Subscription models are here to stay

While content based subscriptions immediately run to mind as the most popular of the lot, today’s digital world offers up a myriad more choices for the humble consumer

Updated: Oct 3, 2018 05:49:05 PM UTC
Image: Shutterstock

It’s official. India (and the world) is awash with personal subscriptions. It wasn’t always this way. Turn the clock back to 10 years ago, and the scenario was very different. Not that subscriptions didn’t exist, but the ubiquity certainly wasn’t there. What changed you may ask?

The vast proliferation of app-based digital services have no doubt played the captain of the subscription ship's exciting journey. Without the mobile phone and a powerful app economy, there would simply be no way to build the level of customer stickiness and engagement required to pull off a subscription service. Consumer products today bring down friction by over 10x compared to a decade ago. It makes all the difference when it comes to subscriptions. It’s effectively impossible to convince a user to subscribe to your service/ product unless there’s an innate love for the core offering. A seamless customer experience is usually at the heart of this emotional connect.

Is deft service delivery really the only reason for the surge in popularity of subscriptions? At a first principle level, it’s quite clear that pricing also plays an important role in driving adoption for subscriptions. For many, the allure of subscription rests in the fact that they can enjoy an “all you can eat” model. This provides individuals with the peace of mind that they can consume to the maximum without getting dinged with additional charges. This is quite a popular model when it comes to video content. Alternatively, many individuals opt for a subscription to avoid advertisement. This is particularly relevant when it comes to written content or musical content.

Competitive Pricing Models
While content-based subscriptions immediately run to mind as the most popular of the lot, today’s digital world offers up more myriad choices for the humble consumer.  Whether it be meals, transport, furniture, or even apparel, there’s now a litany of different options available for the subscription savvy consumer. In these particular scenarios, it’s typically the competitive pricing that lures the customer. For these companies, there are often multiple subscription offerings that are priced based on different usage patterns.

Innovative Subscription Models
Many of these subscription packages are highly innovative in how the companies think about bundling. It’s no longer just about the core offering, but what else companies can offer consumers on an in-kind basis. Customers are more discerning than ever and simply offering the core service isn’t always enough. Flexible tenors (as short as weekly) are one powerful tool to hook the individual, but it’s oftentimes the intangibles offered alongside that can win the day. In many instances, companies are bundling their core offering with other companies' products to provide a 1+1 value.

Bundled Services
In certain cases, companies also throw in different value propositions from its own service portfolio, which aren’t related to the core subscription offering. These strategies help convince the prospective subscriber and help build a deeper emotional connect. Moreover, the perceived value becomes much higher, thereby building a stronger trust quotient with the customer.

Customer-To-Revenue Ratio
It's clear that customers derive significant value from subscriptions, but what about the companies. Do subscriptions lead companies on the path to financial ruin?  To quote an economist, “it depends”. Companies look to roll out subscriptions for two primary reasons: increase the life-time value (LTV) of a customer (jargon for the revenue companies obtain from a user over a 12-month period) or introduce more predictability into future cash flows to drive higher long-term profitability. Both approaches have merit since they will ultimately improve the bottom line cash position of the company.

That said, the devil is in the details and in this case, it all boils down to pricing. This is a very tricky beast since companies must make several assumptions tied to customer stickiness (i.e. will the person terminate and leave early, will they default on payment, and so on). There’s a host of possibilities that can potentially rain on the company’s profitability parade. As such, it’s absolutely critical to price the subscription with certain buffer to account for this subscriber churn. Otherwise, the company will ultimately be left holding the bag on the profitability front.

When it comes to pricing, it doesn’t always have to be plain vanilla in terms of paying ‘x’ for ‘y’ months. Many companies have now introduced certain retention bonuses or cash back at certain milestones within the respective subscription. Additionally, there are tiered pricings that can also better optimise for the expected duration. Finally, companies can also put in certain usage caps with higher margin pricing on the overage usage. This is a classic strategy for telcos and other related industries. While this might not be the finest user experience, it does lead to strong profit enhancements.

Overall, there’s never been a better time to be a subscriber. The euphoria on the part of consumers and companies respectively is unlikely to subside any time soon. Enjoy the party.

The thoughts and opinions shared here are of the author.

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