Here is a number to marvel over: $2.3 trillion. That’s the size the subscription revenue marketplace will be in 2020 if economic forecasters are to be believed. That’s up half a trillion dollars from today.
Where will this growth emerge, you may ask? And, how can my business capture its share? The answer to the first question is: Everywhere. As for the second, by being smart about data and its power to attract, engage, and satisfy customers. Emerging technologies such as machine learning and artificial intelligence will provide new insights into the myriad data streams generated through user and customer interactions.
Way back before anyone spent the weekend binge-watching with Netflix or cooking home meals with recipe kits from Blue Apron, the subscription business model was pioneered by newspapers, magazines and record-of-the-month clubs, which figured out that you can make more money collecting recurring payments than peddling single copies.
Today, there is an amazing range of commercial endeavors that are succeeding with a subscription model. There is massive growth potential for every type of enterprise, even those that a generation ago would seem laughable to put in the same sentence with the word “subscription.” When major automakers start talking about selling that most aspirational of consumer purchases via subscription, you know this is not merely a trend, but a zeitgeist. Frost & Sullivan’s Sarwant Singh, writing in Forbes, reports that his company’s research shows that by 2025-26, one in 10 cars driven in the United States and Europe will be paid for by a subscription which also covers fees such as registration and maintenance. Even now, as the industry launches, the appetite for subscription auto services is already huge.
“Monetization” is the buzzword of the moment as brands seek to derive additional revenue by adopting – or at least experimenting – with a subscription business model and customer relationship.
Today’s consumers and enterprise decision-makers have been primed to accept paying subscription fees for products and services that provide value to their lives, a shift in psychology that can be traced in part to the first cable television subscription services in the middle of the last century. Free broadcast television was the default until entrepreneurs realized that viewers who lived in regions where TV reception was poor due to geography could be persuaded to pay a subscription fee to access TV. The subsequent explosion in premium channels and recent advances in digital cable, streaming and other services followed. Today, services like Netflix, Hulu, Amazon Prime, and even HBO with its HBO Now offering, are leading the subscription video market.
There is no doubt that we are in the midst of a subscription boom, and companies in the consumer and enterprise channels alike are discovering new means of monetizing their goods and services to customers eager to embrace this increasingly popular business model.
Even Apple – best known as a purveyor of shiny white objects – saw 60 percent growth in paid subscriptions to 300 million over the past year, which CEO Tim Cook called “a significant and increasing percentage of services business” in a conference call discussing the most recent quarter. He expects Apple’s services revenue – $9.5 billion in the most recent quarter – to double by 2020. Part of that growth, for example, will come from streaming music.
The rise of convenient and flexible online purchase options has opened up a whole host of subscription alternatives for services and products that were previously either one-time purchases or offered for free.
Consumers – desiring convenience and customer service and a la carte options – are opting to subscribe rather than buy.
Music fans, having long ago dispensed with CDs in favor of digital downloads, are now opting to subscribe to music services such as Spotify, Pandora, Amazon Music, and Apple Music. Flexible and innovative pricing tiers and buying options mean that one-size-does-not-fit-all when it comes to accessing these services. While some consumers may start with the free offering, brands have an opportunity to convert these fans of their service to paying subscribers and even offer premium content to avid users. Spotify, for instance, said in its midyear update that its $14.99 family plan was a driver of additional users and a method for retention. About 85 million of its roughly 188 million subscribers opt for a premium offering.
Home cooks, jettisoning their cookbooks, have not only hopped online to find inspiration for meals but are signing up for premium services that provide end-to-end meal planning. Allrecipes, for example, attracts visits from 40 million home cooks who can convert to paying subscribers after getting a taste of the free offering.
Beyond online services, products that usually are carried home in a shopping bag are now also moving into the subscription economy in a throwback to the days when milk landed on the doorstep every morning. My Subscription Addiction lists more than 2,000 subscription boxes on its website, from the iconic Birchbox and its beauty wares that started the box trend back in 2010 to everything from coffee to underwear to shaving supplies to Merlot wine.
Traditional retailers, looking to compete with Amazon and its Prime subscription service, are getting on the box bandwagon, including behemoths Target and Walmart.
The bankruptcy of Toys “R” Us was just one of more than 600 retail failures in the last year, and as Amazon sharpens its competitive edge by rewarding Prime subscribers, brick-and-mortar retailers are seeing the value in generating loyalty from customers who sign on for subscription programs.
In the arena that started it all, publishing is also turning to subscriptions for a greater share of its revenue as advertising continues to wane.
This return to reliance on readers to pay the bills is actually a throwback to the earliest days of newspaper and magazine subscribers. That model was blown up 150 years ago when The Sun newspaper in New York City decided that it could attract more customers by lowering its issue cost from 5 cents to 1 cent and make up the difference selling advertisements.
That strategy set a model for the periodical publishing business that lasted until advertising fled to the Internet. Now supporting the cost of doing business with subscriptions is hot once again as publishers ponder ad-free offerings.
Subscriptions are also overtaking the enterprise, particularly as software-as-a-service (SaaS) becomes the default. Gartner predicts that by 2020, 80 percent of vendors in the market today will offer subscriptions to their products and every new product will be sold using that model. Laurie Wurster, research director at Gartner, said that there is a stampede of vendors moving to the SaaS model: “SaaS has not killed the software market, but is growing rapidly and pressuring legacy providers to include SaaS options or risk losing market traction.”
Whether you’re a purveyor of subscription boxes or streaming video, engaging the customer when he or she is evaluating a purchase and demonstrating a willingness to subscribe is the driving goal during the acquisition phase of the subscription lifecycle.
The massive and accelerating growth in subscription businesses touches every facet of the consumer and enterprise markets. Join me in future installments of this column as I analyze the key angles of this business model. Here’s a taste of topics to come.
THE POWER OF PAYMENT: Subscription companies that are thriving are also experimenting with payment options and analyzing the resulting data to chart their strategies. On the horizon, even more innovative payment methods will use sophisticated analysis of customer habits and metrics such as social currency to calculate how much a business should charge an individual subscriber for its product or service.
DATA AND MACHINE LEARNING: Regardless of the product you sell or the service you offer, how you use data and how you use artificial intelligence is going to determine your success in the long term. Research firm Gartner cautions that business that use AI to drive their business decisions will steal $1.2 trillion from less savvy peers by 2020. The value of data is extremely important, but the question is: What do you do with it to generate more revenue, increase your subscriber base and retain your customers?
MANAGING METRICS: One of the problems that all businesses share is that we collect too much data. How do you determine what are the most important metrics? What are the benchmarks for those metrics? How are your peers thinking about themselves relative to those metrics? Focusing on the right set of data is critical because data without an intelligent understanding of its potential to take action is useless.
CUSTOMER ACQUISITION AND RETENTION: The fine art of engaging new customers is crucial for subscription-based companies, of course, but the customer relationship has to go further. There’s nothing more frustrating, and we’ve all been there, than getting online or on the phone and being rerouted and never getting an answer to our problems. Building brand value via customer loyalty speaks to the later phases of the subscription lifecycle.
Kevin Cancilla is the Global Head of Marketing of at Vindicia, an Amdocs company. Vindicia offers comprehensive subscription management solutions that help businesses acquire and retain more customers.