Subscription businesses have been around for ages: think newspapers, library memberships, cable TV, even the milk bottles that used to arrive at your doorstep. Yet suddenly, they are in the news again and reportedly growing at 18% CAGR, nearly 300% between 2012 and 2018. What explains this boom?
A major reason is that the world is changing and with it, consumer behavior: what we buy, where we shop, how we choose and how we pay. Here are 4 interesting trends in consumer behavior that are fueling the growth of subscription businesses.
#1 Convenience in a time of plenty
The customers of today have choices in every aspect of life, from what kind of toilet paper to buy to where to listen to the best podcasts. But such a world can also be very noisy (and not just literally).
Brands are vying for customer attention everywhere: following them online with targeted ads, pushing notifications into their smartphones and beckoning to them from supermarket aisles. All this can result in a paralyzing situation of decision fatigue. How many of us, after all, want to decide what brand of shaving cream or diapers or dog food to buy every single month?
For customers fatigued by decision making, the biggest attraction of subscription businesses is how simple they make the purchase decision process. When buying a subscription product, a customer needs to go through the early stages of decision making (discovery, awareness, intent) only once. After they set up payment (also easy and one-time), the product or service will be delivered to them at regular intervals with no additional effort.
#2 New experiences, delivered regularly
Surprise is the most powerful marketing tool, digital strategy veteran Scott Redick wrote in HBR back in 2013. “Surprise is like crack for your brain,” he said, “Studies have shown that people are designed to crave the unexpected.” A number of subscription businesses have certainly taken this to heart and the success of their models proves that there is definitely something here.
With data and technology making much of our everyday lives predictable (someone’s availability, the traffic situation, weather conditions), brands have a tremendous opportunity to capture their customers’ attention by surprising and delighting them with new products and experiences. Take, for instance, Sephora’s Play! beauty box that sends you six full-size samples from their top brands. More examples include Hygge Box (sends a box of ‘coziness and happiness’) and KiwiCo (delivers a new STEM/Art activity box for your child) every month.
In this regard, subscription businesses have a definite advantage over traditional models. While traditional businesses get one chance to retain their customers, subscription businesses get multiple chances, practically every month.
#3 Personalization and curation for the win
As recently as twenty years ago, businesses had products they wanted to sell and they looked at customers as ‘market segments’ who would purchase these. But today, the nuances of customer preferences influence a number of brand decisions including product features, packaging, brand experience and advertising.
Customers seek and often pay a premium for personalization and curated experiences. According to the 2018 ‘The State of the Subscription Economy’ report by McKinsey, 55% of all subscriptions are curation-based and 28% of subscribers say that the most important reason for continuing their subscriptions is a great personalized experience.
Through advanced analytics and AI, subscription businesses make effective use of their customer data to customize and curate their offerings. Since customer lifetime is typically higher for subscription businesses, the companies are able to learn more about their customers and design better experiences for them.
#4 The rise of the Rental Economy
The previous generation was raised to save money and invest it for the future, but millenials are different. On one side are the cash-strapped millenials who resort to renting simply because they cannot afford to own. But there’s another growing section who think and act differently, with catchphrases like YOLO defining their attitude to life.
“They don’t necessarily want to commit, but they have disposable income and they want nice brands and want nice furniture and they appreciate good design.” Neela Montgomery, CEO of Crate & Barrel
These millenials prefer to live in the now and not worry about the future. With this comes their aversion to ownership. From where they live (Stoop) and how they commute (Uber, Lyft) to the furniture and appliances they use (Fernish, Joymode) and what they wear (Le Tote, Rent the Runway, Tulerie), millenials have the option to design their entire lifestyle around rentals. This bodes well for subscription businesses who tap this segment by offering these products/services for a recurring fee.