Companies are tapping into the seemingly limitless potential of the subscription economy, but users are fed up.
BMWs might be the ultimate driving machine, but you'll have to pay extra for a warm bum. The German manufacturer now charges anywhere from $15 to $20 monthly for heated seats installed in your car. The subscription is to unlock their thermodynamic abilities.
As strange as it sounds, it's part of the latest trend. Of course, paying for a monthly service has been around for ages, but now, every aspect of our life is a subscription. As we speak, your wallet might feel the burden increase, and it won't slow down.
From 2011 to 2019, the subscription economy grew by more than 300%. The pandemic accelerated this trend, and by 2021, the global subscription e-commerce market had reached $73 billion. Moreover, by 2026, it's expected to reach $900 billion. So how did we get to this point?
1600s: King Charles I of England envisioned modern-day insurance centuries ago by creating a fire-protection plan. It failed because people didn't understand it. That's why you need good marketing!
1800s: Subscriptions already included milk deliveries and the first monthly telephone services, with AT&T starting the service in 1885.
1900s: Paying for a monthly, or even daily service, was a part of our daily lives, thanks to newspapers. At the same time, newspapers also helped target potential buyers with coupons and discounts.
1920s: Entertainment subscriptions see a rise in popularity. One example is the Book of the Month Club, which started with 4,000 subscribers and grew to 550,000 by 1950, all through snail mail.
1950s: The post-War boom saw the first attempts at subscriptions in the television industry, which would pave the way for cable TV.
1970s: HBO becomes the first true premium cable TV offer, and thus the cable television era begins.
The infamous "idiot box" wasn't only responsible for hours of mindless entertainment. The rise in subscriptions owes a large part to television and cable.
Cable TV was, for decades, one of the most popular subscription services in the world, mainly because there was very little competition. However, it wasn't perfect, with too many ads and junk channels. Still, it was what many people had, even when it was one of the most expensive services, far outpacing inflation for two decades.
Video rentals were an alternative form of entertainment. We could enjoy almost every content imaginable on VHS tapes for a monthly fee. Still, even this model, though popular, was inconvenient. Fines for late returns, deposits, and other expenses made it expensive. Plus, the tapes were cumbersome, taking up tons of space.
It was in the 90s that Netflix challenged how we viewed subscriptions. While they started renting DVDs in a similar business model to Blockbuster, they eventually changed to a flat-fee unlimited subscription model. Users loved the idea, and Netflix was on its way to becoming a giant. One flat fee solved our lives, making companies a lot of money.
Music wasn't far behind, with CDnow offering CD-of-the-month subscriptions as far back as 1996. This example is valuable as it shows how the offering was considerably cheaper than music stores and was tailored to the consumer, thanks to a series of recommendations. These factors made subscriptions all the more enticing for people. In addition, with the advent of the internet, more and more services, such as wine, beauty products, and food, became available. Consumers, thus, were reaping the benefits of one thing: comfort.
People love subscriptions because they can solve an immediate need, make our lives easier, or both. For many families, one of those needs is putting food on the table. Cooking dinner was a hassle for busy families until one company took a shot at solving it.
In 2007, a Swedish company called Middagsfrid began serving full meals to families for a monthly fee. Parents now didn't have to guess their way into a haphazard dinner. Now, they had a full menu conveniently delivered to their homes.
One important note is that these weren't the first food delivery services to work on a subscription basis. Borden, the dairy company, delivered to your door for a monthly fee as far back as the seventies. Still, Middagsfrid was among the first to offer a full meal. The company, whose name roughly translates to Dinner Peace, revolutionized the market, locally and globally. In 2022, there are more than ten meal kit companies in Sweden alone, a country of only ten million people.
These services then made their way to the US, and companies aimed at cities like New York, where eating out can be prohibitively expensive. So, a $10 meal seems cheap, so the recipe was a hit (no pun intended). By 2022, the US has more than 150 meal kit companies; some of the biggest names, such as Hello Fresh, have become global powerhouses.
Food wasn't the only way to consumers' hearts. We might not think of makeup as an essential service. Still, one company saw an opportunity, ran away with it, and added a little twist.
Birchbox was born in 2010 with a simple idea. For a monthly fee, it would ship out makeup and beauty samples to customers, with unexpected products in the mix. Users loved the idea, and for companies supplying the samples, Birchbox's promise was that, eventually, customers would buy full-size products from them.
While the company is a hit, Birchbox has stated that only around 5% of customers buy more full-size products from those samples. This churn rate can become a challenge for other companies in the future. Still, the company was a success, growing from two founders in 2010 to being sold for $45 million in 2021.
For decades, Gillette dominated the shaving industry. The company had 70% of the global market share at one point until subscriptions came along. The Dollar Shave Club provided cheap, brandless razors for a fraction of the price for a low monthly fee.
Since loyalty wasn't strong in the razor game and quickly, people chose this program over Gillette. In 10 years, the market share went from 70% to 54%.
Desperate to save itself, Gillette countered with a similar program, albeit more expensive, offering higher-quality products for a low fee, and users could have them delivered with a simple text message. The program has worked, helping Gillette stay afloat, and it isn't the only case.
Microsoft was once so mighty that the US Government took action to reduce its power. Even with this, the company continued to dominate the productivity sector until Google upped its game with the G Suite. This offered one critical difference: there was no need for cumbersome installations. It was all done online.
Microsoft understood that it needed to take action to avoid losing all those enterprise customers. Thus, it launched Office 365 in 2011, which offered the productivity suite for $9,99 a month. At first, the idea was a failure. After all, people had long associated Microsoft with buying the packages. Still, eventually, customers warmed up to the idea, leading to a growth in revenue, further showcasing the value of a crucial concept behind subscriptions.
LTV stands for Customer Lifetime Value, representing how much you're worth to companies. So let's dive deeper into the Microsoft Office example to explain it. At its peak, one out of two computers at offices ran Microsoft, and to get the Office package, one had to purchase it as a one-time payment.
It was common for people and companies to buy the software once and resist the upgrades for years. So, in this case, the LTV was one package and, perhaps, an upgrade later, which would happen years later when you couldn't use your expired software anymore. So, though each license was expensive, it translated to one sale. Still, at the same time, there were plenty of running costs behind it, such as updates, troubleshooting, and patches.
In Microsoft's case, the LTV needed to be enough to cover those costs but still relied on one-time payments. So, when Google showed up, it flipped this business model on its head, and Microsoft had to act.
Thus, the giant created the $9,99 subscription: goodbye to large payments, hello to monthly microtransactions. In this case, the LTV was higher and thus helped the company earn more revenue frequently. The same applied to Gillette, as the customer's LTV. This, and many other examples, show the actual value of subscriptions and why, all of a sudden, it became a craze.
In 2022, it was estimated that people had an average of 12 subscriptions to entertainment alone. This doesn't include others such as health and Saas. Millennials have the most, with them subscribing to 17 in total.
On average, including all subscriptions, people spend an average of $300 in subscriptions in 2023 per month, which has increased from $237 in 2018. Moreover, the subscription economy index in the US has grown 437% from 2012 to 2020, with no signs of slowing down. This translates to anywhere from $2200 to $3600 a year.
From a company perspective, we understand that a subscription increases a customer's LTV. Still, customers also feel they get more benefits. According to the "End of Ownership" report, 42% of people subscribe to services because they are convenient. 35% said they wanted more variety, and 35% said it saved them money. A separate McKinsey report stated that 49% of its voters considered convenience the main reason for subscriptions. Savings are also a big part, with McKinsey reporting that 50% of users believe they save more.
It's not only about work. One significant example is Adobe. It went from having an expensive one-time subscription to a monthly payment for all its services. Many users find the monthly payment much more accessible than a one-time payment that costs hundreds or thousands. For companies, many benefits might take a lot of work to envision.
For example, physically fitting everyone who has signed up at the gym is impossible, but gyms only expect some to go. In fact, they love it when you don't use their facilities. It's practically free money. And the same applies to all the other subscriptions, from movies to music, to food. Even though we need to eat, we might bore ourselves with HelloFresh's menu and order takeout but still pay that subscription. Thus, the main problem for consumers arises.
Soon, we might come to a point where we pay a monthly subscription for everything and own nothing. Of course, some people love that idea, and others fear it, but it's closer to reality than we think. We're already seeing the problems with subscription-based living.
We much rather pay for a service and have it readily available instead of not having it at all, but this creates a problem. As subscriptions pile up, people lose track of how much they're paying. A recent survey from C+R Research shows that people underestimate their subscriptions by an average of $100 to $200 monthly. More than 40% of people pay for subscriptions they've forgotten about. Additionally, 86% of users have their subscriptions on autopay, and some people are losing money without realizing it.
Companies are also brilliant at keeping us within their reach. During the pandemic, Zoom became the go-to tool for communications. Everyone used it, but as the world opened its doors, people found that unsubscribing from it, or its newsletters, was practically impossible. Companies strive to make unsubscriptions complicated or expensive. With a hint of scarcity, they urge users to remain. Some models state that getting a new subscription might be more expensive, so people fearfully choose to stay.
Another underlying problem with subscriptions is that they're necessary but are too expensive. Let's use the Adobe Creative Suite example. Previously, a program such as Photoshop would cost you $699 once. That's a lot of money, especially for someone who has just started to work. So, $20.99 a month is easier and much more accessible, but in the long run, this adds up. Let's say one person subscribes to Adobe and uses it for five years. That's a total of $1260, not considering that the subscription could increase in price in those years. So, those $699 seem cheap now, though they weren't possible in the first place.
That's how companies have found a way to keep users hooked, but it's challenging for them too. One of the biggest challenges that companies now face is customer churn. Though it has flourished, the meal kit industry faces astounding churn rates. On average, within the first month, these companies see a 40% drop in retention, with 60% of users staying after 30 days. This number drops to an average of 15% within a year.
These, of course, aren't the only examples. As more competition entered the streaming industry, Netflix saw a drop in its subscriber base, forcing it to take drastic action, including lowering the fees. Even then, in Q1 of 2023, the company saw millions leave for 4% of its subscriber base.
There's no denying that we can extrapolate Netflix's case to all the rest of the companies applying the same principle, and that's how we go back to the BMW heated seats. There's too much competition in the market for streaming, food, and almost all services that we can imagine, and people are tired of it. So, when one company, such as BMW, adds another subscription, users could choose a different brand altogether.
BMW's heated seats can heat your body after a long day of driving about town in the dead of winter. They have all the needed tech to do so, but the computer can block the function if you don't pay for the $15 to $18 subscription. As a result, the seats become a heatless pile of junk in a blink of an eye.
You can pay a flat fee of about $415 to have unlimited access to seats with the tools to warm you up. Many prefer it this way. In the US market, the car company had to stop offering these heated seats in the US because customers already expected them to be included in the payment. 90% of US BMW buyers order them upfront, but what happens with what we can't buy upfront?
Subscription services could run into a big problem: no more subscribers. Let's take Netflix as an example. There were few worthy competitors when it first launched, but now, the battle is fierce. HBO, Paramount, Hulu, Amazon, and Disney are only some companies battling for our attention. Netflix, once a giant, is now struggling to keep its subscribers at bay.
Then, there's an aspect of financial uncertainty. If users become more aware of their finances, they will begin to slash out the unnecessary. In fact, it's happening as we speak. McKinsey found that, on average, subscription businesses have a monthly 10% churn rate. For these companies to survive, they must find others willing to pay. This involves a desperate marketing effort, a constant search for the next great idea, and a hustle to remain competitive.
On the one hand, the business has always been this way: competition forces creativity–but, on the other hand, paying to live might become too expensive in the future. So, companies must create a subscription worth enjoying for life, and that's not easy.