kae subscription white paper
DESCRIPTION
Overview of the global trend towards subscription based businessTRANSCRIPT
What’s driving the global subscription economy?
SECRETSOFSUBS-CESS
1 Introduction 3
2 Whatarethedriversofsubscription? 5
3 Whatmakesasuccessfulsubscriptionsbusiness? 7
Thekeysuccessfactorsofsubscriptions
Challenge&choice-makingsubscriptionsworkinmusic–Spotify
Challenge&choice-makingsubscriptionsworkinvideo–Netflix
4 Thefutureforsubscriptions 12
Contents
K AE SecretsofSubs-cess Contents 2
1Introduction
TheCustomerStrategyteamatKAEhasspentsometimeassessingthehealthofthesubscriptionbusinessmodel,bringingtogetherourprojectexperiencewithashallowdiveintosomecasestudiesofthosebrandsthathavemadesubscriptionscentraltotheiroffering,includingSpotify,Netflix,SkyandVirgin.
Despitebeingaqualifiedsuccessstory,thesubscriptionmodelcontinuestobeanenigma.Aswewrotethispaper,newsbrokethatYouTubeistolaunchapremiumsubscriptiontierforvideocontent(inadditiontoitsscheduledMusicKeyservice).Buthavingahugebaseofusersforfreeisnoguaranteedplatformforbuildingaviablepaid-forservice.Willingness-to-payneedstobeestablishedamongabroaduserbase(i.e.beyondinnovatorandearlyadopterconsumers)–butatapricehighenoughtosustainabusinessmodelthatcarriessignificantcosts(contentacquisition,technologyandservicingcosts).
ArecentstudybytheIAB(InternetAdvertisingBureau)intheUK(perhapspredictablyforanadvertisingassociation)suggestedthatwillingnesstopayforcontentsubscriptionsispresentinthemassmarket,butonlyatverylowprices.UKadultsarepreparedtopayanaveragepriceofonly£1.10permonthforvideocontentand92pamonthtoaccessnewswebsites,accordingtothestudy.Thesurveyofmorethan2,000adultsfoundthatconsumerswerepreparedtopayevenlessforsocialmediaandonlinegames.
Because of highly sensitive factors like willingness to pay, price and costs, subscription is a notorious business model to get right when it comes to profitability. In this private white paper, produced for KAE clients and close contacts, we explore what it takes to get subscription right, and how the future looks for one of the most popular business models of our time.
K AE 1Introduction 3SecretsofSubs-cess
Forthispaperweconductedsecondaryresearchcoupledwithsomeexpertandexecutiveinterviews,coveringthefollowingbrands:
Subscriptions have spread across many sectors Overthepastfiveyears,thesubscriptionmodelhasbecomethekeydriverofentertainmentcommerceandproductinnovation,drivenbythesuccessofmajorplayerssuchasSpotifyandNetfl ix.Gartnerhaspredictedthat35%oftheglobaltop2000companieswillhaveasignificantcontributiontotheirrevenuesfromsubscriptionsin2015andthatthetotalrevenuesfromSaaS(softwareasaservice)productswilltop$22billionthisyear.
Inthesoftwarebusiness,subscriptionhasbeenthepreferredcommercialmodelofsuppliersforsometime,ledbySalesforce.BothMicrosoftandAdobehaveshiftedtheirbusinessmodeltosubscriptionrecentlytoo.
Butthesubscriptionmodelhasspreadtomorebusinesssectorsthanyoumightexpect.Gamesconsoleplayersarerampinguptheirsubscriptionofferingsinanattempttobuildlong-termcustomerrelationshipsaswellasmanagetheformatshifttoonlinegaming.
‘Subscriptionboxes’–forbeautyproducts(e.g.Birchbox)andfood(e.g.Graze)–havebeengrowingintheUSandUKmarkets.OurfavouriteistheDollarShaveClub(“agreatshaveforafewdollarsamonth”)–doingwellintheUSdespitethebeardyrevival.Thesesubscriptionboxplayersareinteresting,notleastbecausetheyareproductbased,requiringaphysicalfulfilmentdimensionontopoftheothersubscriptionbusinesschallenges.Theirstrategyistoownasliceofanyparticularcategory–forexampleGrazehasfocusedonhealthysnackingandbreakfast–competingwithsupermarketsandfoodchains.
Mostindicativeofallthatthesubscriptionmodelisadaptableacrossproductcategories,iscars.ApartfromsuccessfulnewcarrentalbrandslikeZipcar,mostcarbrandsaregrowingtheirleasebusinesses.Accordingtoautomotiveblogs,morethan50%ofBMW’ssalesnowcomevialeasing–aformofsubscriptionalbeitwithcontractcommitment.
The‘subscriptioneconomy’isalsopoweringdigitalcommerceplatformandcloudtechnologyproviders,suchasZuoraandAvangate,sothereisagrowingB2Beconomybehindthetrendaswell.
K AE 41IntroductionSecretsofSubs-cess
2What are the drivers of subscription?
We’vetakenadeepdiveintothesubscriptionmodelatKAE,acrossallsectors,usingplayersbothnew(includingNetflixandDropbox)andestablished(includingo2andSky),ascasestudies.
Thesubscriptiontrendisnotdrivenbyspecificindustryconditionsorcharacter(seeboxonpage4),sothereisverylittleholdingthemodelback.Wediscoveredtwocorephenomenabehindthegrowthofthebusinessmodel.
Thefirstisawell-balancedformulaofsupplier‘push’andconsumer‘pull’.Often,withtechnologydrivengrowth,suppliersdrivemarketgrowthbeforeconsumersareready(asdemonstratedbyGartner’stechgrowthmodel,the‘hypecurve’),butthesubscriptioneconomyisbeingfuelledbyaplentifulsupplypushalongsidea
naturaldemandpull.Thedemandstemsfromconsumers’desireforasimple,non-transactionalrelationshipthatprovidesthemwithmorevaluethanthesumofthetransactionstheywouldnormallyexpecttomakeinthegivencategory.
Theexampleparexcellenceismusic.ConsumerspaythesamepermonthonSpotify($9.99)aswhattheywouldpayforonealbumdownload(orCD,ifanyonestillbuysthose).ButwithSpotify,theypayforaccesstoamassivecatalogue,playablefromanywherewithawirelessconnection,oronanydevice.Theonlydownsideofcourse,isconsumersdon’townthemusic–somethingthatcauseddebateaboutthevalueof‘rentingmusic’intheearlyyearsofmusicsubscriptions,butisperfectlyunderstoodandacceptedbyconsumersnow.
K AE 1Whatarethedriversofsubscription? 5SecretsofSubs-cess
• Increased predictability of revenue
• Better tracking of revenue and cost (i.e. cash position)
• Technology changes in the software industry (SaaS)
• Demand for more flexibility and pricing options
• A relationship beyond the transactional
• A way of avoiding abundant choice
Supplier Push Customer Pull
A well-balanced formula of supplier ‘push’ and customer ‘pull’ – subscription offers a clear set of benefits to both suppliers and consumers
Forexample,suppliersbenefitfromaregular,predictablerevenuestreamandconsumersgainadifferentwayofaccessingandchoosingtheproduct,withthestressoftransactionalshoppingtransformedintoaconvenience
K AE 6
Thesecondmajordriveristheglobalnatureofthesubscriptionmodel,particularlytheaggressive‘worlddomination’strategiesofmajorsubscriptionplayerslikeNetfl ix,Spotify,Adobe,Microsoftandothers.
Inaddition,somebusinessesareintroducingsubscriptionaspartofaportfolioofofferings(andthereforerevenuestreams).Thisisthecaseinpublishingforexample.Following
thesuccessoftheFTandEconomist,mostmajornewsbrandsarenowpushingtheirsubscriptionofferswithacombinationofdigitalandphysicaleditions,plus‘experiences’–suchastheGuardian’s‘Masterclass’series.
Whetherpartofglobaldomination,oradefensivemovetodiversifytheportfolio,subscriptionseemstobepartofthegrowthstrategyofnumerousbusinessesinadiversesetofsectors.
1Whatarethedriversofsubscription?SecretsofSubs-cess
Subscription strategies go way beyond a shift in the pricing model, requiring clear market positioning, single-minded strategy and ruthless, operational excellence
Forexample,newspaperpublishersarecurrentlymanagingthetransitiontodigitalsubscriptions–albeitwithverydifferentstrategies.TheTimeshasstucktoitsgunsbykeepingitscorecontentwithinapaywall,whereastheGuardianhaskeptitsdigitalcontentfree(advertisingfunded)andismarketingsubscriptionsbasedonadditionalfeaturesandpartnercompanyoffers
GLOBAL
LOCAL
SINGLEPRODUCTPORTFOLIO
Balance•One-price•KPI:ARPU•Mixofsubs+advertising•Manageablerisk
Adapt & broaden•Modularproduct&pricing•Mixofsubs+ala
cartemodels•KPI:ARPU/
productsperuser•Mediumrisk
Scaleplay•Freemiumtier•One-price•KPI:premiumsubs•SupportedbyB2Bpartnerships•Highrisk
Sustainable growth•Discounttrialmarketing•KPI:revenues&margin•Member-get-member•Physicalfulfilmentoftenrequired
(hencelocalmarketoffer)•Mediumrisk
3What makes a successful subscription business?
Thereareclearriskswithsubscription,particularlyforthosebusinessesattemptingtoshifttosubscriptionafteroperatingadifferentmodel.Subscriptionisnotjustanewwayofpricing.
Withsubscription,acompleteoverhauloftheoperatingmodelisrequired.Acrosspeople,systems,processesandstrategy,organisationalresourcesneedtofocussingularlyaroundvalueprovisionandcustomerexperience.Asputbyoneexecutivewespokewithinanestablishedsubscriptionbusiness:
“Youareaskingforalotofmoneyeachmonth,sotheorganisationmustbehavelikeit!”
The key success factors of subscriptionsThemorewelearnaboutthesubscriptionbusinessmodel,wefindthatorganisationalcompetencesareakeydriverofsuccess,sowechosetoexplorethisinmoredepththroughaseriesofshortcasestudies.Successfulsubscriptionplayersseemtohaveadifferentphilosophyofdoingbusiness,andaspecificskill-setinmanagingthecustomerjourneythroughtheclassicstagesofacquisition;retention;loyaltyandchurn.
K AE 3Successfulsubscriptionbusiness 7SecretsofSubs-cess
1. Strategic use of KPIs Withsubscriptions,it’seasytofallintothetrapoflayeringKPIuponKPI–trialusers,conversions,productsperuser,revenueperuser,‘active’usermeasurement,churnetc.WefoundthatbusinessesthatsuccessfullygrewsubscriptionstendedtofocusonjustonecoreKPIatatime,guidingstrategyanddrivingfocus.Forexample,Sky.Foralongtime,Sky’sprimaryfocuswasacquiringnewusers(a10millioncustomerbaseforexample,wasamajorgoal).However,oncethe10milliontargetwasachieved,Sky’sfocusswitchedto‘productsperuser’–drivingthestrategyofcross-sellingquad-playservices.Morerecently,Skyisfocusedonceagainoncustomeracquisition,thistimeforitsdigitalservices,bothwithinitscustomerbase(SkyGo)andinthewider‘OTT’space(NowTV).
2. CRM-centred Inmanybusinesseswherewe’vedonecustomerstrategies,CRMplaysanactiverole,butisverymuchatacticalactivity.CRMstrategycomesafterthecoremarketingstrategyisinplace.Successfulsubscriptionbusinessesareanexceptiontothisrule.CRMiscentraltodecisionmaking,marketing
strategyandthebuildingofcustomerknowledge.Subscriptionbusinessesarebetterat‘customercloseness’thanpurelytransactionalbusinesses.WeexaminedCRMcommunicationslikee-mailandtext,andfoundsuccessfulsubscriptionplayerswerebetteratrelevant,frequentcommunicationsthatinformedorencouragedcustomerstotrynewthingsandstayengaged.
3. On-boarding strategy Inconjunctionwithattractingthebestcustomers,wefoundvariablestrategieswhenitcomestowelcomingnewcustomersandintroducingthemtotheirservicestogetthebestfromthem(again,encouragingnewcustomerstounderstandthevalueoftheirsubscriptions).VirginMediahasanoutstandingapproachtothe‘on-boarding’process,witha‘wowfactor’welcomeandhighlyengaging,informalcommunicationaboutwhatservicesareavailableandhowtotrythem.Withsubscriptionbeingamajorcommitmentbycustomers,thishigh-effortwelcomeprocessisbothimpressiveandreassuringandthebeststarttoalong-termvaluerelationship.
K AE 8
SUBSCRIBE
1. Strategic
use of KPIs2.
CRM Centred
3. On-boarding
strategy
4. Brand-led
5. ‘Whole
product’pricing
6. Customer
Service
7. Product
Innovation
We have identified seven Key Success Factors that make successful subscription players tick:
3SuccessfulsubscriptionbusinessSecretsofSubs-cess
4. Brand-led KAEhasworkedwithmanyproduct-basedcompaniesthatlaunchimpressive,individualproducts,butdon’tdoenoughtocontinuouslyinnovatefortheirbrands.Oursubscriptioncasestudieshowever,seemedtobeproudlyfocusedonbrand.O2forexample,continuouslytopsbrandtrackerstudiesformobile,duetoitsbigbrand-ledinitiativeslikeO2RewardsanditsprogressiveproductslikeRefresh.Likewise,Sky’scontinuousinvestmentinbothcontent(majornewprogrammesandrenewedsportsrights)andinnovation(SkyGO,NowTV)isnicelyintegratedwithitsover-arching‘BelieveinBetter’brandstrategy.
5. ‘Whole product’ pricing Ourdiveintosubscriptionsprovedtousthatsubscriptionisanorganisationaldiscipline,notjustapricingstrategy.However,thepricingofsubscriptionsisinitselfisahighlycriticalfactor.O2hasrecognisedthatpricecomplexityinthemobilespacehashelpeddrivemarginsovertime,butiswearingthinwithcustomers,henceitsRefreshproposition.Skyrecentlyreducedthenumberofcontentbundleoptionsforcustomerstojustfour(atonestagethecompanyhadover100differentlypricedoffers).ServiceslikeSpotifyandNetflixhavestucktotheirgunstokeeppriceassimpleaspossible–justonetierandoneprice.Subscriptionbusinesseshavetobepassionateaboutdemonstratingcontinuousvaluetotheircustomers,andthereforeneedtoconstantlybeawareofhowtheirpricepointsreflectthisvalue.Sinceincreasingpricesisalothardertodothandiscounting,thesedecisionshavetobespot-on.Wecallthisprocess‘wholeproductpricing’asthepricingdecisionissointertwinedwiththeoverallproductstrategy.
6. Customer Service Mostsubscriptionserviceshaveanongoingrelationshipwiththeircustomersviatheplethoraofdigitalchannels–alreadyanadvantageovertransactionalbasedbusinessesintermsofcustomercommunicationandfeedback.Themosttransactionalofbusinesses,Amazon,isanexemplarwhenitcomestoservice.ButAmazon’sshifttosubscriptionviaitsmusic,videoandPrimeserviceswillrequirethecompanytoofferamorebalancedandperhapspersonalisedapproachthanitscurrentlevelofdigitalefficiency.Wefoundthatthesuccessfulsubscriptionplayersutilisedalltheusualtouchpointswell,andinbalance.Tutorials,trainingandrecommendationswerealsoafamiliarpartoftheoffering–oftendonewithgreatcare.Insectorssuchasmobileandentertainmentcontent,newplayerscanoftenenterthemarketdemonstratinganabilitytodisruptcurrentoffersintermsofvalue,socustomerservicecanbecomeakeydifferentiatorfortheestablishedplayers.
7. Product InnovationWefoundaveryspecificcapabilitytobepresentamongsubscriptionleaders,whenitcomestoinnovation.Inaword,steadyseemstobethesecrettosuccess.Ifproductfeaturesaretoonumerous,orloadedtooquickly,customerscangetconfusedorfrustrated.Spotify’sraftoffeaturelaunchesin2013(ledbyanautomaticallyloadedDiscoverpage)wereindangerofalienatingcoreusers,forexample.Sincethen,itsfeatureshaveevenedout,andappeartobemuchbetterresearched.Subscribersappreciatesteady,continuousimprovementsthataddvalue,butkeepthecoreexperiencesimple–thereasontheysubscribedinthefirstplace.
K AE 93SuccessfulsubscriptionbusinessSecretsofSubs-cess
Challenge & choice - making subscriptions work in music – SpotifySpotifywasn’tthefirstmusicbrandtolaunchacompellingsubscriptionservice.BothRhapsody,andalegalisedversionofNapster,hadlaunchedyearsbeforeinarangeofmarketsincludingtheUSA.Butthoseservicesstruggledtoreachthemassmarketwithmusicstreaming.Thetrueinnovatorofthesubscriptionmodelarrivedin2009withafreetierserviceactingasabroadacquisitionfunnelforpremiumcustomers(‘freemium’),andaveryslickmusicplayerappthatallowedfullmobilityforthosewillingtopay.Followingasingle-minded‘globaldomination’strategy,Spotifyhasreached58countriesand60millionusers.
Spotifyhassuccessfullykeptitscorepropositionsimple,whilemakingcontinuousimprovementstoit.Anythingthathasn’tworkedhasbeenquietly,unceremoniouslyremovedfromtheproductportfolio.Ithasmanagedtodivertindustryargumentawayfromchurn–thekillerforearlysubscriptionplayersandstillprobably,forSpotify’speers.
ArecentreassessmentoffreemiumbySpotify’smusicsuppliershas,however,putnewpressureontheservice.Itsconversionratefromfreeuserstopayingsubscribershasbeenwidelybroadcast:15millionpremiumsubscriptionsfrom60millionusers–animpressive25%.Butthishassloweddown,andthemusiclabelsandpublisherswantmorewaystomonetisethebroaderbaseofusers.Sofar,advertisingrevenue(althoughstillincreasing)hasbeenadisappointmentcomparedwiththatfromcoresubscribers.
Spotify’s strategic choicesSpotify’spresentoptionsaretocreaterevenuestreamsthataugmentthecorepremiumsubs.Theseincludelowerpricedtiers,familyupgrades(Spotifyhasrecentlyexperimentedwithits‘Family’productatanincrementalpriceof$14.99),sellingmerchandise(&perhapstickets),andmajorpartnerdeals(Spotifyalreadyhasnumerousdealsinplacewithtelcoprovidersaroundtheworld).
Spotifyhashowevertriedtheseoptions,tosomedegreeofsuccess,butnothingtomatchtheincomefromitscorepayingusers.Itappearstohavealimitedsetofchoices,butsimplyhastokeepitspremiumsubscriptionacquisitionratesup.Moreover,itismorecriticalthanevertokeepacquiring‘real’,committed,customers–thoselesslikelytochurnafteraninitialtrialormobilebundleoffer.
Withorwithoutthefreemiumfunnel,thebiggerquestionis,howcanSpotifycontinuetogrowitscore?Drivingpremiumsubscriptionsintothemassmarketistoughenoughwithlow-costcompetitorslikeYouTubeandPandoraonthemarket,butitwillgetevenharderasartistsgetmorevocalabouttheirdissatisfactionwiththecurrenteconomicsaroundthestreamingmodel.
Itseemsinevitablethatmoreartistswillchoosetowithholdnewalbums(thosethathave,seemtohavedonewelloutofthedecision).AmajornewstreamingcompetitorhasalsoarrivedintheshapeofApple–whichappearstobepushingforwindowedexclusivesfromhighprofileartists.
Spotifyhascrammedsomuchintovalueforcustomersintoitscore$9.99pricepoint,itseemstohavecreatedamassivecommercialchallengeforitself.
K AE 103SuccessfulsubscriptionbusinessSecretsofSubs-cess
Challenge & choice - making subscriptions work in video – Netfl ixFoundedin1997asamailordervideorentalbusiness,Netfl ixisnowavailablein50countries,butwantstoexpandto200withintwoyears.Ithasnowreachedover60millionsubscribersaroundtheworldandcontinuestogrowatanimpressiverate.ItsrecentarrivalinScandinaviaandFrancehasdriventheondemandvideomarketsinthosecountriesandexceededallexpectationsintermsofgrowth.
Whenitstruggledtolicensefrommanyofthemajorfilmstudiosandtelevisionnetworks,Netfl ixmadeamajorstrategicdecisiontoinvestinoriginaltelevisionprogrammes–amovethatpaidoffhandsomelywithHouseofCards,butmayhaveprovedmorechallengingwithMarcoPolo.Inexplainingitsdecisiontolaunchoriginalprogramming,ReedHastingssaidthatNetfl ixwastryingtobecomeHBOfasterthanHBOcanbecomeNetfl ix.
Amazon,AppleandHBOareNetfl ix’sbiggestglobalthreats,alongwithanincreasingnumberoflocalTVnetworksnowlaunchingtheirown‘overthetop’videoservices(includingSky,ITVandChannel4intheUKforexample,alongwithBBCiPlayerofcourse).
IntheUSA,HBOhasrecentlyannouncedanewpartnershipwithAppleforitsownoverthetopserviceHBONow,joiningDishandothermajorrivalsfromComcast,HuluandSony.WhatcanNetfl ixdotodefenditspositionundersuchmajorthreats?
Netfl ix’s strategic choicesDespitethegrowingcompetition,Netfl ixlaunchedearlyenoughtobuildrealmomentum,andhasbecomeamajorforceinonlineviewing.Itstucktoitscorepropositionofpay-only(noadvertising)atavaluepricepoint(originally$7.99intheUSA,increasedto$8.99in2014).Intheprocess,itchangedviewerbehaviours,especiallyforitscoredramaHouseofCards,whichwasmadeavailableinitsentireseries.
Netfl ix’smainbarrierremainsitslimitedcontentcatalogue.Thoughtheserviceoftenespousesbigtalkaboutbigdata,andtheuseofalgorithmstomakecontentselectioneasy,choosingwhattowatchonNetfl ixisaseriouscustomerpainpointbecauseofthelackofcontentavailable.
Netfl ixwillneedtocontinuetoworkaroundthisissuewithanumberofcombinedstrategies.Itwilldoanythingandeverythingtoavoidincreasingpricesagain,havingbeenforcedtodoitonce.Andithassetaclearmissiontoavoidanynotionofanadvertisingfundedmodel.
Netfl ix’sstrategicchoicesaretocontinuetoinvestinmajorTVseriesandmoviecontent,andtoobtaingloballicensingforthecatalogueitcanacquirefromstudiosandnetworks.Itcouldexpanditsgenrestocovercomedy,reality,orevenperhaps,nichesports.LikeApplewilldoinmusic,Netfl ixislikelytouseitsmarketpowertonegotiateforexclusivesfromthosestudiosthatlikethelookofthechequesizes.Withnocurrentglobalsourcefor‘deepVoD’(videoondemand),Netfl ixseemswellpositionedtobecometheplacetogoforlongtail,nicheandarchiveprogrammes.
K AE 113SuccessfulsubscriptionbusinessSecretsofSubs-cess
4The future for subscriptions
K AE 4Thefutureforsubscriptions 12
Weuncoveredasetofchallengesforsubscriptionplayersthatmightmakeithardertodrivegrowthfromnowon.Inparticular,fromthepointofviewofconsumerdemand,twochallengesstandout:
• Potentialsaturation–howmanysubscriptionscanconsumerssustain?
• Risingexpectations–withvaluesuchadriver,cansubscriptionplayersmakedecentenoughmarginstothrive?
Would you like another subscription to go with that?Fromthepointofviewofconsumerdemand,amajorquestionisjusthowmanysubscriptionscaneachindividual,orhousehold,sustain?InTVandfilm,contentisbeingcarvedupamongseveralsubscriptionproviders,somethingthathasheldbacksubscriptionsinonlinegames.InTVforexample,canwereallyexpectconsumerstocarrysubscriptionsfromeachofSky,Netflix,AmazonandApple?Arecontentsupplierspotentiallymissingoutonbiggeraudiencesbynotsupplyingtojustonemajoraggregator?Certainly,recentreportsaboutthevolumeofillegaldownloadsforprimecontentsuchasGameofThrones(season5)suggestthatfanswilldowhatever’s
necessarytoaccessthecontent,withoutchoosingtherequiredsubscription.
However,wheremoreuniversalcontentcoveragedoesexist–inmusicforexample–thismodelappearstobecomingunderseverecommercialstrainsandstresses.Indeed,musicmaybegintolookmorelikevideo,ifSpotify’srivalslikeAppleorTidalaresuccessfulinconvincingartiststoputexclusivesontotheirservicesandwithholdthemfromSpotify.
Ifsubscriptiongrowthisheldincheckthroughthefragmentationofsupply,perhapscontentownerswillmoreactivelypursuewindowingstrategies,managingtheirportfoliosfrommarkettomarketwithacarefulstrategyofbroadcast,pay-per-view,pay-to-ownandfinally,subscription.
Lookingmorebroadlyacrossallsectors,withsubscriptionsbecomingsoprevalent,justhowmuchwillthemodelkeepongrowingbeforesaturationisreached?Moreover,intimesofausterity,wemaylooktothebigticketitemssuchasongoingsubscriptions,inmakingcutbacks.AddtogetherapayTVsubscriptionwithNetflixandSpotify,anaveragemobilepackage,andweareapproachingorevenexceeding£100permonthpurelyonentertainmentandcommunications.
SecretsofSubs-cess
Such great value for customers, can it be good for business?Thesecondchallengefromthepointofviewofconsumerdemandisrisingexpectations.Spotifyhassetthebarhigh–accesstoallmusiconalldevices–forthepriceofanalbum.It’sagreatvaluemodelandamiracleformusicfans,butdoesitleaveenoughmarginforSpotifytobreathe?Andisthereanyscopeforincreasingprices?
ThelowmarginshaveforcedplayerslikeSpotifyandNetflixtogoforglobaldominationstrategiesandthesebusinesseshaveperhapsbecometooobsessedbythedriveforscale,ratherthanfocusonaprofitable,sustainablemodel.Dedicatedsubscriptionplayersalsoleavethemselvesexposedtocompetitorsthatcanaffordtosubsidisecontenttoselldevicesorotherservices–likeAmazon,AppleandGooglecan.Thismakessustainabilityevenharderforstandalonesubscriptionbusinesses.
Intheenditcomesdowntovalue,andthefeelingofattachmenttothesubscriptionfeltbytheconsumer.Isitsomethingtheycan’tlivewithout?Thebusinessesthatthrivewiththesubscriptionmodelunderstandvalue,andarepassionateaboutit.However,whilethefocusonvalueisacoredriverforsubscriptionplayers,havetheymadearodfortheirownbacksbysettingthebartoohigh?
Wepredictthatsubscriptionplayerswillsoonintroduceanumberofadd-onpayextras,orrequireconsumerstocommittocontractterms–likethetraditionalsubscriberbusinessesinPayTVandmobile.Howthiswillimpactcustomervalueperceptionswillbeinterestingtosee.
Staying the course – playing to strengths and exceeding with innovation, service and brandWebelievethereisahighdependencybetweenthreesuccessfactorsinparticular:whole-productpricing,innovation,andbeingbrand-led.Moreconfidentinnovatorsarebetteratbeingbrand-ledandsubsequentlyhavemorecapitalwithcustomers.Thismayallowthemtoprotectpremiumpricing(orincreaseprices)eveninthefaceofheavycompetitionfromupstarts.Wethinkit’salsopossibleforcustomerservicetoplayasimilarroletoinnovation,orpotentiallybeasubstituteforit.Greatservicemayhelppreservebrand,andinturn,sustainpremiumprice.
Market leaders must protect price, requiring a strong brand, underpinned by innovation, customer service or other forms of excellence.e.g. Sky ‘Believe in Better’
Subscriptionisnoteasy.Whileitisn’tpossibletoexcelateverything,wefoundthatsuccessfulsubscriptionbusinessesmasteredatleastthreeofthesevensuccessfactors(sometimesmore),anddisplayedahighlevelofcompetenceordesire,inothers.Theideaoftradingoffsuccessfactorshowever–excellinginsometocompensateforfailingsinothers–doesn’tcutit.Weaknessinjustacoupleofareasexposeseventhebestperformerstotheriskofbeingusurpedbycompetitorsabletoexploittheweakestlinks.
K AE 13
Innovation or Customer
ServiceBrand
Price
4ThefutureforsubscriptionsSecretsofSubs-cess
ThiswhitepaperwasputtogetherbytheKAECustomerStrategyTeam.Forfurtherdetailsandaconversationaboutsubscriptions,acquisition,retentionorloyaltystrategies,contactusasfollows:
Keith Jopling, SVP [email protected]
Baber Ahmed, Senior [email protected]
Salman Sharif, Senior [email protected]
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