Consumer product ownership has drastically changed with the proliferation of subscription services. In a recent survey, 71 percent of adults from across a dozen countries said they had subscription services. Twenty-six percent of the respondents reported having more than three subscriptions at a time.
Thanks to the limitless reach of the internet, entrepreneurs are turning to subscription-based e-commerce as more consumers continue to embrace the convenience and culture of owning less.
In the past, you could only subscribe to monthly magazines, newsletters, and pamphlets. Today, you can subscribe to a wide range of products and services, including food and drinks, cosmetics, video games, TV shows, and wellness services. Many old brands and fresh start-ups all want a share of the rapidly expanding $240 billion subscription market.
Subscriptions for digital products and services
Online services have the biggest potential in the subscription economy. From a commercial perspective, businesses can enjoy convenient, cheap, and powerful computing capabilities through subscription-based cloud services. Consumers can easily subscribe to media streaming content – listen to music, play video games, and watch films without going out to buy DVDs or albums.
The largest consumer subscription services actually involve digital media. Netflix, Xbox Game Pass, Sony’s PSN, and HBO MAX are some of the leading brands in digital streaming and subscriptions. Using Netflix and Xbox Game Pass as references, let’s find out why media-based subscription services are so popular nowadays.
The pros and cons of a subscription business model
Some subscription businesses are very successful, while others struggle to get off the ground. What’s in it for entrepreneurs in the subscription business, and what are the associated risks and pitfalls?
1. Ready market
By the end of 2023, Netflix had over 203 million subscribers. Xbox Game Pass ended the year with over 18 million users and a 50 percent year-over-year increase in revenue. These figures indicate the subscription market is both huge and lucrative. Plus, there is still a lot of business potential in untapped market segments.
2. Predictable income
Subscription businesses have a stable and predictable revenue stream. Unlike a retail business where one cannot accurately predict customer flow or sales, a subscription model gives its owner an exact sales figure based on the subscriber count. Entrepreneurs can also predict revenue months in advance by looking at new signup rates and the products or services in the pipeline.
3. Good customer relations
Since subscribers don’t make a one-off purchase, it’s easier to engage them regularly and form lasting connections. These direct and repeated interactions with customers help build trust and make the buyers feel like part of a larger community. Also, the customers can provide valuable feedback and suggestions on improving the subscription services or products.
1. High customer acquisition costs
Convincing people to sign up for a monthly service is harder and more expensive than getting a one-off buyer. Subscriptions are more about selling ideas than the actual products or servicing – most consumers need personal motivation to buy a subscription. This makes subscribers’ acquisition costs a lot higher than in traditional business models. But retaining subscribers is relatively much cheaper; in a way, it all balances out.
2. Risk of high churn rate
Every subscription business runs the risk of cancelations. Churn is a messy and expensive affair, usually involving refunds, fees, and returns. The only way to avoid high cancelation rates is to keep customers interested in their subscriptions and ensure they get their money’s worth.
Netflix recently partnered with big film producers and actors to keep things exciting and increase its content’s diversity and quality. Microsoft has also taken a similar approach with PC and Xbox games.
3. Small issues become big problems
If anything affects the supply chain, the entire subscriber base feels the impact. Small delays or hiccups in delivery can result in unfulfilled orders, which inevitably snowball into the subsequent months. For instance, if Netflix’s online infrastructure went down for whatever reason, millions of subscribers would miss their shows.
How does the subscriber benefit?
The main reason box and service subscription businesses are popping up everywhere is that more and more customers prefer subscriptions over single purchases. Here is why a subscription-based purchase model works for consumers:
- It’s so easy and convenient.
- Subscribers get more value for their money.
- There is an element of exclusivity with most subscriptions.
- Automated payments mean no worrying about bills.
- Most vendors allow users to personalize their subscriptions.
- Subscriptions fit well with the busy, fast-paced modern lifestyle.
Although subscriptions have many benefits, you have to be careful when signing for every new subscription. If you make it a habit, you might end up spending a lot of money on stuff you don’t really need. Additionally, make sure you understand what you’re paying for and the vendor’s terms and policies on cancelations, returns, and refunds.
What’s next for subscription services
The subscription business model and recurring payments are disruptive trends in the e-commerce space. We’ve already seen subscription-based food deliveries, fitness and wellness programs, book clubs, and social platforms. Yet, with the right skills and education that people get from courses like this one, entrepreneurs are still getting more creative with subscription services to capture niche markets.
The fintech and healthcare industries are the newest entrants into the subscription arena. Some of these companies are already testing the waters with prototype apps and personalized services.
Even some of the oldest and most conservative commercial sectors, such as manufacturing, transport, and banking, are learning a lot about the subscription business model from e-commerce giants like Netflix and Microsoft.
Oli Kang is a working mum who has a passion for teaching and all things educational. With a background in marketing, Oli manages the digital channels and content at Courses AU.