Notably, fast casual chain Sweetgreen is also testing out a new subscription service for its popular to-go salads. For $10 a month, Sweetpass subscribers can receive $3 off their order each day. While this is closer to Lyft Pink than Taco Pass, in that it offers discounts rather than fixed-price monthly access, it is nevertheless an intriguing hint at how fast casual restaurants may innovate on reward programs with subscription plans.
For frequent customers, a subscription service will likely offer a better value proposition and a more seamless experience than a conventional loyalty program. According to a recent report from the National Restaurant Association, 57% of adults said they would likely participate in a subscription program if it were offered by one of their favorite restaurants, with 80% of millennials and Gen Z indicating they would partake.
Moreover, subscriptions can help incentivize customers to engage with QSR brands digitally, which may generate higher checks and provide them with valuable customer data. For example, Taco Bell’s subscription can be purchased in the brand’s app, which has resulted in a 20% spike in new rewards program members. Similarly, the Sweetpass is available solely via the Sweetgreen app and works at all locations, but not via third-party delivery services such as Uber Eats, DoorDash, or Grubhub, which helps Sweetgreen ensure its profit margin by encouraging direct orders.
New Rules of Brand Loyalty
The pandemic has changed a lot of things, and brand loyalty was one of its many victims. A 2021 McKinsey report found that around 35% of U.S. consumers have tried a new brand during the pandemic, with the top three reasons behind switching being value, availability and convenience. Recent global supply chain issues also exacerbated the availability of certain brands’ products, opening an opportunity for consumers to try out new brands. The abundance of choices brought on by the D2C wave and collapsing purchase funnels also means it is easier than ever to try out a new brand. Overall, it is not that customers have become less loyal to their favorite brands, as much as the shifting circumstances have made it increasingly difficult to maintain loyalty as brands.
In this context, subscription may serve as a crucial tool for brands to cultivate loyalty in these uncertain times. Regular loyalty programs alone no longer cut it — unless you’re banks or Starbucks (more on that later) — and adding a subscription service is becoming a popular way for brands to incentivize digital engagement and increase the “stickiness” of their products through repeat businesses. Most of the subscriptions we mentioned above are essentially paid loyalty programs designed to confront the broader challenge to traditional loyalty models. Whether it’s free daily taco or free teeth cleaning, the perks covered by the subscriptions are mostly written off as the cost of customer acquisition and retention. The real money, as is usually the case, lies in the other upsells that loyal customers are happy to pay for.
Points-only loyalty programs were already starting to fall out of fashion even before 2020; In this new paradigm, paid loyalty programs can drive higher purchase frequency, basket size, and brand affinity compared with free loyalty programs, thus offering an attractive option for companies both to attract new customers and to shore up long-term customer value. In addition, they also help fund premium rewards that are too expensive to offer more broadly.
For a proven example of success, look no further than Amazon: 76% of U.S. households have an active Amazon Prime subscription, and they tend to spend four times as much as the non-Prime shoppers. Prime is a unique program in that it is a super bundle that not only includes digital media access (Prime Video, Amazon Music, etc.) but also shopping benefits like fast shopping and discounts at Whole Foods. Amazon recently raised the annual cost of Prime by $20, yet received very little pushback for one very simple reason: the perceived value of being a Prime member far exceeds the cost for most Amazon customers.
Brands Aspiring to Become “Banks”
Of course, not every brand can be Amazon and build a super bundle like Prime. And despite the aforementioned reasons on why subscription programs may help build brand loyalty, they are not suited for every single brand. People certainly don’t want to pay extra dollars every month in order to access services or features that are expected to come with the products, or sign up for subscriptions from brands with which they don’t expect to have frequent interactions. A recent Bankrate survey found that 51% of Americans ended up with unwanted charges from a subscription or membership, and brands should avoid contributing to this problem.
However, most brands are missing out on an enormous opportunity that an integrated digital reward program can unlock. Take Starbucks for example. Despite being one of the biggest QSR brands worldwide, the company has so far resisted launching its own subscription service. Upon a closer look, however, it would appear that the Seattle-based coffeehouse chain simply does not need one, thanks to its wildly successful digital rewards program.
As one of the first QSR brands to digitize their rewards program and integrate it to in-store payment, the Starbucks app enjoys unparalleled high usage among its customers. In fact, as of March 2021, the Starbucks app ranked as the second most used mobile payment app for point-of-sale transactions in the U.S. with over 30 million users, per eMarketer’s estimate. Impressively, it beat out Google Pay and Samsung Pay, and was only after Apple Pay in terms of in-store usage. More importantly, millions of Starbucks customers have preloaded money onto virtual Starbucks cards, as part of this rewards program, essentially loaning the company over $1 billion at 0% interest. In other words, Starbucks operates like a bank that happens to sell coffee.
To some, this may recall the business model of modern airlines, which has evolved to rely on selling frequent-flyer points to banks as a primary revenue stream. The banks then turn around and issue them as credit card rewards for purchases such as at hotels and restaurants or for groceries. This is why Delta recently launched a new “buy now, pay later” option that lets customers create a fixed monthly payment plan with zero interest — provided that they are using Delta’s co-branded American Express credit card in both cases. In a way, airlines have also become “banks.” And the airlines have realized there’s more opportunity to make money from these programs than just engendering loyalty, leading to more ways to earn frequent flyer points other than taking a flight. This is why airlines don’t care if they make money from subscriptions as long as they prompt their best customers to fly more and rack up more miles for the airlines to sell.
Then again, it should be self-evident that not every business is suited for this model either. For most brands, it is far more practical to embrace the “lifecycle loyalty” trend we highlighted in this year’s Outlook trend report. For more and more products, the relationship between consumer and brand is extending well beyond the point of purchase, encompassing the entire lifecycle of the product, from acquisition to replacement.
Much as Apple maintains ongoing software updates and hardware trade-ins for the iPhone, brands in categories ranging from fashion to food are starting to realize that maintaining that consumer relationship over the long term increases the likelihood that when the time comes to replace it, the consumer will simply choose the latest from the same brand they already know and love. For brands that can build an ongoing customer relationship, there is great opportunities in timing your communication and product updates into the natural seasons of life. Things like moving, marriage, and having children and pets have been times when certain brands target consumers in a state of flux, when they’re open to trying new products and services.
If you want to learn more about the concept of lifecycle loyalty, or discuss the many ways that your brands can solidify customer loyalty, the Lab is here to help! If you wish to dive deeper into the new dimensions of subscriptions and brand loyalty, please reach out to our Group Director Josh Mallalieu at josh@ipglab.com.
