It’s a Product World: The Evolution of the Subscription Economy

March 26, 2018

The evolution of the subscription economy

Greg Harwood, Director at Simon-Kucher, interviews Board Member and Managing Partner UK & IR, Mark Billige about the changing nature of the subscription economy

 

GH: We hear a lot about the growth of subscription businesses, but are they the best approach in all cases?

MB: The future of subscription business models is currently quite polarised and the outlook depends on whether we consider ‘products’ or ‘services’.

The really new world of subscriptions has come about in products businesses and it is here that we find many examples of non-traditional subscriptions services: For products from razor blades and socks to food kits and alcohol!

Conversely, in many typical subscription dominated service businesses (e.g. gyms, mobile telephones etc.) the world is shifting away from subscriptions back to pay as you go – that’s why more than a third of us have ditched our gym memberships to join pay as you go chains.

 

GH: What do you think is driving these changes from the consumer perspective?

MB: These changes to what are established business models come from both the consumer and the supplier side and are most likely to lead to a continued shift in these directions.

From the consumer side, we like subscriptions for two main reasons. One is rather economic, the other more lifestyle driven and maybe less obvious.

  1. Economically, we like the fact that subscriptions allow us to gain now but defer pain to the future. i.e. pay less (or nothing) upfront but start consumption immediately. We also like the predictability and simplicity of a subscription which reduces the need for us to make multiple buying decisions over time.
  2. Subscriptions also deliver a unique lifestyle benefit insofar as they enforce discipline. It’s no big surprise that many of the first wave of product-in-a-box subscriptions were in the health, beauty and wellbeing space (e.g. Graze, Hello Fresh, Birchbox, etc..).

Gyms stand out as the obvious exception to this rule. And that is where the product vs service dimension matters. Subscribing to a service when you may not use it is different from subscribing to a product that turns up every week or month. The biggest issue with subscriptions in services is what the industry terms ‘breakage’, paying for something that you use less than you thought you would: the supplier likes that, the consumer not so much!

 

GH: What does this mean for suppliers?

MB: For many years, product businesses have looked with envy at service businesses, jealous of the fact that many of them have a stable and predictable revenue stream from a large group of loyal subscribers. However, in the past the channel economics for product businesses have made subscriptions unviable. Two big factors have changed that:

  1. Growth in digital channels (website / mobile) allow a cost effective and scalable shop window.
  2. Huge changes in home delivery allow greater flexibility whilst managing costs.

Overcoming those two barriers makes the economics work and unlocks the upside benefits that subscription’s bring: Increased units per customer, hugely valuable customer data, and more revenue stability.

 

GH: So what is your prediction for the future?

MB: Well, given that subscriptions can benefit both consumers and suppliers in a product world, I imagine we will see the continued subscriptionisation of things. In the service world, funnily enough, I think we may see the opposite