The Evolution Of The Subscription Business Model
How sustainable is subscription?
The subscription business model is far from a new idea. Daily milk deliveries are one of the oldest examples of subscription commerce, and even your monthly utility bills come under the same label. With digitalisation has come a transformation of how subscription services work, with more companies experimenting with the model, widening the definition and bringing companies much closer to their customers. D/SRUPTION spoke to Andy Katz and James Taylor, strategy and growth experts of PA Consulting, to find out how subscription services can navigate this territory.
The rise of subscription is hardly surprising, given its various benefits. With digitalisation has come greater opportunities to personalise product and services, as well as pursue a multichannel approach that goes beyond ordering and receiving.
“There’s a business need as well as a customer need for subscriptions, and they are coming together to create a new opportunity and market,” says Taylor. “In terms of the business drive, there’s the reliability, increased revenues, and knowing you’ve got a certain amount of subscribers. From a customer point of view, it’s the convenience, the personalisation, the brand affinity, accessibility. . . in this fast moving world, this is what customers are looking for.”
Other benefits include being able to predictably manage resources and inventory, and establishing a dialogue with customers. In turn, this has helped businesses to build their brand loyalty. However, at the same time, the model is not without its pitfalls. Customers can end up paying for services that they don’t use or fork out for stealthy automatic charges. While some businesses – gyms, for instance – make their money from people who pay for a service they don’t use, this can damage customer relationships. There’s also the potential to become complacent, and consequently lose consumer trust. Taylor explains that it’s not only about meeting demand for personalisation and convenience, but respecting customer knowledge.
“There’s a good chance that if subscription models are done incorrectly or perceived as being deceptive, customers will wake up and realise and this may end up damaging the business’s reputation. A good example is Amazon Prime which experienced a significant backlash after some customers realised they had been paying for subscriptions unknowingly. More and more businesses need to reflect and acknowledge customers’ greater understanding and awareness.”
The next stage of subscription
Subscription model businesses clearly have a number of different challenges to overcome, not least in the form of competing pricing strategies. Other options include short term contracts, which retain the benefits of subscription without tying consumers to extended timeframes. Pay per use is another option that sacrifices revenue certainty to deliver relevant customer service. A third alternative, micropayments, allows customers to purchase only what they want in small quantities. An example is buying an article rather than a whole paper. Katz advocates an approach that directly answers customer demand for flexibility by providing a range of choices.
“The issue with subscription is that you’re paying for something every day, week, or month – what if customers don’t want that level of frequency? Is there something that allows the consumer to have the ability to turn things up, or down, or not to subscribe when they don’t want to? The challenge is to offer a plethora of different options to best meet the needs of their varied consumer base. Perhaps subscription will morph into membership.”
Switching up supply chains
If subscription changes, so do supply chains. At the moment, customers pay for single products or services from single businesses. On the one hand, offering greater choice and flexibility could complicate the supply chain. However, on the other, it could encourage the development of wider ecosystems as businesses work in conjunction.
“There are lots of different things going on in terms of packaging, delivery, the ecosystem, and technology. Pretty much everything you take for granted in a traditional model, you can start to turn upside down,” says Katz. “Do people want a whole multitude of subscriptions with different entities, or do they start to want bundled solutions?”
Katz offers the example of health and wellness, which includes a range of different branches including vitamins, nutrition, exercise, and even medication. Instead of traipsing through different providers to find exactly the right product or service, there is an opportunity for businesses to look at industries as ecosystems, and consider how convergence could deliver convenience.
While subscription remains a lucrative and attractive strategy, companies may need to consider the extent of the products and services that they offer. Customers expect low friction, low effort, accessible solutions. The success of specific subscriptions (or indeed, memberships) could come to hinge on how many needs a company can fulfil before the customer has to find another provider. As always, there will be winners and losers. The most successful organisations will satisfy a multiplicity of requirements via a frictionless customer journey. This could involve leveraging different payment options for all important flexibility, or partnering with other businesses to, as Katz’s says, “bundle solutions”. So, the subscription business model will continue to thrive, but only if it can evolve alongside consumer needs.
Will subscription morph into membership? How will convergence impact subscription services? Will customers prefer bundled, lateral solutions over single subscriptions? Share your thoughts and opinions.
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