A World of Subscriptions

The rise of subscriptions leading to an ‘ownership-less’ future?

Let me start with a few questions:

• What was the last thing you went out to buy that you clearly own?

• How about the last subscription that you paid for?

• Any payments that you make resembling a subscription?

When I answer these:

• Groceries for the week. And well, they’re perishable so technically the ownership would be fleeting :)

• I don’t actually have a lot of subscriptions, but I did just renew our cloud storage.

• Now that I think about it, quite a bit. Rent, utility bills for gas, electricity and water, phone bill. Recurring bills mostly.

Finally, were these paid in cash or by credit card? All on credit card.

I don’t know about you, but whenever I look at my answers, on the one hand, I don’t really see any issues. If anything, it’s pretty convenient, all things considered.

Yes, there are quite a few recurring payments, but they tend to be automated and carried out online. And when I do want to buy something, being able to do so quickly with the security and fluidity that credit cards provide is actually kind of amazing.

On the other hand, and I'm not saying any of this is bad, when you really think about it, a lot has changed in terms of the way we procure goods and services.

Smaller recurring payments are becoming the norm, while larger one-time payments seem to be less common. This isn’t just limited to subscriptions per se, but also things like bills, rent, and even buying on installments like short-term loans and “Buy Now, Pay Later” (BNPL) schemes.

Obviously, there’ll always be a need for discrete payments, but how easy has it become to subscribe to something, even if you only “own” it temporarily?

A subscription to life

Like with anything touching the tech industry, trust it to take it to the next level—in this case, a business model. More on that later.

The subscription business model has been around for a very long time, pioneered for the most part by publishers to get access to their books and periodicals (e.g., newspapers, etc.). Gym memberships are another form of a “traditional” subscription that we’re used to seeing in modern-day life. Oh, and let’s not forget about our much-needed Internet, phone, and cable plans.

While I don’t have numbers on hand, I don’t imagine that the average person has a subscription to too many of these. Perhaps a couple or a few publications, and a subscription for each of the rest.

But when we begin to look online and in software, things just explode.

Remember the days when we needed to buy a new version of Windows every few years or purchase the latest Adobe Photoshop that came in a boxed package with a CD? Speaking of CDs, when was the last time you bought a music album?

Yeah, those days are long gone.

The shift to subscriptions for software and services really picked up pace when the technology became viable to centrally host it and make it available online and on demand via what many call the “Public Cloud.” 

So, what if we add all the other kinds of subscriptions out there that we know of? 

You know, things like video and music streaming, game services, web hosting and storage, lifestyle and wellness services—the list goes on.

When doing some quick research online (and depending on the source), consumers in the US have averaged between $219 and $273 per month on subscriptions over the last few years.

If we take the midpoint ($246) and then ballpark an average fee (let’s say, $15 to $25 per month), that could be as many as 10 to 16 subscriptions per person.

That’s quite a bit.

Interestingly, but perhaps not surprisingly, when consumers were asked to estimate their subscription costs, they would underestimate by at least $100 per month.

A takeaway here is that signing up for a paid subscription has become very easy. Thanks to technology and the unwavering incentive for businesses to squeeze more dollars out of our wallets, the experience is more frictionless than ever before.

The steps to sign up are few, the access is immediate, and the payments are automated. And it seems that once your subscriptions get into the high single-digits and double-digits, they become easier to lose track of.

So what’s the deal with subscriptions?

Well, for one, they’re more affordable in the short run. The mental and budget gymnastics tend to be easier for us to justify the lower we get on a sub-$100 spend for something.

What’s even better, we get to try it out for a month or two, and if we don’t like it, it can be canceled with a few clicks. 

Then throw in a multitude of free trial promotions, and it becomes a no-brainer when compared to a larger upfront payment and being stuck with something that you may end up not liking. 

I think that’s an important nuance here. Businesses aren’t just making their goods and services easier to access; they’re also betting on all of the above.

There is a sizable portion of consumers who either forget about their trial period or that they even have a subscription. And when the times are good, you don’t tend to lose as much sleep over it, knowing that the payments are low and it’s easy to get out of, for the most part.

But the times aren’t always good. 

If anything, the economic road ahead looks uncertain. In a previous article, I covered some intriguing charts that showed a sharp decline in US savings rates and record-reaching credit card debt levels in 2022.

Yet managing subscriptions has become an exercise in itself. If you think about it, it’s almost like how businesses have accountants manage their cash flows. You need to be your own accountant. There are even tools out there for it.

And you guessed it, they also charge via subscriptions.

The ‘dream’ business model

Before we dive deeper into subscriptions, I did want to expand a bit more on the cloud for more context.

The leading market segment is widely known as “Software-as-a-Service” (SaaS). It shares the Public Cloud with its siblings, IaaS and PaaS (for infrastructure and platforms, respectively).

SaaS tends to be licensed and distributed on a subscription basis. Almost any kind of software available to consumers today is either a SaaS or is offered as one of the ways to use it. And any kind of good or service procured online is likely to be powered, directly or indirectly, by the cloud. 

Yet despite the proliferation of cloud services, whenever I look at the mainstream media coverage, the cloud still feels like this new and abstract “thing.” Heck, at times, I still feel it’s new and revolutionary. 

But let this sink in: Amazon Web Services, one of the commercial pioneers in cloud computing, has been around for over 20 years at this point. 

This is a mature market hitting its stride. According to Statista, revenue in the US public cloud market is expected to reach $258 billion in 2023, with the US comprising 50% of global revenues and double-digit growth expected for the foreseeable future.

That’s more than the “Gross Domestic Product” (GDP) of Portugal’s and New Zealand’s economies in 2021, according to the World Bank.

Bringing it back to subscriptions, the average US employee spend by companies is expected to reach $1,530 in 2023, or $127.50 per month.

And while not all cloud services utilize a subscription model, there certainly is an industry trend towards it with the number of business-focused SaaS companies popping up everywhere.

Using the same ballpark estimates as we did with consumer subscriptions, that works out to about five to nine subscriptions per employee. In a funny way, you could argue that there’s plenty of room for growth. 

So why the fascination with subscriptions?

Similar to the rationale of consumers, a lower price point is more digestible. It allows a consumer to “commit” and try out a service, letting the business through the door to show you why you should keep your subscription through its marketing and overall product experience.

Various sources show that the average Netflix customer keeps their subscription for around two to four years, indicating that when the product or service is good, subscriptions tend to be quite sticky.

And this is something businesses and investors love: predictability. 

By having a steady flow of revenues coming in and a known churn rate (that is, customer attrition), it is easier to plan and forecast further into the future relative to a business that relies on revenues from direct sales. Furthermore, steadier cash flows can also help weather any market volatility or unexpected events.

Add to the fact that, as a subscriber, you’re only paying for access. This means that basically everything sits on the business side; it simplifies the relationship between the business and the customer from a logistical standpoint. 

Final thoughts

It’s clear that subscriptions are on the rise. It’s almost as if you need to have them in order to live your life.

We even have subscription-based business models in sectors that have traditionally been driven by direct sales.

Need a shaver? Get a new one every month. What about trying new skincare products? Let us send you a monthly box set. Too busy to eat healthy? Let us take care of it for you.

Granted, some of these are actually pretty cool, but many companies are buying into the hype of building their entire business around subscriptions and the benefits they provide (on paper).

That’s risky, if you ask me. Remember, customers are paying for temporary access to something. By nature, as the business, you’re taking on more risk.

Whether this means providing a lower price point compared to a direct sale, meaning you’re at a loss early on, or taking advantage of economies of scale by centrally hosting a service or product, making you capital heavy, you generally need a lot of customers to stick around to make your money back.

We haven’t even begun to talk about competition. Have you seen what’s been happening in video content streaming?

It has been a pressure cooker that’s been building for years. We’re now seeing streaming services increase prices or release new subscription tiers in an attempt to extract as much money from customers as possible. 

During the good times, investors were satisfied with strong topline growth and the potential of these companies, but as the times have become more challenging, profitability and sustainability have become the order of the day.

The streaming giants are now dealing with the reality of balancing the enormous costs involved with acquiring and producing high-quality content and maintaining a tech stack needed to deliver a smooth video streaming experience to millions of customers.

And with consumers expected to tighten their wallets, it’s ironic, but I feel that the content streaming landscape may just end up looking like their cable counterparts over time.

Consolidated, expensive but something we can’t seem to live without.

Businesses need to focus less on the hype surrounding subscriptions. Instead, they need to focus on the fundamental question of whether they have a true differentiator in terms of unique intellectual property or a value proposition.

Hoping your customers forget about their subscriptions just isn't a good business strategy.

See you in the next one!