Fatigue Subscription Business Model: Earlier this year, my bank invited me to become a “member” of the credit card I had been using for years. I was piqued.
The benefits of membership were essentially the same as what I was already receiving for free (cashback and no FX markup), but were now available for a monthly fee of $10. Reading between the lines, the bank must have undershot borrowing projections and was now attempting to plug the profit gap with the new consumer buzzword: subscription.
Fatigue Subscription Business Model
My bank invited me to become a “member” of the credit card that I had been using for several years earlier this year. I was piqued.
The benefits of membership were essentially the same as what I was already receiving for free (cashback and no FX markup), but were now available for a monthly fee of $10. Reading between the lines, the bank must have undershot borrowing projections and was now attempting to plug the profit gap with the new consumer buzzword: subscription.
Subscriptions, which were once limited to benign staples like milk or niche hobbies, now pervade all types of consumer markets. Brands are working to formalise our repeat purchase habits and increase our wallet share. It’s a carbon copy of the tried-and-true Software as a Service “SaaS” playbook that debuted in the early 2000s.
Returning to my credit card incident, I was left wondering if the race to subscriptionize everything had gone too far. Many subscription businesses appear to be misguided attempts to “synthesise” recurring revenue and loyalty within commodity or niche product offerings in order to appease wide-eyed investors.
Have We Reached Peak Subscription?
According to Fuel by McKinsey, the subscription eCommerce market had $7.5 billion in sales in 2018 and has been growing at a 60% annualized rate. Remember that digital subscriptions are not included; Amazon Prime has 150 million subscribers, which equates to $15 billion in annual revenue.
Subscription eCommerce Sales $ Billion
According to the same study, consumer subscription models are divided into three job-like categories: curation (55% of the sample), replenishment (32%), and access (13%). The most popular type of subscription, curation, is an ironic antidote to eCommerce’s ailment: mass abundance and the value of paying someone to sift through it all.
Subscription revenues are increasing because their share of our wallets is increasing, despite the fact that the overall market is rapidly expanding. According to Zuora’s analysis of UK consumers, the average consumer’s monthly subscription spend has increased 141% in two years (from £18.49 in 2016 to £44.55 in 2018).
According to My Subscription Addiction, subscription-focused businesses fail at a high rate, with of a given cohort succumbing to defeat. The 40% of customers who eventually cancel subscription plans, with half churning within the first six months, provide clues as to why. The seemingly homogeneous nature of trying to sell everyday items on a subscription that we used to just go to the shops for – funded with steep marketing costs and discounting – does draw parallels with the flash-sale craze of a decade ago.
In the subscription-based business model, the fine line between success and failure also appears haphazard. Consider HelloFresh and Blue Apron, two seemingly identical meal kit companies that both went public in 2017 at valuations just under $2 billion. Blue Apron has since floundered; it is now worth only $47.4 million and is on the verge of bankruptcy. HelloFresh, on the other hand, has thrived to varying degrees.
There will be a lesson in better execution here, but the overarching message hints at hubris and shoehorning. Meal kits, it turns out, were not such a revolutionary form of consumption after all.
Shoehorning in a Subscription
Ideas can be put to work very quickly in global eCommerce markets with cloud-based drop shipping operations available at the click of a button. When competitors appear to appear at a multiplicitous rate, it becomes extremely difficult to defend brands and ideas. This can be especially disheartening and fatal for pioneers in a field, who act as Trojan horses by creating hype for a new market (via hard marketing dollars) before a flood of new entrants arrive and drive prices down.
Businesses that see their customer lifetime value figures decline due to the race to commoditization will look for novel ways to address the problem, with subscription plays frequently viewed as a panacea. Unlike previous razor blade or game console business models (sell the “base” at cost and earn margin on the “disposables”), these subscription plays frequently appear shoehorned in and tenuously linked to the original product:
- Clear Aligners for Teeth. Prices for at-home clear teledentistry have been cut in half since Invisalign’s patent expired due to their disintermediation of orthodontists. Many D2C startups that sell such products are now attempting to offer teeth whitening as a recurring revenue stream into this rapidly commoditizing industry.
- Mattresses. Vacuum packing a mattress into a box was a noble but moat-less innovation. So many businesses now offer such products that a WSJ reporter calculated that free trial periods in gaming could provide up to eight years of free sleep.
- Juicero. When a juice press can raise $120 million in funding, it is clear that selling a $400 device will not suffice.
The SaaSification of Everything
Because it established bonds of mutual benefit between consumer and vendor, SaaS was a revolutionary subscription business model in enterprise and B2B software markets. The threat of obsolescence was removed for IT procurement managers, and hardware costs were outsourced to the cloud. With a self-service sales model that eliminates the lengthy sales cycles of traditional pitches, the vendor could gain traction quickly.
Large upfront payments for software implementation were effectively converted into perpetual annuities. For enterprise customers, this was less risky and more scalable, and for the developer, once initial software development costs were repaid, they entered zero marginal cost, “flywheel” territory, with the power and clout to try new things. Consider Salesforce, one of the SaaS forefathers; it’s now a $200 billion behemoth engaged in activities unrelated to its initial product, a simple CRM system.
That’s fine in B2B/enterprise markets, but the issue I see with consumer goods companies clamouring to enter the SaaS-type subscription business model is:
- The majority of the subscriptions are simply disguised forms of trade financing.
- Business models are being developed to meet investors’ desires for SaaS-style recurring revenue.
- Because there is no iterative improvement to the service and competitors have weak defensibility, earning loyalty is much more difficult.
The Allure and Fallacy of Recurring Revenue
For businesses, the allure of the subscription is the goal of attracting recurring revenue, which adds to an increased overall customer lifetime value. Because it charges customers’ bank accounts each month, a subscription becomes a very “direct” way of formalising repeat purchase loyalty.
The subscription promise is driven by the goal of attracting sticky revenue, which in the case of SaaS businesses has resulted in historical valuation upticks of 2-3.5x more than comparable one-time licence pricing competitors. Adobe, for example, has seen its share price increase by more than 1,000% since introducing subscription pricing in May 2012, far exceeding the NASDAQ’s 200% increase. To put this in context, IBM, which has struggled in the cloud era, lost 25% of its value during the same time period.
Recurring revenue allows for further product improvements with SaaS and digital subscriptions, which further embeds incumbent customer loyalty. Developers can observe user behaviour in real time and see what works and what doesn’t. When something clearly delights customers, it becomes a no-brainer to invest more resources (recurring revenue) in further improving it. Remember how Netflix developed Bird Box based on user viewing habits?
More often than not, recurring revenue from physical product subscriptions will not be invested in such value-added activities:
- How can you innovate or improve on a meal kit that is delivered to a customer’s door each week?
- How do data-moats, which improve digital users’ experiences by learning more about them over time, manifest themselves in physical goods markets?
The answer is that they don’t all the time.
Many subscription businesses make the mistake of using the subscription as a trade financing vehicle, frontloading revenue and spending it all on marketing to more expensive-to-acquire new customers. In such cases, recurring revenue will only equate to loyalty if the status quo remains static and apathy prevails.
Earn the Repeat Purchase
The idea that you need subscriptions to learn more about your customers has been debunked by the history of other markets. Consider banking, the ultimate industry in terms of sticky and recurring features (in this case, from deposits). While perpetual notice accounts are common, the vast majority of deposit money is held in fixed-term or call in checking accounts. Although these two extremes are not contractually recurring, banks will model trends and stress test rollover percentages (essentially churn) in their risk teams to ensure ongoing solvency.
Consumer goods companies have survived for generations without the need for subscription business models. The FMCG behemoths that stock households did not burden customers with cumbersome subscriptions. Instead, the dynamic friction of “earning” the repeat purchase kept the brand and end user trusting each other. To learn more about feedback and habits, brands would tally up monthly order histories and use coupon/survey promos to go direct to end consumers.
Conditions Where Fatigue Subscription Business Models Work
Subscriptions used to bring physical convenience: the local newspaper delivered without having to go out in the rain, fresh milk delivered before you wake up. The value-add component of a subscription has become more important in the digital economy. For these two nostalgic examples, the magazine is now available digitally, and eCommerce discovery makes it easier to find a more suitable milk vendor.
However, in 2020, I believe the following factors are critical to consider in the context of a subscription business model.
1. Psychology
When it comes to some widely accepted characteristics of what subscriptions serve, they can be divided into two psychographic traits: what we need (necessities) and what we want (luxuries).
A good subscription business model excels in one of these areas but has greater long-term viability if it can find something at the intersection of the two. In terms of necessities, this ensures differentiation from a pure commodity offering, whereas in terms of luxury, it broadens the market beyond a niche “nice to have” service.
Here are some examples:
| Price | Convenience | |
|---|---|---|
| Curation | Cosmetic boxes e.g., Birchbox Curation of beauty products allows consumers to try premium brands at a lower cost (due to the collective scale provided by the curator), while also building an interesting marketing play with suppliers. | Streaming video e.g., Netflix In an era of cable cutting and an infinite choice of what to watch, there is an advantage to turning on a trusted service and letting them serve up what they think you want. |
| Personalization | Mail order contact lenses e.g., Waldo Contact lenses are a benign product but one that must be customized to a user’s prescription. Buying directly from the factory cuts out the optometrist middleman and thus provides price benefit. | Health consultations e.g., Babylon Health Offering fixed-price access to personal medical consultations and advice is a unique benefit that has strong bespoke convenience for consumers. |
2. A Trust Bond
Customers who use SaaS rely on the vendor to provide ongoing software support or they will leave. This dynamic keeps both parties in a healthy relationship with aligned incentives.
Can you say the same for the majority of consumer-facing subscription businesses? It’s definitely more speculative to believe that benign consumer staples can have continuous product improvement and innovation cycles.
Instead, a subscription is frequently used to capitalise on apathy. Unlike SaaS products, where usage benefits the vendor by providing first-hand feedback on what is useful and what is not, consumer subscription businesses sometimes benefit the most when consumers do not use the service. Profiting from apathy is not a sustainable business model.
Including a social impact component in the business can help to strengthen the trust bond. In the United Kingdom, there are companies that sell boxes of “wonky” vegetables that don’t fit supermarkets’ ideal aesthetic for the perfect carrot. More customers not only allow the company to reach more farmers, but they also enable the company to reduce food waste.
3. Buffet-like Sensations
Buffets with all-you-can-eat options exist because they make money. They feed on the consumer’s irrational greed, which leads them to believe that by consuming more, they will gain more utility than the other diners. Nonetheless, the buffet will make a profit over time.
When there is some element of this buffet mentality, consumer subscriptions work. If an all-you-can-eat subscription provides the user with utility and satisfaction, their evangelising of the service will attract more diners.
Consider Spotify: a song earns an average of $0.0072 in royalties per play (based on the previously disclosed range of $0.006 to $0.0084). The service costs $9.99 per month, which means that 1,388 songs are “included.” To listen to 1,388 four-minute songs, a user would need to spend 92.5 hours per month, or slightly more than three hours per day, on the service. Based on this, I can say that Spotify is profiting from me, but I also believe it is a great value service, even if I don’t get my “maximum utility” from it.
This, I believe, is what distinguishes the trade-finance subscription businesses from those that will endure. The main reason consumer product subscriptions are so difficult to get right is that it’s difficult to achieve that “all you can eat” mentality in an analogue context. Here are some examples of those who do:
- ClassPass: While not “unlimited,” the bundled pricing of gym classes appeals to users.
- Amazon Prime has mastered the free delivery hook, which encourages customers to purchase more.
- Unlimited data cell plans: If users use too much data, they will eventually be throttled.
What’s the Next Craze?
Building a business to appease investors you hope to attract one day is a risky path to take in the evolving journey of business-building gamification. One way this happened was by following the SaaS gameplan of demonstrating recurring revenue metrics. Now, in 2020, in the post-WeWorkian aftermath of chasing profits over growth-at-any-cost hyperscaling, the bar for consumer goods startups has been raised even higher.
The macroeconomic environment for consumer eCommerce is extremely challenging. The omnipresence of large aggregators such as Google, Facebook, and Amazon serve as market gatekeepers, charging advertising fees and owning customer relationships. Because of these conditions, many consumer goods companies are forced to compete on pricing and differentiation.
The Rise of the Rundle
As a result of such aggregation, the necessities of “price” and “convenience” can quickly converge into easily replicated commodities. Large tech behemoths are now capitalising on convenience by constructing recurring revenue bundles – rundles- subscription offerings, effectively making them a one-stop shop for consumers. Consider how Apple expanded from Apple Care to Cloud, News, Music, TV, and Games in just a few years. All of this additional revenue and attention provides a flywheel of momentum for them to attempt ever more audacious feats, such as taking on Hollywood and Detroit at the same time.
As a result, I anticipate that the next wave of consumer startups will concentrate on the curation and personalization aspects of recurring revenue products that are more difficult to clone and are more bespoke by nature. Subscriptions are successful when they can provide incremental value to customers over time. Someone smart will figure out how to do this in a scalable way for consumer products one day.
It can be difficult for new brands to find organic customers online. In addition, I believe that an old-school, offline component of hyperlocal marketing will become de rigueur. Finding customers in their everyday lives and then serving them online, outside of mass-market aggregator ecosystems, may be the most viable path forward.
Conclusion: Fatigue Subscription Business Model
The fatigue subscription business model is a promising approach for companies that provide products or services that require regular replenishment or maintenance. By offering a subscription model, companies can create a predictable revenue stream, increase customer loyalty and retention, and reduce customer acquisition costs. Additionally, customers benefit from the convenience of having products or services delivered regularly without the need for repeated purchases or appointments. However, companies must be mindful of potential challenges such as subscription fatigue, pricing, and the need to constantly deliver value to customers. With proper planning and execution, the fatigue subscription business model can be a win-win situation for both companies and customers.