The sums and psychology of subscriptions

The subscriptions model has quickly evolved from utilities to digital and more recently into physical products. Startups are taking on the most locked up sectors with this approach, but how are they doing it?

First pioneered by newspaper and magazines, subscription has now become the business model of the 21st century.

It has spread far beyond utilities such as mobile phone contracts, pay TV and internet access, filtering into every area of consumer culture from music to socks. The mass market consumer has demonstrated a willingness for online sign ups and direct debits for virtually any product.

Subscription-based startups have come crashing into a variety of sectors, changing consumer attitudes and causing havoc with the old guard.

The subscription economy is now so large and accessible that providing the tools and infrastructure for such ventures has become a business in itself. Zuora does just that, and has handled £12bn worth of commerce since launching in 2007.

Digital renting

The engine powering the rush to sell through recurring payments has been digital; one tipping point was the ‘all-you-can-eat’ model for music and film. This, along with cloud storage, shifted consumer attitudes towards the idea of ‘content’. It killed off the long-held practice of building personal collections, turning the value of ownership upside down along the way.

Business-to-business services like sales management or book-keeping software have also shifted from something bought to something rented by way of Salesforce and Xero.

Digital subscription services may have been lapped up, but they’ve also involved people relinquishing a good degree of privacy, ownership and control in the process. It’s too early to see if there is a backlash, or if the issues mount up and eventually crack, but it’s something digital subscription firms appear to be ignoring for the time being.

Whatever the outcome, the ingredients for a successful digital service business appears clear: cheap, reliable, a benefit that’s easily understood and a well designed product available across a variety of devices.

Physical products

While the likes of Spotify and Netflix have been the most synonymous with subscription, some of the most fascinating disruptors of traditional purchasing have happened with physical products. Enabled by slick web identities, social media profile building and efficient courier services, they have been able to disrupt the stranglehold big corporations had on a variety of products.

Food, cosmetics, toiletries, books and even clothing are all sectors where stuff is sold through recurring purchases, bundled up and sent in a package sized to fit through the letter box.

Dollar Shave Club, launched in 2011, was one of the first product-based services to achieve wide ranging success. The firm took the US by storm and now has over half a million subscribers who have fresh razors delivered for as little as $1 a month. Gillette have since copied the model.

In the UK, Clean Shave Society has attempted to emulate the success while Cornerstone, launched by Oliver Bridge, has taken a more upmarket approach, offering a full range of shaving products.

‘The whole concept is around making things simple,’ says Bridge. ‘We’re targeting busy people who don’t have time to go to the shop.’

Pricing and the sign up

Even convenience and price isn’t sufficient to change consumer behaviour in such a radical manner. The biggest challenge the typical subscription services faces is getting people to subscribe in the first place.

To encourage people to sign up, a huge proportion of subscription businesses offer a free first month as a trial or discounts in the early months before the real price kicks in.

‘Free subscription trials are particularly effective, because people are prone to inaction, especially if the renewal is automatic and they have to opt out,’ says Alain Samson, consumer behaviour specialist at the LSE.

Upgrading to a richer experience from a low or free but limited service is another key method. Spotify’s ad-based free service encourages its users to pay the £10 a month to block the ads and access unlimited music on a phone. It’s a method that was also employed by music streaming startup Bloom FM.

Despite abruptly shutting down in April when its backer pulled funding, Bloom was able to sign up 1.2 million users in less than a year from launch. It did this by offering a baseline subscription for just £1 a month. This allowed users to store and listen to 20 tracks at any given time.

‘What we saw is the majority of our users tried the one pound, then didn’t want to give up the music they had, so they go up to the £5 (200 tracks) then £10 (unlimited) rather than give up the music,’ explains founder Oleg Fomenko. ‘It gave a positive reason to pay more once they were already signed up.’

Discovery and serendipity

An alternative model trumping the general cheap and convenient rule of subscriptions is the ‘curation’ model — a service marketed on the exclusivity of the products involved.

It provides consumers with the opportunity to receive surprise products they may not have found on their own. It could be the carefully selected products from Not Another Bill, craft beer of Desk Beers, chocolate of Cocoa Runners or Abel & Cole’s mixed bag of seasonal veg.

‘When we started out it was mainly about brand discovery — interesting things that you wouldn’t come across yourself,’ says Not Another Bill founder Ned Corbett-Winder. ‘Now it’s increasingly becoming about exclusivity. We provide something unique that you won’t get anywhere else.’

Birchbox has perhaps been the most successful in exploiting the model. Launched in 2010 in New York, it sends out a selection of beauty samples to subscribers for $10 (£6) a month.

The service has recently launched in the UK charging £12.95 and has over 400,000 subscribers worldwide. The business model has also shrewdly developed to focus on selling retail size products through its online shop.

Managing stock

A big draw of subscription models to new businesses is the ability to build a constant revenue stream without a costly retail presence.

Stripping out the traditional retail setup, marketing and distribution costs has allowed these new entrants to offer prices much lower than their established rivals. In several cases, side-stepping the big retail chains and supermarkets has also allowed new challengers to enter markets they would never have previously had access to.

An equally powerful advantage is managing stock. The subscription model offers certainty on inventory and income that a more traditional store can’t. It can make longer term commitments on its stock, it’s less prone to writing off bad debt from unsold stock and is less vulnerable to any sudden changes in the market.

No storage

‘It means I can make bold long terms decisions,’ says Cornerstone founder Bridge. ‘I know that as long as those people are kept happy, we will have the revenue coming through.’

For Desk Beers, having a set number of subscribers each month has meant only ever ordering the exact amount of beer being sold each month, with no excess stock left behind.

Steve Marshall, co-founder of Desk Beers, says: ‘One of the main reasons we went for subscriptions rather than an online shop is that it means we don’t have to store the product and can avoid the need for an alcohol license.’

He adds: ‘A big cost for us is logistics, but knowing how much revenue we have coming in and where we need to deliver to in advance allows us to plan ahead.’

But setting up the systems needed to allow online sign ups and automated order generation is not easy. ‘To manage the subscriptions and generate the orders we had to use a lot of combinations of software,’ says Cocoa Runners co-founder and ex-Last fm CFO Spencer Hyman. ‘It was much harder than setting up a site just to sell.’

Future growth

Question marks remain on the viability of subscriptions within certain sectors. Even Spotify, arguably the most well known digital subscription service is yet to turn a profit. Many critics point to the 70% income that labels demand and the sluggish growth rates for premium account sign ups.

More generally, there is the challenge of marshalling people to sign up in great numbers, and then keep them there. It’s a business the mobile phone industry will attest is no mean feat, spending vast sums to retain customers after the initial gold rush.

The broad shift, however, is positive. The consumer appetite for recurring payments on products and services clearly exists, as do the tools to set up such a venture. Given the success of several new businesses to attack sectors that once seemed impossible to challenge, it’s a safe bet that a whole wave of aspirant founders are currently looking at virtually any sector and modelling a potentially disruptive subscription business to take it on.