Key takeaways

  • Advances in digital technology have bred a new generation of subscription-based businesses.
  • Powered by cloud infrastructure, the new subscription economy swaps product ownership for limited service access.
  • Pairing low cost products with superior customer experiences, the subscription economy is creating a new generation of consumers – and businesses should take heed.

Historically, the word ‘subscription’ has been tied to media and publishing. For centuries, newspapers and magazines embraced the subscription as their business model, distributing vast amounts of printed content in regular cycles to captive audiences.

This bastion has been stormed. In the US, the print newspaper market has – with the exception of 2013 – been in steady decline for more than a decade1, disrupted by the arrival of the internet, smartphones and social media. Attempts to adapt to this new paradigm, such as paywalls, have so far not managed to stem the losses: PwC’s Entertainment and Media Outlook predicts newspaper market share will continue to contract through to 2020.

The digital disruption of the publishing industry didn’t signal an end to subscriptions in general. In fact, subscriptions are finding a new lease of life within the digital economy, with tech giants and startups alike using it to provide controlled entry to a new era of technology-enabled products and services.

Welcome to
the subscription economy

A subscription economy substitutes ownership for access. Rather than purchase a copy of software or another service loaded onto a physical object, such as a newspaper, CD or DVD (and therefore retain that product for as long as the physical media lasts), subscriptions instead provide fixed access to a digitised version for a defined period of time. In the case of software, these products are often known as software-as-a-service or SaaS.

To maintain access to these services, customers must maintain this subscription, providing steady revenue to the vendor rather than a one-off payment. As a result, subscription-based services are often lower in price than a standalone physical copy of the product. They also produce less material waste, are updated more frequently with bug fixes and new features, and change development cycles from ‘big bang’ cornerstone releases to continuous delivery.

Well-known examples of software products that have transitioned to a subscription service include Microsoft’s Office 365 package and Adobe’s Creative Suite.

From the newsstand
to the clouds

The culmination of multiple digital trends has enabled the rise of the subscription economy. Among them the arrival of ubiquitous high-speed internet, the digitisation of assets, and the advent of cloud computing infrastructure.

A startup looking to provide its own subscription product can purchase cloud computing infrastructure such as Google’s Cloud Platform, Microsoft Azure or Amazon Web Services to power it. These technologies allow for digital services – store inventories, databases, analytics and marketing – to be provided at scale and at a lower cost.

Ironically, these cloud capabilities can be subscription services in and of themselves, sometimes referred to as infrastructure-as-a-service.

For businesses, infrastructure-as-a-service can be highly beneficial. Leasing outsourced infrastructure cuts down on in-house capital expenditure and physical footprints, freeing resources that would have otherwise been spent on hardware, IT staff, and training for other ventures. Project timeframes are also shortened, further accelerating returns on investment.

Infrastructure service offerings can also reduce risk, as they can be scaled up or down as required, avoiding potentially disastrous hardware failures or unnecessary expenditure on too much capacity.

Digital
goes physical

Productivity software and utilitarian infrastructure are only the tip of the subscription economy iceberg. When applied to consumer goods and services, the business model allows for product experiences that are more valuable to customers than going out and shopping for the item from a bricks-and-mortar store.

Digital plays a crucial role for most of these offerings. Vendors are able to use data analytics to analyse the decisions and choices of their subscribers, providing a scalable personalisation experience that also informs inventory decisions and optimises future offerings. This data can also help craft the marketing messages, deducing which customers are most likely to be receptive to individual offers.

A wide range of goods and services are now offered using this model, including workplace fruit delivery company Fruit Box, undergarment manufacturer MeUndies, at-home meal service HelloFresh, toy company LootCrate, razor blade companies Dollar Shave Club and Harry’s, and fashion curators Trunk Club and Kent and Lime.

The model is also being applied to transportation through urban car sharers ZipCar and GoGet. An Australian startup, Airly, is applying the concept to plane flights, announcing a subscription service that provides business travellers with unlimited private flights along the busy Sydney-Melbourne air corridor for a monthly fee.

A new kind
of customer

What does the curation and personalisation experience look like for a particular product? Consider the digital fashion curators. Pairing customers with in-house stylists, a selection of outfits are provided following an online consultation. The customer then keeps what items they like and returns the rest.

By providing a digital stylist as part of the package, the brand experience extends beyond the physical good itself, delighting customers with a personalised service. Additionally, the brand’s bypassing of retail channels – going direct to the consumer from a digital store – allows prices to remain competitive with bricks-and-mortar stores. The vendors can initially draw customers in on price, retain them with a superior experience, and help craft a new generation of experience-loving consumers in the process.

A novel benefit of such digital curation is that it can save the customer time, attention and decision-making. Having a trained professional decide on your outfit choices frees you up to focus on other tasks – a similar philosophy shared by leaders such as Barack Obama and Mark Zuckerberg2, who wear similar outfits every day to reduce decision-making and improve focus.

Scaled digital curation offers the same service to a large consumer base – albeit with much more fashionable results. It can also cater to fashion-conscious consumers who want to participate in the latest looks, but may not have the expertise or resources to do so.

An ecosystem
of experiences

The subscription economy has benefits, yet some of its more unusual aspects might go unnoticed. One of these is the creation of new integrated business models:

Amazon, for example, bundles a range of perks such as video and music streaming services, free shipping, and access to its e-book lending library into its Prime subscription, leveraging economies of scale to make its e-commerce platform even more attractive to customers. This turns Amazon from solely an online store to a wider ecosystem of customer experiences, and one that’s more challenging to compete with on traditional metrics.

A similar situation can exist on the enterprise side. Subscription cloud infrastructure services can be bundled with other software packages, such as server software, database managers or CRMs, locking in the enterprise customer and making it more difficult to migrate in the future.

Notice
of renewal

At its core, the subscription economy has synergies with collaborative consumption – otherwise known as the sharing economy. By purchasing limited access to a service rather than the physical product, outright ownership of material goods is reduced, just as the sharing economy finds new uses for existing assets.

As sharing economy theorist Rachel Botsman once analogised, the average home-owned power drill will be used for a total of 12-13 minutes in its entire lifetime, because what the user needs is the hole, not the drill itself3. Leveraging the power of digital technology, the subscription economy is another way to unlock these service opportunities without the need for the physical good.

With Apple recently allowing any app developer to move to a subscription-based pricing model in its app store this year, it’s likely that more subscription services will seek a spot on our digital devices. As a result, more competitors could enter the marketplace, innovating on these already rapidly evolving business models, product offerings, and customer experiences.

Hence, it’s never been more important for businesses to continue to rally around their own customer experiences, reframing sales from one-off transactions to ongoing long-term relationships4 and consistently looking to improve product offerings with the aid of digital technology. There is a lot at stake: as the newspaper industry has learned, a subscriber is easy to lose and difficult to win back.


Rob Chan is a former senior consultant in PwC Australia’s Experience Centre.

 

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Rob Chan