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Subscription Economy

The Fundamentals of the Subscription Economy

By Ji-Soo Kweon

The Fundamentals of the Subscription Economy

The Subscription Economy provides flexible, dynamic services in a relationship of predictable, recurring benefit for all. Welcome to the future!

 


 

Cast your mind back, if you can, to the pre-Netflix, pre-Blue Apron, pre-Spotify, pre-Audible days of yore. If you wanted anything, you had to buy it, and so we all bought into the addictive glamour of ‘retail therapy’ and her not-so-nice cousin, ‘shopping addiction’. Society has always glamorized conspicuous consumption, and many milestones in a modern, conventionally successful life involve purchase and ownership. Buy a house, buy a car, buy a watch, buy a bag, buy another car. 

The product economy throws many obstacles between consumers and the abstract notion of contented happiness that money can apparently buy. Inherent to the ownership of things is the burden of maintaining, repairing, supplying, and eventually replacing them. Cars need fuel, trips to the mechanic, washing and waxing, and eventually they get too old for their intended use and need to be replaced. On top of the costs of the normal life cycle of various consumer goods, the product economy has ways of exploiting the burden of ownership, which is held entirely by the consumer. The ‘razor and blades’ model sells one item - such as a razor - for free or cheap, but the use of this item is dependent on the continual purchase of consumable supplies - the blades. Another exploitative practice in the product economy is ‘planned obsolescence’, in which products are designed to have an artificially limited useful life, thus ‘shortening the replacement cycle’ and obliging consumers to continually replace goods.

In contrast to the product economy, the subscription economy is based not on the transferral of ownership from suppliers to consumers, but on a dynamic, ongoing, mutually-beneficial relationship between service providers and their customers. The subscription business model dates back to subscriptions to books and periodicals in the 17th century, and a pioneer in the modern subscription economy is Costco, which opened its warehouses to members of the public willing to pay an annual subscription. In exchange, customers had access to discounted groceries and cheap on-site food courts, as Costco’s margins are much slimmer than traditional supermarkets and membership fees account for 80% of Costco’s gross margin. Other examples of early subscription services include magazines, gym memberships, phone contracts, and cable television. The subscription economy has grown steadily as the global community has digitalized, as many contemporary subscription models are facilitated by the internet, particularly smartphone apps. 

According to Forbes there are four factors driving the subscription economy: price, convenience, personalization, and curation. A recurring subscription for a service or staples that need to be purchased regularly can be made more cost-effective for the consumer by eliminating the need to constantly facilitate individual transactions, meaning that companies can save money on marketing and, in most cases, on the costs of maintaining brick and mortar retail locations or engaging a retailer as a middle man. This benefit of the subscription economy has allowed companies like The Dollar Shave Club to literally undermine the razor and blades sales model, as razor blades can now be sold cheaply by monthly subscription and sent right to the customer’s door in regular shipments.

The subscription economy also facilitates increased convenience in the overall customer experience by digitalizing and automating much of the process. For services such as car or bike sharing, there is the added convenience of not having the burden of purchasing, maintaining, and replacing objects, but rather having one available for use at a moment’s notice, arranged and paid online. Beyond the convenience of having goods and services magically appear whenever one might need them, the subscription economy also allows for greater personalization of the customer experience. Beyond the benefit of ensuring that customers get exactly what they want out of a subscription service, the personalization available in the subscription business model is beneficial for businesses, as it allows them to make customers feel seen and properly cared for. Good, old fashioned service in the futuristic world of digitalized subscription. 

Finally, the subscription economy also allows for greater curation of content, goods, and services. Curation is related to personalization, but instead of the customer choosing their own preferred experience, curation refers to the feeling that an expert is listening to what you need and putting the pieces together to create an exceptional custom product. The subscription economy includes a variety of ‘surprise boxes’ of various themes - beauty, fashion, pet accessories, popular culture fandoms, etc. - that are curated into a regular ‘surprise’ of items that are especially chosen for the consumer. This experience also applies to subscriptions to various media catalogues, such as Spotify or Netflix, which can curate suggested playlists based on earlier habits. 

The subscription economy has a long and strange history, starting with 17th century periodicals, meandering towards opening discount warehouses to paying members of the public, to the explosion of online services and products. The subscription business model is accessible to legacy brands - such as OEMs branching out into providing car sharing platforms - as well as to exciting new upstart companies. This is especially the case in the *digitalized* subscription economy, as according to a 2017 KPMG report only 22% of online consumers care about brand names and will instead prioritize convenience, price, personalization, and curation. The digitalized subscription economy is also freed from traditional restrictions on how goods and services trade; the consumer is no longer confined by whichever shops they live near, but can instead access a bold new world of exciting new products, content, and services - all for a small recurring subscription fee, fully automated in a sleek smartphone app. Welcome to the future, folks. Your package has arrived. 

 


 

References: www.forbes.com, the-truth-about-online-consumers.pdf

 


 

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