The subscription-based model is revolutionising every major industry on the planet and reshaping consumer behaviour in real-time. If you have a Netflix or Spotify account then you are already reaping the benefits of the subscription model, which basically entails a business selling a product/service for a recurring price at regular intervals (mostly monthly).
According to Forbes, subscription business models are set to climb from a $650 billion market in 2020 to a $1.5 trillion market by 2025. Advances in the technologies that support the subscription model are one reason for the industry’s growth. But more importantly, it is the mutual benefits enjoyed by businesses and consumers that are driving these numbers. The subscription model offers businesses income stability while offering affordability and convenience for consumers.
Let’s take a look at how the subscription-based model has developed over the years to become the robust and technology-driven industry it is today.
The start of the subscription economy
In 1856, renowned sewing machine company, Singer, created the world’s first subscription-based purchase/rent model for its latest product. Singer offered customers the chance to rent a sewing machine for $3 after putting down a $5 deposit. A decade later, industries such as media, telecommunications, automobile, software, and retail began adopting the subscription-based model to conditioned consumers.
The automobile industry began its rental model In 1918 when Hertz launched the world’s first short-term car rental option.
In the late 1940s, television and media companies began adopting the subscription-based model which saw millions of households access entertainment via monthly subscriptions which still persists today. Netflix, HBO, and the rest of the media streaming industry are the most recent examples of the popularity of today’s subscription-based model.
Telecommunications got in on the subscription model in 1996 when AOL launched its first flat-rate internet service and others followed suit.
But the industry that has been most affected by the subscription-based model is the software industry. In the early 2000s, subscription-model heavyweights SalesForce popularised the software-as-a-service (SaaS) model which set the tone for the entire software industry. From this, the software-as-a-service (SaaS) market size is poised to reach $208 billion by 2023, fueling the subscription-based economy.
Modern industries adopting the subscription model
Thanks to technological advancements in digital payment, data analytics, and logistics handling at scale, modern businesses are embracing the subscription-based model.
The software industry has adopted the subscription model like no other. For example, creative and design tool companies like Adobe and Sketch previously sold their software as a once-off purchase that came with a lifetime license that often included updates and support. Today, these companies are selling their software via monthly subscriptions and no longer provide lifetime access for a single purchase. Interestingly, there is no monthly subscription model for Apple’s creative/design software such as Final Cut and Logic. Users can purchase the software once-off and the licences will last up to 6 years.
However, last month Apple released its latest monthly subscription model for their Business Essentials software which connects employees’ smartphones to a company network so management can provide access to various tools and software.
With private car ownership in global decline, automobile companies are searching for new ways to meet the changing demands of customers. One way they are doing this is through a change in approach to “usership over ownership” that sees them offering monthly car rental/usage subscriptions that include car rental, maintenance, insurance, and roadside assistance. This all-in-one rental service package is proving enticing for customers who no longer need to deal with multiple vendors.
Airlines have long offered loyalty programs but the introduction of the subscription-based model is proving to be more beneficial for both companies and flyers. Companies like FlyLine and Surf Air offer users discounted airfares, early check-in and boarding options, and many other options users can benefit from for a monthly fee. Delta and United Airlines have also started monthly subscription services which provide members with various perks, from in-flight meal discounts to priority boarding.
With advancements in technology and the internet, the video game industry is leveraging the subscription-based model to allow users access to games and promotions via a monthly fee. Gamers can play multiple games for a monthly subscription rather than playing only one for a flat, upfront fee. Xbox Game Pass gives subscribers 100 games for only $10 a month while PlayStation Now offers 650 games for $9,99 per month.
- Health and wellness
Healthcare providers are exploring the subscription-based approach to reduce point-of-service costs and minimise the load on individual providers. Some healthcare providers and insurance companies are offering patients a flat monthly fee that gives them access to medical visits and healthcare benefits that covers most needs at a fraction of the cost. Various wellness practitioners are also leveraging the subscription model: meditation, fitness, and sleep guidance experts are offering all-inclusive services via a monthly fee.
Pros and cons of the subscription model
The subscription model does come with its associated benefits and drawbacks for both businesses and customers. Let’s explore the most important pros and cons for each.
- Pros for businesses
The most obvious benefit of the subscription model for businesses is recurring sales based on repeat purchases. Businesses can rely on a steady and predictable income stream by providing access to services/products to customers for a monthly fee. Once customers are subscribed, they tend to remain in the subscription for a long time which means businesses can save on certain customer acquisition initiatives. In some instances, subscription models can produce more income than single, once-off purchases.
The subscription model also brings customers and businesses closer together into a mid-to-long-term relationship which builds strong loyalty through continuous engagement. This leads to more cross- and upselling opportunities which can lead to more revenue for businesses. What is also important is that businesses are able to gather valuable customer insights from this loyalty which can guide business decisions that will improve the product/service and customer relationship.
- Cons for businesses
The biggest drawback of the subscription model for businesses is the need for specific technology tools used to handle subscribers and their purchases. These tools can be expensive and require technical know-how to implement and manage. This means that in order to get the most benefit from a subscription-based model, businesses will need to either hire a fully functioning Information Systems team or outsource one to oversee the technical aspects.
Another drawback is that in some cases the subscription model does not necessarily guarantee monthly revenue due to churn and unsubscriptions depending on the product or service on offer. Businesses need to continuously add value and adapt to meet the changing demands of customers in order to retain their subscriptions.
- Pros for customers
The primary benefit of subscriptions for customers is the important element of convenience. People far prefer to subscribe to a product/service each month because it takes away the constant hassle of repeat orders and product/service management.
Subscription fees are almost always more cost-effective than a once-off purchase so customers end up saving on items while having the opportunity to pay off smaller amounts each month. This monthly pricing model encourages continuous engagement with businesses, meaning customers have an open line of communication and support throughout their subscriptions. This creates room for improved customer service which promotes a greater brand-customer relationship.
Another big draw to the subscription model for customers is that they are able to opt-out or unsubscribe at any time, releasing them from being locked into a service they don’t want. Customers enjoy this kind of freedom and flexibility which makes them more inclined to try out a subscription before committing.
- Cons for customers
In many instances, the cost of a software or application subscription works out to be more expensive than a once-off payment, especially if the product/service is regularly required. However, some people don’t mind this if you take into account the continuous customer support subscriptions provide.
Another drawback for customers is the possibility they become locked into a vendor making them dependent on their service provider. This reduces a customer’s freedom of flexibility to choose different vendors as many subscription models only work within a native ecosystem.
There are also security implications of subscribing to one vendor: if they have a security breach, all of your sensitive information and data is out of your hands to keep safe.
Is it a fit for your business?
More and more customers are proving that access to products is more beneficial than outright owning them. Today, you can subscribe to almost anything. So, if your business has a product and/or service then you should seriously consider the subscription-based model revolution that is poised to reshape the consumer industry.
If you would like to explore your options to create a bespoke “___as-a-service” for your business, get in touch with us to see how we can facilitate your digital transformation.