Denice R. Preston
The subscription model has existed for a long time but is now gaining popularity. To emulate its success in the SaaS industry, consumer-oriented companies are increasingly looking to increase revenue through recurring subscriptions through subscriptions.
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In the spring of this year, the bank I was with contacted me to be a “member” of the credit card I’d been using for a couple of years. I was enthralled.
It was, however, a disappointing experience.
The membership benefits were the same ones I am currently enjoying at no cost (cashback and no markup on FX); however, it is being offered for sale at around $10 per month. From the PR and the financials, it is clear that the bank failed to meet its borrowing expectations and is now trying to fill the profit gap by introducing a new buzzword: subscription.
The past was a place of harmless items like milk or hobbies that are niche today; subscriptions are a significant part of every aspect of the consumer market. Companies are advancing towards making it a reality that we make repeat purchases and grow the share of wallets. It’s a carbon copy of the tried and tested Software as a Service “SaaS” playbook, first introduced in the early 2000s.
Recalling the incident with my card with credit, the event has made me wonder whether the current trend of subscriptionizing everything is taking too long. It appears that most subscription companies are attempting to “synthesize” recurring revenue and loyalty in niche or product commodities to satisfy investors who are a bit squeamish.
Have We Reached Peak Subscription?
According to the Fuel report published by McKinsey, the market for subscription eCommerce had revenues at $7.5 billion last year and is increasing by 60 percent annually. Keep in mind that digital subscriptions aren’t included here. Amazon Prime has 150 million members, translating to $15 billion in annual revenue.
The same analysis classifies consumer subscription models into three jobs-to-be-done-esque categories: curation (55% of the sample), replenishment (32%), and access (13%). Curation, the most well-known type of subscription, is an ironic remedy to the internet problem: massive inundation and the worth of hiring someone to sort through the plethora of information.
Subscription revenue is increasing because the proportion of our wallets devoted to subscriptions is growing despite it being a growing overall market. The average monthly expenditure on subscriptions has increased by 141% over the past two decades (PS18.49 in 2016 and PS44.55 at the end of 2018), According to Zuora, a subscription management platform. Zuora’s study of UK customers.
Businesses focusing on subscriptions have a high success rate, with about 40% of the same group succumbing to defeat, per My Subscription Addiction. The reasons for this can be gleaned from the 40 percent of customers who end their subscriptions, which is half in the first six months. The apparent uniformity in trying to market daily things through subscriptions that we would have to go to the store to buy – which is funded by the high cost of marketing and discounts is akin to the flash sales phenomenon in the past decade.
The fine line separating the subscription-based model’s success and failure appears to be a bit haphazard. For instance, take HelloFresh or Blue Apron, two similar meal kit companies listed on the stock exchange in 2017, at a bit under $2 billion valuations. Since then, Blue Apron has floundered in its current state, is, valued at only $47.4 million, and is on the edge of bankruptcy. However, HelloFresh has, to the greatest extent, thrived.
There is an essential lesson in more efficient execution to be learned from this, but the primary message points to being an example of the ego and shoehorning. It appears that meal kits aren’t an incredibly innovative food consumption method.
The SaaSification of Everything
SaaS was a groundbreaking subscription business model in the enterprise or B2B market since it created relationships of mutual benefit between the vendor and the consumer. For IT procurement executives, the risk of obsolescence was eliminated, and hardware costs were shifted to the cloud. The vendor could gain traction quickly using the self-service sales model, which frees them of the long selling cycles of traditional sales presentations.
Costs for software implementation were transformed from huge upfront fees into perpetual annuities. This was safer and more adaptable for large-scale customers. When the initial development costs for the Software developer were paid back, they moved into no marginal cost “flywheel” territory, with the capacity and authority to explore new concepts. Consider Salesforce as one of the pioneers of SaaS and now a $200 billion business involved in various activities that aren’t related to its initial product, which was a simple CRM system.
All is well and good in the B2B/enterprise market; however, the issue I’ve observed with consumer goods firms that are clamoring to join the subscription model of SaaS is that:
A majority of subscriptions are dressed-up versions of trade finance.
Business models are being designed to satisfy the desires of investors about SaaS’s characteristics for regular revenue.
The absence of continuous improvement of the service, as well as insufficient defensibility against competitors, makes loyalty much more challenging to attain.
The Allure and Fallacy of Recurring Revenue
The attraction of subscriptions for businesses is the purpose of attracting repeat revenue as it increases the total value of the customer’s lifetime. A subscription is a “direct” way of formalizing the habit of repeatedly buying since it charges customers’ accounts a monthly fee. Month.
The promise of subscription is based on the idea of attracting sticky revenue, which for SaaS companies has led to historical valuation increases of 2-3.5x higher than one-off pricing offered by competitors. Adobe, for instance, has seen its share price rise by 3.5x since the introduction of the subscription model in 2012 and has witnessed its share price rise by over 1,000%, much greater than the NASDAQ’s 20 percentage increase. To give you a better understanding in the same time frame, IBM – which has had a difficult time in the era of cloud computing was able to decrease its value by 25 percent.
Through SaaS or digital subscriptions, regular revenue can be used for product enhancements that strengthen existing loyal customers. Developers can access users’ behavior and determine what works and what doesn’t. If something is pleasing users, it’s an easy decision to invest more resources (the regular revenue) towards further enhancing it. Do you remember how Netflix developed Bird Box based on patterns of viewing by users?
