The subscription economy is bringing about a revolution in consumer practices. L’Atelier looks at the reasons for and advantages for companies of this type of solution.
The subscription economy has now gained a broad foothold and is beginning to affect all areas of the economy. Rather than making one-off item purchases, many consumers are now opting to subscribe to receive a service on a regular basis, thus entering into a long-term relationship with the company that provides the service. Many of these services can be personalised. Consumers can now adjust their telephone subscriptions to suit their needs, choose a customised subscription for their gas and electricity, and receive Nespresso capsules or new contact lenses every month.
This change in consumer habits is very much more than a passing fashion. We are witnessing a paradigm shift in the market system, similar to the on-demand economy. There are a number of reasons behind this shift: new company models have appeared – not least the startup phenomenon – which are forcing larger, established firms to work harder to differentiate themselves as consumption patterns evolve. However, while the subscription approach has its advantages, this new paradigm also throws up its share of challenges, which have to be met.
“A century ago a new era came into being: that of mass production. Making and selling products became a company’s core business. Fordism became the favourite production method, and large companies able to sell their products on a massive scale built empires on this basis. This paradigm dominated the 20th century. Today we’re living in a digital world, where the key to success is to provide a high quality user experience rather than producing and selling as high a volume of goods and services as possible,” Tien Tzuo, founder and CEO of California-based enterprise software company Zuora, told the audience during the company’s recent Subscribed 2016 event in San Francisco, which was dedicated to the ‘subscription economy’. He also pointed out that in the last fifteen years over half (52%) of all Fortune 500 companies – the top 500 US companies in terms of turnover – have disappeared. Back in 1955 a company’s life expectancy was 75 years, today it is only 15 years. “For the first time since the industrial era, market entry barriers are very low, and large firms are much more afraid of startups than of their traditional rivals,” underlined Zuora President Marc Diouane. And those dinosaurs that have survived extinction have succeeded in going the subscription route, points out Tien Tzuo. For example, General Electric is no longer content to sell light bulbs and house appliances. The firm has become a digital services provider, selling products such as cybersecurity software. Meanwhile IBM provides services focusing on data processing and has fathered the iconic ‘supercomputer’ system Watson.
The food industry – coffee, for instance – also uses the subscription model
New consumption habits
But these new practices basically arose from public demand for a change in consumption modes. The younger generation in particular have different expectations from their elders. “Millennials are more interested in using and sharing that buying. That goes for bicycles, cars, films, music and much more besides,” points out Jérôme Traisnel, CEO of SlimPay, a French startup specialising in direct debit payments. Looking at it another way, the subscription economy also makes it easier to do things: it becomes less expensive to use Lyft, Uber and Blablacar on a regular basis than to have your own car, paying a Netflix subscription costs far less than buying DVDs, and so on. In the near future, rather than buying a computer every three or four years so as to keep up-to-date with our equipment, we might have the option of paying a subscription to the manufacturer, who would then take care of software updates and maintenance, and would keep track of what needs overhauling by regularly collecting data from our computer. Our provider might also be able to act proactively if an emergency were to arise, and would moreover exchange the computer for a more recent model when the first becomes out-of-date.
The subscription model marks a fundamental change in consumption habits
A winning model for businesses…
and for customers too!
Of course there is plenty in the subscription approach to suit the customer as well. “One of the main motivations of consumers is peace of mind”, argues Jérôme Traisnel. “If you’re a subscriber you get what you need on a regular basis and you’re spared the constant worry that you might run short.” The coffee lover who uses thirty or so Nespresso capsules per month can have them delivered to his/her home, which avoids the risk of discovering with horror one morning that s/he is running short of capsules and also saves making regular journeys to the shop. Because the subscription economy implies creating a long-term relationship between customers and providers, it is very much in the company’s interests to focus hard on service quality. Some of the drawbacks of the mass production system, such as planned obsolescence, might well be about to disappear: “It’s becoming a must to focus on the product life-cycle. Companies cannot just be content to sell their product, they also need to take care of the maintenance,” says Ricardo Mello. By stimulating competition and making it easier for new competitors to enter markets, this new economic model also encourages the creation of more customer-friendly services. Last but not least, taking out a subscription enables the consumer to space out his/her payments rather than having to make a big outlay in one go. This is quite an important advantage during a difficult economic period.
The model is also increasingly appealing to charity organisations: “We operate subscription systems for, inter alia, UNICEF, Médecins du monde (Doctors of the World) and Action Against Hunger,” reveals Jérôme Trainsel, explaining: “It’s easier for donors to give a small sum every month than to donate a larger amount of money once a year. Moreover the charity can then focus its efforts on winning over new subscribers rather than trying to encourage past donors to give again. Not least, this model works far better in terms of revenue predictability than organising a major annual event to raise funds.”
Charity organisations are now switching over to the subscription model in large numbers
Risks helping to create synergies between startups and majors?
This new approach is however not without risks. It requires existing players to make profound organisational changes. “Marketing, sales, and after-sales service under the subscription model differ radically from the traditional model,” points out Marc Diouane. “The accounting department has to be reconfigured, given that that the firm is switching from a model where it received huge sums in ad hoc fashion to one where it receives small sums on a regular basis,” explains Ricardo Mello. These fundamental changes might cause serious problems for less flexible companies. In order to mitigate this problem it might well be a good idea for major corporates to collaborate with startups in order to benefit from their adaptability and new ways of looking at things, while the startup would in turn benefit from substantial investment from the larger firm.
Take Clear for example. The startup with the novel airport security clearance solution uses a biometric identification system to enable its subscribers to whizz through airports and stadiums without having to stand in line. A partnership between Clear and a major hotel chain such as Hilton or Marriott would allow the hotels to give their customers access to all their establishments worldwide through a monthly or annual subscription system. Similarly, if advanced analytics company SAS went into partnership with a manufacturer of household appliances, this would enable the manufacturer to collect and process data emitted by its machines and offer customers rates based on their actual consumption. Major retail outlets could join forces with foodtech startups to provide their customers with regular deliveries of food hampers, and so on.
The possibilities seem almost infinite, and turning them into reality would appear to depend only on the ingenuity and determination of the players in question.