Customers are increasingly favouring services which offer innovative access and experiences over traditional pay-per-product services. It is this shift in demand - from long-lasting ownership to instant or rapid gratification, from staid transaction to meaningful relationship - which describes the “subscription economy”. Seventy eight percent of the adult population in the UK currently subscribe to at least one product or service and over a quarter think they will be using more services in five years’ time. So what does this mean for the consumer product behemoths geared towards an increasingly outdated economy of products?
Companies are reinventing their business models
The media industry has long been peddling a business model based on subscription services, from the daily newspapers and periodicals to, later, streaming services such as Netflix and Spotify. Now the biggest players in consumer products are realising that they must fast catch up if they want to remain relevant and stifle competition. If you can’t beat them, join them – or so Unilever must be hoping after paying $1 billion for Dollar Shave Club, a start-up that sells cheap razors and other men’s grooming products.
However, while start-ups may initially have used the advantage of their size and agility to lead the way in disrupting the consumer products sector, “their business models are often easily replicated by the very giants they seek to disrupt.” In the US, the beauty subscription service Birchbox is facing competition from its bricks-and-mortar rival Sephora, which launched its own subscription service last year.
The subscription economy offers businesses a “recurring revenue model”. From a consumer perspective, perceived benefits of subscription include the option to easily upgrade the products or services they use, the ability to gain instant access to what they want and the attraction of discovering new products based on their personal preferences. The company-customer relationship is transformed from a one off purchase largely dependent on chance to an enduring affiliation based on trust and loyalty.
Innovation is raising customer expectations
The resulting challenge is for companies to retain their subscribers by continually innovating their services and the price at which these are offered. It is not enough for businesses to simply charge their customers on a monthly basis and label this a subscription plan; a whole host of considerations must be taken into account.
For example, a subscription business may be more susceptible to stock or delivery issues. A pay-as-you-go retailer can postpone orders for faulty or low stock items, whereas customers who have subscribed to a service have an expectation that it will be delivered on time. Levers for growth may also be limited in a subscription model; depending on the model, it can be harder to push different or additional products on customers or encourage them to make purchases more frequently than at the rate prescribed by their subscription. Reeling customers in with discounted introductory offers must also be carefully executed as the initial impact on margin must ultimately be outweighed by converting the customer into a loyal and profitable patron.
The giants of consumer goods have recognised the value of partnering with both start-ups and large conglomerates in an attempt to overcome some of these challenges by targeting new and established customer bases. The Amazon Dash Button, which allows users to instantly reorder their favourite products, already links to Procter & Gamble’s own Gillette brand and PepsiCo’s Gatorade brand. Yet “fewer than half of people who bought a Dash button since March 2015 have used it to place an actual order.”
The opportunities are promising
So is there an inherent paradox in companies which are built on selling physical goods purchased on a need-to-have basis attempting to flog a more abstract concept of a nice-to-have service? Arguably not. Five percent of respondents (2.5 million) to a YouGov survey on the UK subscription economy expressed an interest in a subscription service for toilet roll and the modern customer prizes convenience and personalisation.
Zuora, the software company which promotes the term subscription economy, sees the key to success as moving from a product-centric to a customer-centric business model. And while the possibilities attached to regular deliveries of toilet roll may be somewhat limited, the scope for consumer products companies to drive sales through customised services is seemingly endless.