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The Subscription Economy: Mastering the New Subscription Model

by Bennett Voyles

June 18, 2015

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In this era of demanding customers, tough competition and sophisticated technology, subscription businesses need to think two steps ahead. (Image: Chao Fansen/CKGSB Knowledge)

The success of businesses in the new subscription economy needs more sophistication, nuance and responsiveness.

In theory, the basic idea of a subscription business is simple: you take the customers’ money, deliver a service, and if the customers like the service, they sign up again—rinse, lather, repeat. (To read about why subscription economy companies are becoming popular again, please click here.)

In practice, however, it’s not so easy, particularly now, in an era when touchy, unforgiving customers, tough competition, and complex technology make the modern subscription business a somewhat delicate machine.

“Subscription businesses collect small sums per month or other period from customers and it is essential to keep customers engaged or the vendor will lose money,” says Denis Pombriant, founder and Managing Principal of Beagle Research Group, a consultancy focused on customer resource management. “This is completely different than a one-time sale in which a vendor gets all the money [up] front. That’s why subscription vendors are so focused on providing exactly what customers want and need and why they collect and analyze customer data so much more carefully than conventional vendors.”

Three Challenges

Tom Asacker, a business consultant and author, says companies with subscription offerings face three basic challenges. The first is technical: maintaining an “always up”, easy-to-use site, with a frictionless interface. The second is logistical: ensuring access to, and rapid delivery of, all of the products and services offered. The third is strategic, he says: “staying in tune with consumers’ changing desires, and evolving one’s products, services, and delivery mechanisms to fulfill those changing desires.”

Although subscription companies may not have many unique technical risks, they do sometimes have some special logistical risks. Netflix, for example, leases all its content on a yearly basis with no connection to the number of subscribers, according to its 2014 annual report, creating a potential mismatch between its costs and revenues if an unexpected number of customers cancels.

In the end, the toughest issues tend to be strategic. Today’s consumers are used to a world where everything revolves around them, says Lisa Roberts, VP for Marketing at Edgecase, a software company that creates personalization software for e-commerce sites. “My seat adjusts to me whenever I open my car door, my thermostat is learning about my habits at home and adjusting the temperature on time of day and whether it knows I’m there. My phone is adjusting to my speech habits, whenever I’m talking into it,” she explains.

“This whole Subscription 2.0 or whatever you want to call it is definitely not the old Fruit of the Month Club where it was the same offering for everyone,” she says. “What it’s about today is… I’m giving them little pieces of information. I’m adjusting my seat a little bit on my own, I’m adjusting that thermostat, I’m tweaking it over time, and it’s learning from me.”

Faster Thinking

Younger subscription companies and “pure play” online retailers have a slight advantage in making these kinds of observations and then courting the consumer on the basis of their insights. “They can move very quickly, they can evolve very quickly, they can look at their data and build intelligence off of it much more quickly than older and more established retailers,” Roberts adds.

Older companies are hobbled not only by legacy technology, she points out, but by legacy organization. “Marketing has worked on its own technology and [in] its own silo, with its own goals, with its own budget, with its own budget approver, with its own P&L, with its own performance reports—and that’s very different than the merchandising team’s and generally very different than the site operations team’s,” she says.

When it works, as it has with Birchbox, the beauty and grooming samples subscription business, the company ends up with the best possible market feedback—a reorder and spontaneous chat on social media, according to Roberts.

No detail is too minor: Edgecase analysts, Roberts says, look at how a product is discussed in social media for an idea of the kind of language they should use in the product description.

However, data isn’t foolproof. “If you derive the wrong intelligence and use that data for future actions, there’s definitely a danger there,” Roberts warns. “Loyalty today is not what it used to be, so if you have enough irrelevant touch points, you will lose a customer.”

Don’t Forget the Vision

But not even good data mining can make up for a lack of vision. The businesses that are resonating now among the new subscription companies tend to have a particular style and encourage consumer discussion. “It’s a very different world than the old Fruit of the Month. We’re nurturing everybody’s ego: what fruit do you like? Where do you like to eat your fruit?” Roberts says.

“It’s very much about having a story,” she adds. “You look at the niches out there that have grown up around the subscription companies, and people are into that niche because it’s something that really interests them.”

Some of those niches are quite unusual. Food clubs, for instance, offer eaters a wide array of boxes, including NatureBox, a shipment of guilt-free snacks; HelloFresh, a grocery box that includes the ingredients and recipes you need to prepare three healthy meals; gluten free goodies and recipes from Taste Guru; and even Mantry, a wooden box filled with jerky, hot sauce, and other manly treats.

Finally, such hyper-focused businesses may face conventional branding challenges as they grow. The transition from niche to major player is never easy, and marketing strategists have often noted that early adopters’ needs tend to be very different from those of the mass market.

Nor are other common transitions, such as a merger, necessarily risk-free. Analysts have noted, for instance, that Avis Budget Group’s purchase of Zipcar in 2013 for $473 million looked good on paper, but warned that it could create a branding challenge. At the time, Adweek likened the established company’s acquisition of a whippersnapper like Zipcar to “gaining custody of an unruly child”.

Looking ahead, subscription marketers will also need to keep an eye out for new opportunities that their networks create. Media subscription libraries such as Netflix, for instance, may find that their offering itself becomes more social over time.

“I’m not convinced that subscription changes much about how we consume. It more likely might change what we consume,” says Bob Stein, Director of the Institute of the Future of the Book, in New York, and founder of the Voyager Company, a pioneering CD-ROM and laser disc developer in the 1980s and 1990s. Being a member of Spotify, the music service, for instance, “hasn’t changed my music consumption except in the sense that my friends now tend to be my DJ,” he says.

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