Business
Subscription-based businesses were considered unassailable throughout the pandemic. But this year, as economic conditions tightened, subscriptions started to fall. Some firms have continued to thrive, however. So what is the secret of their success?
S ubscriptions are hardly a 21st-century phenomenon. Charles Dickens, medieval trade guilds and magazine publishers were among the many to recognise their benefits long ago: reliable revenue for business and peace of mind for consumers.
Nonetheless, digital technology breathed new life into the idea. Suddenly, it was easier for customers to find subscription offers; the payment risk fell with new billing services; the cost of digital storage declined as the cloud expanded; and new propositions, such as streaming, became viable as bandwidth increased. Highly successful services sprang up in sectors as diverse as razors, recipe boxes, socks, pickles and cosmetics. Reports published as late as 2021 proclaimed that the subscriptions economy had grown by as much as 435% over nine years and showed no signs of slowing down.
Then, inflation and the associated cost-of-living crisis began to bite. Few companies have welcomed this, but as London Business School professor Oded Koenigsberg explains, it can be particularly problematic for those that use subscription pricing.
Unnecessary burden
“Subscriptions are very sensitive to inflation. If inflation is high and firms commit to a price, it will go straight out of the bottom line as their costs go up. But if they keep deviating from their price, it takes away some of the point of having a subscription in the first place. From the consumer’s perspective, they may as well just go elsewhere,” he says.
Clearly, too, subscriptions can seem an unnecessary burden to households struggling to pay for essentials. Netflix, long a poster child for the sector, exemplified the challenge when it suffered slowing growth and then falling user numbers. By mid-2022, a million consumers had left the platform globally. Rival streamers, including Amazon Prime, have experienced declining numbers too, and it has not stopped there. According to data analysis group Kantar’s Global Issues Barometer, nearly 40 per cent of households planned to cut back on subscriptions generally in 2022.
To forestall cancellations, we began a targeted offer testing programme – experimenting with different discounts, free cards, upgrades and options to pause or downgrade to a lower subscription tier. We then used the insights to retain customers at scale
Some companies will handle the changing circumstances better than others. Nice-to-haves are clearly more exposed than need-to-haves during hard times, whether they are sold on an ongoing or transactional basis. And some subscription sub- categories are more vulnerable than others. Access models – where a membership fee allows customers to buy discounted or exclusive products – tend to prove to be more resilient, as they can still be flexible with their prices. Replacement models can hold up, but only if their products are well priced and service levels are top- notch. Curation models, which range from book-of-the-month clubs to make-up boxes, may be most at risk. Their appeal lies in finding things people might like but don’t know about yet, which is tricky to justify when basics are becoming prohibitively expensive.
Of course, what businesses want to know is how to make sure that they end up on the winning side of the subscription economy’s apparent crisis moment. But that’s not the most important question to ask, at least not at first.
Economies of scale
Businesses are not immune to the forces of fashion. When they see other companies doing something impressive, it’s natural to wonder if they could follow suit. But this does not always work out.
Koenigsberg singles out Netflix as a candidate that could benefit from a makeover. “Netflix does subscriptions for the right reasons, but it is not a good strategy for the business. The cost structure doesn’t fit the revenue model,” he says. He suggests that a company’s cost structure is best suited to subscriptions pricing if it supports economies of scale. This is because subscriptions encourage customers to use a product more than they otherwise would. When fixed costs are high, this pushes down unit costs, improving margins and customers’ sense of value for money. Think cinema chains offering unlimited movie tickets to fill seats, for instance. But when variable costs are high instead, this creates challenges. “It can create ineffi- ciencies in terms of providing products at a price that is lower than the cost,” Koenigsberg says.
Netflix and its peers are not low- cost aggregators in the way Spotify is in music. The film and television studios have each launched rival streaming services, with unique content libraries. In all the competition for consumer streaming spend, these businesses are forced to keep feeding subscribers more and more original content to stop them switching sides – and it’s very expensive. Netflix alone spent $17 billion on content in 2021, compared with $6.9 billion in 2016. Others are also pouring money into their streaming offers.
In essence, these firms’ success may arise despite their revenue model, rather than because of it – offering a valuable lesson for any would-be imitators. “Subscriptions can be a great strategy, but they are not right for everyone. If you see an impressive company, don’t necessarily emulate the pricing model. Emulate the product,” says Koenigsberg.
Netflix and its peers are not low-cost aggregators in the way Spotify is in music. In all the competition for consumer streaming spend, they are forced to keep feeding subscribers more and more original content to stop them switching sides – and it’s expensive
Lasting value
Products also need to be different from the norm and the relationship with customers should be such that it engenders loyalty. Importantly too, subscriptions per se do not make customers loyal; unless they value the relationship or the product, or both, they can simply take what they want and unsubscribe.
To create meaningful and lasting value, author and consultant Robbie Kellman-Baxter says that subscriptions should satisfy a clear “forever promise, solving an ongoing customer problem or achieving an ongoing goal”. Not only does this mean that businesses need to think hard about what they are selling and how they are selling it, but also that they require patience at well – it usually takes time to accumulate enough subscribers to start turning a profit.
“For a subscription to work, the organisation needs to focus on the long term, on the customer lifetime value, rather than just the immediate transaction,” Kellman- Baxter says.
If companies are not offering a unique, ongoing solution and cannot afford to wait to make a return, they probably should choose another model, she suggests.
But assuming subscriptions pricing is an appropriate tool, strong execution begins with a focus on what Kellman-Baxter calls customer success: “ensuring that subscribers are using the subscription well and getting the value they’re entitled to”.
Online blood test company Thriva has taken this to heart. After paying a flat membership fee, customers select a range of tests – cholesterol, vitamin D, blood glucose and many more – and a repeat period, from monthly to annually. Thriva then analyses the results, reveals trends and feeds back personalised health recommendations.
The digital subscriptions boom is not confined to consumer-facing services. In fact, in many respects, business-to-business firms were in the vanguard of it, most famously with the launch of Adobe’s Creative Cloud in 2011, which heralded the beginning of the end of perpetual software licences.
Software-as-a-service and cloud-based solutions are classic subscription-based models and they have transformed numerous industries.
But even heavy industry has discovered ways to make use of the subscription approach. Construction equipment company Caterpillar, for example, has a thriving, smartphone-operated, subscriptions platform called Cat Connect, through which it provides safety recommendations and offers a range of after-sales services, including advanced
analytics that reduce maintenance and fuel costs.
The firm has also begun renting kit to subscribers that want to reduce capital expenditure – a clear reminder that, like their consumer-facing counterparts, business- to-business firms considering subscriptions should always begin with the benefit that the model might offer to their customers.
The digital subscriptions boom is not confined to consumer-facing services. In fact, in many respects, business-to-business firms were in the vanguard of it, most famously with the launch of Adobe’s Creative Cloud in 2011, which heralded the beginning of the end of perpetual software licences.
Software-as-a-service and cloud-based solutions are classic subscription-based models and they have
transformed numerous industries.
But even heavy industry has discovered ways to make use of the subscription approach. Construction equipment company Caterpillar, for example, has a thriving, smartphone-operated, subscriptions platform called Cat Connect, through which it provides safety recommendations and offers a range of after-sales services, including advanced
analytics that reduce maintenance and fuel costs.
The firm has also begun renting kit to subscribers that want to reduce capital expenditure – a clear reminder that, like their consumer-facing counterparts, business- to-business firms considering subscriptions should always begin with the benefit that the model might offer to their customers.
It's cool for Cat
Customer-centric rationale
“Our customers truly start to experience the benefit of Thriva when they are able to test at regular intervals. This enables them to assess exactly how any lifestyle changes they are making are impacting their health. So there’s a clear, customer-centric rationale for us to focus on a subscription approach,” explains Thriva’s chief growth officer, Karim Gargum.
While subscriber value increases the more consumers use the service, Gargum advocates striving to increase this value further. Thriva recently launched a range of tailored supplements, for example.
“We can understand how subscribers’ health changes over time and provide them with the support to improve it. Beyond that, sharing personalised educational content enables us to enrich our relationship with customers,” Gargum explains.
A company’s cost structure is best suited to subscriptions pricing if it supports economies of scale. Because subscriptions encourage customers to use a product more than they otherwise would
TouchNote founder Raam Thakrar has drawn a similar conclusion, though in the case of his online gift card company, customers need more of a nudge to experience the full benefits of membership. “A study we did with Dr Anna Machin, a leading anthro- pologist from Oxford University, showed that engaging in more meaningful communication, such as sending personalised notes or cards, is a way to strengthen relationships with loved ones. So we try to encourage customers to participate in a behaviour we call ‘everyday sending’, offering them the ability to add reminders for special dates in the app and add a relationship to each person in their address book,” Thakrar explains.
Measuring what matters
TouchNote also benefits from one of the great advantages conferred upon businesses by subscription models – richer customer data, which, through subscription intelligence service Chargebee, it uses to optimise retention in the face of inflation.
“We had a huge uptick in new subscribers during the pandemic, which carried a significant downside risk: our continued growth depended on customers renewing their subscription after the first year. To forestall cancel- lations, we began a targeted offer testing programme – experimenting with different discounts, free cards, upgrades and options to pause or downgrade to a lower subscription tier. We then used the insights to retain customers at scale,” Thakrar says.
TouchNote discovered that subscribers at risk of churn were as likely to stay when offered a 40 per cent discount as with a 50 per cent one, thereby reducing lost revenue from offers. The company managed to dissuade numerous wavering subscribers from cancelling just by offering them discounts and other incentives.
As with anything else in business, successful execution of subscriptions pricing depends on having the right goals and metrics, in this case retention and customer lifetime value.
These in turn should help reorient the business to deliver customer success.
For a subscription to work, the organisation needs to focus on the long term, on the customer lifetime value, rather than just the immediate transaction
Driving acquisition
According to Kellman-Baxter, this can involve adopting very different ways of working in various departments. “If you’re selling a treadmill, then the goal of product design is having exciting new features to drive acquisition, and the goal of sales is selling as many units as possible and then finding a new prospect and selling more,” she explains.
“If you’re offering a subscription on your treadmill, the goal for product design is that the product itself drives engagement and referrals to new subscribers. Instead of infrequent launches of ‘new and improved’ products, there is a spirit of the product continuously getting better, post- sale. For sales, engagement and retention become more important: you may want to change compen- sation to reflect metrics like churn and customer lifetime value.”
So the subscriptions model resembles any other: businesses need to be clear about what they are trying to do and why they are doing it, and then relentlessly look for ways to do it better.
In that sense, through the hype of the past decade and the panic of the past year, nothing has really changed. Our stagflationary moment is no more the end of subscriptions than the dotcom crash was the end of the internet. It will never be for everyone, but when used wisely, in the right situations, for the right reasons, it can still be a powerful tool for sustainable growth n