Subscription Economy: New pricing model for the future
Friday August 14, 2020,
4 min Read
New dimension of "Customers doesn't want quarter inch drill, they want quarter inch hole"
If customers require ‘quarter inch hole’ drilled for once or twice, will you sell the drill or rent it?
Companies are now shifting from providing high quality and free maintenance to owning the maintenance. Many companies are already experimenting subscription pricing model.
According to Zuora Inc., subscription revenue grew by 350% or more, in the last seven and a half years. Gartner predicted that by 2020, 80% of historical software vendors will offer subscription based business models. Even during COVID 19 pandemic, many companies have seen increase in customer acquisition, because of their subscription models.
Image: Impact of Subscription based businesses due to COVID-19
Source: Zuora Subscription Economy index
Image: Growth of Subscription based businesses in last 7 years
Source: Zuora Subscription Economy index
Near to dear customer
Subscription business model works well, only if the companies maintain good relationship with their customers. More than product, subscription model depends on people. Subscription models allow companies to move from products to service and can also have direct access to customers. This provides an opportunity to have good relationship with customers. Also, with frequent interactions, companies can understand customer requirements better than before. Subscription pricing structure can also increase customer lifetime value.
Subscription business model will have recurring revenue. They can maintain healthy cash flows. Moreover, customers don't have to worry about maintenance or repair costs. Rolls Royce with its ‘TotalCare’ program charges aerospace customers per hour, for their engine maintenance, where customers don't have to worry about maintenance of engine because Rolls Royce engineers will be monitoring the engine. This helps in obtaining constant revenue and increased customer satisfaction.
Convergence of subscription and sharing model
The difference between subscription model and sharing is, about who owns the asset. If one subscribes for a car service, it becomes company's responsibility to follow the required standards and provide maintenance. In Rolls Royce TotalCare program, with the help of big data, company can adopt preventive maintenance, which conserves the life span of the equipment and lessen the likelihood of it failing. Sharing model helps in reducing underutilization of assets, although both models lead to maximum utilization of assets.
With the help of digital technology, health care has seen a change in the trend i.e from doctor appointments to yearly subscription fee. Instead of having appointment fee for every consultation, customers pay yearly fee. Practo, a medical startup from India, provides a platform that allows patient to pre-book doctors’ appointment. Having a premium membership (Practo plus) allows users to have unlimited online consultations with more than one doctor. Poland based Medicover has subscription packages ranging from basic to elite, with increase in access to special features and consultations with many number of doctors.
Hyundai in collaboration with Revv, allows its customers to rent a car during week days or weekends instead of purchasing it. Customers can enjoy riding various models of cars instead of one car. Indian EV startup Revolt motors allows customers to pay monthly fee for their Electric bikes and customers can get unlimited maintenance at free of cost. One major drawback here is, customers may not experience the sense of ownership. This transformation of selling product to providing ‘Equipment as a service’ is an example of how subscription economy can disrupt many industries.
In India, number of OTT platforms are increasing substantially. Industry was once dominated by Hotstar, Netflix and Amazon Prime. But recently Zeetv, Sunnxt, MX player and many others have increased the competitiveness in the industry. With the content being diversely available on many platforms, customers might lose interest on single platform subscription and might lead to subscription fatigue.
Major demerit of subscription model is that conglomerates can create an ecosystem, where the entry of new players is largely restricted. They can collect more data and create more personalized experience as they already have huge customer base. This helps them in creating a feedback loop with this ecosystem model. For example, Amazon Prime Services include same, one or two-day delivery and streaming music and video etc. Due to their presence in various industries, customers can avail these services at lower cost. This attracts more and more customers, creating a competitive advantage.
Therefore, companies should re-consider their pricing strategy and check on how subscription based pricing can benefit both customers and the company. Creation of new economic moats with innovative services is necessary to avoid subscription fatigue of customers impacting the company.