Harnessing the potential of the subscription economy

Stefanie Cunha, Vice President of Direct Sales, Digital Commerce at Worldline, offers her thoughts on the subscription economy and the future of consumption. 

What exactly is the subscription economy?

The subscription economy refers to a trend in the market whereby individuals and businesses demonstrate a preference to consume goods and services without taking full ownership of the underlying assets. Over the past decade, there has been a steady increase in the number of businesses offering subscription-based services to complement or enhance their existing business offering. An excellent example of this rapid expansion is in the streaming service market; think of Netflix, Disney+, Apple TV+ and myriad other competitors. 

Instead of buying a physical product with a one-time purchase, in a subscription economy, the consumer instead accesses a service or product(s) via a subscription. For example, instead of a one-time purchase of Microsoft Office and the latest software pack, a consumer pays an annual or monthly fee to access the full range of software on the cloud. Another example is streaming music through services such as Spotify and Apple music. Individuals forgo purchasing a single album or song, instead accessing a vast music library via a subscription model. 

How significant a departure is this from older consumption habits? How have they evolved?

Consumption habits have evolved, especially since the dawn of the digital age. Not only have consumers' lives become more interconnected thanks to technology, but their awareness of their consumption's impact on the world has also increased. Ready access to products and services naturally paves the way for society to use more 'on-demand' services. The most effective business model for providing these types of services and products is via a subscription.  

"Several surveys have shown that most people want to own less 'stuff," explains Stefanie. "The digital age and the subsequent focus on seamless user experiences have led consumers to have a lower tolerance for the inconveniences that come with ownership. Ownership implies a large upfront cost to purchase a good or service and the burden of maintaining that asset. We're increasingly seeing that assets can quickly become obsolete as technology advances at an increasingly rapid pace. Accessing services and products via a subscription nearly eliminates these concerns."

The much-discussed impact of social media can also be seen in societies changing consumption habits. Thanks to the pervasiveness of social networks, experiences have become a status symbol. "As a result, individuals are much more open to shifting from purchasing assets to subscribing to experiences. Businesses have similar motivators. They want to lighten their balance sheets by paying for a good or service as they go, rather than traditional one time capital expenditures oftentimes requiring bank financing and insurance," says Stefanie. 

Businesses and consumers now look towards short-term commitments and streamlined, easily-accessible solutions. Doing so minimises unnecessary maintenance costs, large upfront costs and depreciation of value. The modern consumer values flexibility, easy access and value for money, all catered for by the subscription economy. 

What impact has digitisation had upon consumption?

One of the primary drivers of the subscription economy has partially been digitisation. This has been seen in particular across the last decade, especially with the boom in on-demand entertainment, lifestyle services such as Hello Fresh, and an ever-increasing interconnectivity between our devices and our lives. Before the rise of digitisation, another major driver of change has been globalisation. Through globalisation, consumer goods became much more affordable, allowing consumers to fill their homes with physical products. However, this view is now changing, as Stefanie explains. 

"Studies have shown that individuals are becoming less interested in ownership and filling their homes with inanimate objects. Digitisation has been the enabler that has allowed objects and services to be distributed and shared effectively while being coupled with a user experience," details Stefanie. "For example, you can see this in the shift from individuals owning CDs to digital copies on their devices and now to streaming their music."  

"We speak a lot about innovation, and I feel that how we consume our products is almost a natural by-product of innovations in technology. For example, at one stage, same-day delivery for retail was never even a concept, yet now, thanks to infrastructure and technology, same-day or even same-hour delivery exist. So, consumption is driven by what's available, and what's available is driven by technology and infrastructure that makes it possible." 

What benefits does a subscription economy offer businesses?

For businesses, strong economic incentives have accelerated consumer preferences. Companies are looking for ways to ensure a recurring revenue stream, retain customers and extract maximum value from customer relationships.

As Stefanie explains, businesses can tap into the subscription economy by rethinking their business model and whether or not it is conducive to a subscription model. "There will always be an initial impact on the P/L the first year a business makes the shift, but it could be well worth the investment. Whether they should tap into the subscription economy depends on their business goals and the complexity of implementation." 

User experience is key to success in the subscription economy. According to PYMENTS.com, almost 40 per cent of subscribers abandon their services in less than 90 days, while more than half quit within six months. This makes it a market of both incredible potential and risk. Subscriptions allow for the personalisation and satisfaction of a broad range of consumer demands. Through a diversity of content or offerings, businesses can maximise the value of their offering, drive profits and improve the relationship between themselves and their customers. 

What might this mean for the future of content and payments?

One substantial benefit that subscriptions offer is that they allow for the personalisation of content. In an industry so full of competition, attracting and retaining customers has become key to long-term stability and success. By offering increased diversity of content and more personalised customer platforms and experiences, businesses, especially those in the entertainment and digital media industry, can maximise the value of their offering, drive profits and improve the relationship between themselves and their customers.

The subscription economy may be driving the adoption and development of new forms of payment. A subscription business model leans heavily on the internet in the modern age. A business having a presence on the internet opens it up to an international market; therefore, being able to offer the payment method of choice to global consumers is key to driving sales. As some local payment methods do not support subscription payments, alternatives become important. As a result, emerging forms of payment are increasingly being used by new businesses seeking to tap into the growing subscription-based market. Because this business model has proven to be so successful, payment methods inevitably adjust to react to the needs of the consumer. Therefore, as subscription-based services continue to evolve, payment methods will likely evolve alongside them, in whatever ways may be possible in the future.

New business models will likely support the future creation of content. Much like the decline of physical newspaper sales and the rise of digital subscriptions, the industry and people's consumption will change in line with demand. Switching to digital products also opens the door for increased markets and revenues. Digital content can be accessed by consumers around the globe, therefore broadening the potential for both localised services and broad, international platforms.

This does raise the question of payment, especially when it comes to ensuring smooth customer experiences. "Providers will need to offer acceptance of an increasing amount of payment methods as well as acceptance and settlement in an increasing number of foreign currencies. With recurring payments, if you are not authorised to make the first transaction, you lose the opportunity to secure future payments. This means a business may end up completely losing the customer. Therefore, it's essential to offer a wide range of remittance methods both local and global and be aware of local restrictions and potential roadblocks".

What questions should be asked of the subscription economy?

As technology advances and society embraces new products and services, it is vital to consider and address any potential issues and concerns that may arise. For instance, with any evolving technology, highlighting and emphasising security and safety is a must, especially regarding digital payments. There may also be ethical concerns regarding global access to subscription-based services, especially considering current inequalities in infrastructure access.

"If you're talking about access to necessary infrastructure and technology, there may be some questions regarding global access to more impactful subscription services,” says Stefanie. “But, I don't think this ethical question extends so much to digital media or entertainment platforms." 

There should also be scrutiny on how much energy digital services require and what impact this can have, as Stefanie details. "I also think that, in line with how people now perceive their environmental impact, questions have to be asked about the impact of technology, especially regarding carbon emissions and pollution. While people using less 'stuff' and moving away from things such as fast fashion has its ecological benefits, all of the infrastructure and digital services that come with the subscription economy also have an environmental impact. You could also argue that some may view that switching to subscription-based services diminishes their carbon footprint, while at the same time, they have increased their air travel, for example. It's important to make the distinction that there is still an impact from these services, there is no such thing as a free lunch." 

What lies ahead?

According to Stefanie, the subscription economy should only be viewed as an opportunity. "It may continue to polarise, but the subscription model will likely remain the preferred model for goods that are not seen as appreciating in value over the long term and a wide range of services. As the market expands, opportunities will emerge for both established and new businesses. The subscription economy can help drive technological advancements, improve media and critical services access, and help grow awareness of the changes needed to shift consumption and the industries that feed it to more sustainable models." 

There may be some limitations for growth, such as some consumers being more inclined to buy physical products and hold onto assets for long periods. But, production may change, pushing products and services to digital-only versions.  

"Another challenge in the subscription economy is the intense competition in service and user experience. Since the barrier to entry is lower, consumers can stop and switch to another provider at any time. Another aspect that may be of note is assessing how luxury brands and products adapt to subscription models. Physical products with inherent value may never be have a natural fit with a subscription model."

It will be interesting to see how far the subscription economy will evolve. From digital media and fashion to food, business services and health products, our world has become more on-demand and personalised than ever. Our world continues to change and evolve at a rapid pace, and alongside it, how we interact with it changes just as quickly.