Of the business models that have thrived on the internet, arguably none has been as successful as the subscription business model. Thanks to this, seemingly every type of product or service, from movies to clothing, can now be purchased through subscription services and there is little doubt that the model is here to stay.
In fact, according to Laurie Wurster, research director at Gartner, “By 2020, all new entrants and 80% of historical vendors will offer subscription-based business models.”
Subscription business models are attractive to companies for obvious reasons. One of the biggest: subscriptions provide for annuity-like revenue streams that are highly predictable. With predictable revenue, companies can more easily invest in operations and innovation.
But signs are emerging that the boom times for subscription-based services might actually be nearing an end as they flood the market.
According to Deloitte’s annual Digital Media Trends survey, the proliferation of subscription streaming services, and the fragmentation this has created, is now a major problem for many consumers. Specifically, the global consulting firm found that nearly half (47%) of consumers it polled are frustrated by the growing number of streaming services they need to subscribe to in order to access the content they want.
As a result, Deloitte’s Kevin Westcott suggests, “We may be entering a time of ‘subscription fatigue.'”
From slowing signups of Amazon Prime subscriptions to the struggles of subscription commerce players like Blue Apron and Loot Crate, it appears that this subscription fatigue isn’t limited to subscription streaming services. Instead, it looks like consumers are being more judicious about subscription services in general.
The eventuality that the subscription economy would hit a rough patch makes sense. After all, the discretionary spending pie that subscription services target is finite in size and there’s more competition for a piece of it than ever before.
So if the subscription gold rush is entering a new phase in which consumers more carefully consider what they subscribe to — and reconsider their existing subscriptions — what should companies employing subscription models do to defend their businesses?
1) Pay closer attention to pricing
Pricing has always been critical for subscription services but getting pricing right will be even more important in a tougher environment.
Successful subscription services in particular are wise to consider the possibility that they have less leverage than they think. Netflix, for instance, had for years been able to raise prices without ill-effect but its most recent price increase, which came at a time of growing competition, appears to have gone too far for some consumers.
2) Sell necessity
When deciding what subscription services to purchase and keep, it’s logical that many consumers will ask a simple question: “Do I need what I am getting?” If the majority of a subscription service’s customers can’t answer yes to that question, the service could find itself on shaky ground.
From this perspective, services that are designed to help their subscribers meet basic needs could find it easier to maintain their value proposition than services that offer non-necessities. For instance, subscription ecommerce services like Dollar Shave Club, which delivers grooming products such as razor cartridges to subscribers on a regular basis, are in theory especially well-positioned as they provide subscribers with things they need to purchase on a regular basis anyway.
Of course, not all companies sell necessities like razor cartridges, but highlighting the most practical aspects of their subscription services is a good idea for all companies.
3) Make affordable the unaffordable
A number of highly-successful subscription services don’t offer necessities but they do provide what to many consumers can be nearly as compelling: the ability to obtain products and services they wouldn’t otherwise be able to afford.
Among the best examples of this are fashion and beauty-focused subscription services like Rent the Runway and Ipsy. Through the former, subscribers can effectively change their wardrobes on a regular basis, something that most wouldn’t be able to do if they had to buy their outfits outright. Through the latter, subscribers receive regular deliveries of sample-size cosmetics products.
Obviously, these services must remain on-trend with the items that they deliver, but if they do this, they can continue to be successful despite the fact they’re offering a luxury.
4) Focus on retention
With growth becoming harder and costlier to generate in some markets, companies should consider whether the time is right to shift from a subscriber acquisition mindset to a subscriber retention mindset.
One of the most helpful tools for retention is subscriber segmentation. By segmenting key subscribers into groups based on demographic and behavioral factors, companies can identify key drivers of retention and focus their efforts on them. For instance, kids’ programming has proven to be a powerful draw for streaming subscription services, so savvy providers are investing heavily in this type of content knowing that it can help them retain subscribers.
5) Explore alternative models
While many subscription services rely on the straightforward, tried-and-true model under which subscribers are charged a fixed fee on a monthly or annual basis, a number of companies have created different kinds of subscription and subscription-like models.
For example, unlike traditional clothing subscription box companies, online personal styling service Stitch Fix allows customers to schedule the delivery of new items every two to three weeks, month, two months, or quarter. They can also request deliveries on demand. Customers are charged a styling fee for each delivery and can choose which items to purchase and send back. If they keep all the items they are sent, they receive a 25% discount.
Another example of an alternative model was offered by D2C upstart Italic, which offers customers the ability to purchase brandless luxury goods manufactured in the same factories as brand-name luxury goods at a fraction of the cost. To help balance supply and demand when it launched, it only sold to customers willing to pay a $10 per month membership fee that entitled them to purchase two items a month from its marketplace.
Such a model is similar to that of large membership-only retailers like Costco and Sam’s Club, which are only open to those who pay for an annual membership.
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