Plenty of tech companies seem to forgo the old ownership models in lieu of subscription-based services. However, there are both challenges and advantages to adopting this business model
Ownership is so last century. You’d be forgiven for reaching that conclusion if you regularly listen to the tech head honchos of the world. From Lyft’s president imagining a world without car ownership to Spotify reaching 100 million paid subscribers in April 2019, it could seem as if the days of static possession are gone. But are subscription-based services really the future for companies?
There are plenty of examples to suggest that we’re heading in that direction. “[In March], Apple and Google announced their new entertainment services Apple TV+ and Google Stadia [respectively,]” says Chase Buckle, trends manager at GlobalWebIndex, the market research company, speaking with Elite Business. “While we don’t have extensive details yet on the new video-streaming and video game platforms, it is likely that the two different models will be subscription-based.”
It’s hardly the only indication pointing towards the end of ownership. At the end of 2018, an average subscription-based company increased its revenue by 321% compared to 2012, according to research by Zuora, the company providing tech solutions for subscription-based companies. Moreover, these enterprises increased their revenues roughly five times faster than S&P 500 company revenues and US retail sales.
Furthermore, cloud technology offers a third reason why the scales may be tipping in favour of subscriptions. “[You] only have to look towards the growth of the cloud – arguably the most disruptive technology ever – to see that we are heading towards a subscription model,” suggests Mark Dewell, managing director of public, private and third sector at Advanced, the cloud computing services for business providers. “Monthly subscriptions for cloud services continue to challenge the traditional financial model and it’s the move away from paying a big price upfront for a service that makes subscriptions so attractive. It means digital services are easier to reach and, in many cases, can be scaled up and down at any given time according a user’s or organisation’s needs.”
Another argument is the rise of the sharing economy, with companies like Love Home Swap, Hostmaker and Uber all having risen to prominence over the past few years. “There has also been a marked increase in the sharing economy – customers can easily complain online and share the word, which means it’s now much harder for a bad product or service to succeed,” says Lindsay Willott, CEO and founder of Customer Thermometer, the email feedback company.
Indeed, 23% of the UK population used sharing economy services in 2018, according to a Warwick Business School report. Interestingly, the researchers also found that this trend was particularly strong among people between 18 and 24 years of age suggesting it might become more popular over time. In that group, 78% used sharing economy services. “If you add these elements together, the future of tech is clearly subscription-led,” continues Willott.
Going down this direction could have many advantages, especially for tech companies. “In fact, [they’re] the best placed to capitalise on subscription-based models,” argues Eric Jensen, head of IoT product management at Canonical, the open source software provider. “Tech companies focus on selling their services to grow user bases; packages built on vast amounts of data that enable infinitely customisable offerings. This business arrangement extends the lifespan of any product beyond a single transaction, promoting a stronger relationship between a business and the end user.”
In other words, he believes subscription-based technological offerings can “bring real value to people’s lives” by enabling constant feedback and updates based on the people’s tastes. Think about YouTube or Spotify’s algorithms for picking the music best suited to your tastes and you get the idea.
“In short, the subscription model really is a win-win for both the business and its customers,” argues Greg Harwood, director with Simon-Kucher & Partners, the strategy and marketing consultants. “For the business, a subscription model allows for scale, a longer term recurring relationship and a level of data previously unheard of that allows for a personalised consumer-centric approach to balancing acquisition, monetisation and retention. For the customer the subscription model represents convenience, flexibility and control over choice as well as being cheaper more often than not.”
However, businesses venturing down the this venue have to face a number of challenges. “In order to keep up in markets orientated around content subscriptions, businesses have to constantly provide and demonstrate value to retain their existing user bases,” says Buckle. “This can be difficult given the established competition, the likes of Spotify and Netflix, who benefit from a constant influx of diverse content.”
He also warns that the popularity of subscription-based models could also lead to “subscription fatigue” as customers would feel “overwhelmed by the amount of choices on streaming platforms.” “The platforms which succeed in this balancing act will be the ones which personalise the experience based around an individual’s preferences to make sure they keep coming back for more,” Buckle continues.
Another challenge subscription-based companies face is to find the balance between free and paid-for offerings. “Freemium models give users the opportunity to test, evangelise and share a product,” says Harrison Rose, co-founder and chief customer officer at Paddle, the e-commerce platform. “These users may not have been acquired had the product been paid from the start. It worked for Spotify – who have a reported [26.7%] conversion rate.”
He adds: “However, not all freemium-to-paid conversions are as successful. Whether a large multinational or boutique tech startup, the conversion pain point needs to be managed and overcome.”
Clearly, there are both benefits and challenges for businesses and customers alike when it comes to subscription offerings. Yet, it seems clear to the people Elite Business have spoken to that ownership is changing. “It won’t happen overnight – after all, the human race generally doesn’t like change,” concludes Dewell.