ESSA

ESSA

The Subscription Economy


Solomon Zhang

By

September 14th, 2016


From Netflix and Spotify to…Razors and iPhones? Solomon explores why the subscription business model is here to stay, and why this is good news for you as a consumer.


The subscription business model is not a novel concept at all. From electricity and phone services to newspaper and magazine subscriptions, the practice of exchanging periodic payments for regular goods and services is one that society is very familiar with. However, in recent times there has been a noticeable uptake of the business model in industries where companies have traditionally relied on pay-per-product (or service) transactions with customers. From the pioneers and media streaming behemoths, Spotify and Netflix, to more recent examples of subscription businesses in consumer goods, including men’s razor subscriptions (Dollar Shave Club) as well as Apple’s recently unveiled iPhone subscription plan[i], the impact of subscription on business is evident across numerous industries. This trend has led to the coining of the term, the ‘subscription economy’, aptly describing the growing preference on the part of both businesses and consumers to subscribe to services rather than to buy and own products.[ii]

 

What does this signify?

The increasing demand and popularity of subscription services reflects a shifting pattern of consumption amongst the younger generations. The traditional importance placed on ownership has taken a backseat to the ability to access services and experiences[iii], and this has caused businesses to rethink the way they implement their growth strategies by honing in on customer needs.

Subscription services are fundamentally distinct from traditional ‘transactional’ business models in that they involve the creation and maintenance of an ongoing relationship. Consumers should be excited by this shifting trend towards subscription, as it brings into sharp focus the interests of consumers. In fact, the customer experience underpins the entire business model, with the relationship extending beyond the checkout point and requiring the optimization of the customer experience.

The disruptive effect of the subscription business model cannot be underestimated. Take, for example, the case of the music retailing industry. Once dominated by ‘brick and mortar’ stores, the industry has seen a tremendous decline in retailed product sales, first of physical CDs but also on digital platforms such as iTunes, with digital track sales peaking in 2013 before subsequently declining year on year.[iv] Services such as Spotify, Apple Music and Pandora are occupying an increasing share of music industry’s revenue year on year, with subscription streaming set to make more money for the US music business than downloads and physical sales combined by 2017.[v] One can only imagine that this trend is set to continue across other sectors of consumer goods. In the words of e-commerce company Digital River, ‘the transition of everyday physical goods from ownership to the subscription economy is the essential factor that will truly and wholly revolutionise the end of the ownership economy as we know it.’[vi]

 

[i] Iphone Upgrade Program – Apple (2016) Apple.com <http://www.apple.com/shop/iphone/iphone-upgrade-program>

[ii] Forbes Welcome (2016) Forbes.com <http://www.forbes.com/sites/kimberlywhitler/2016/01/17/a-new-business-trend-shifting-from-a-service-model-to-a-subscription-based-model/#55e586dc685e>

[iii] https://eventbrite-s3.s3.amazonaws.com/marketing/Millennials_Research/Gen_PR_Final.pdf

[iv] Spotify And Youtube Are Just Killing Digital Music Sales (2016) TIME.com <http://business.time.com/2014/01/03/spotify-and-youtube-are-just-killing-digital-music-sales/>

[v] How Long Will Streaming Take To Dominate The Music Business? – Music Business Worldwide (2015) Music Business Worldwide <http://www.musicbusinessworldwide.com/how-long-will-it-take-streaming-to-dominate-the-music-business/>

[vi] The subscriptions Generation – How businesses are adjusting for the Post-Ownership Era -Digital River (2016) White Papers

<https://www.digitalriver.com/SubscriptionsWhitepaper_LandingPage.html?utm_source=Blog>

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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