In the fight for business survival, brands today are under more pressure than ever to shift the way they approach customer experience, which has given rise to some great innovations and new approaches to delivering value to customers on their terms – most notably, the Subscription Economy.

Although not new (think paperback magazines and newspapers), the concept of subscription-based business models is back in fashion, thanks primarily to the immense success of services like Netflix, Spotify, and Amazon Prime, just to name a few.

Essentially, instead of highlighting a particular product or service, a brand adhering to a subscription-based model focuses mainly on the needs and wants of its customer. According to this school of thought, people want fulfilment on an “anywhere, anytime” basis – all without the physical and financial burdens of full ownership, such as outdatedness or depreciation.

While rental businesses also address these needs, the subscription model goes far beyond; by harnessing the data collected from subscriptions, brands can create a personalised service that will resonate with new and existing customers by getting to know who they are, what they like, what they view and what they buy… the ultimate purpose of which is to form an ongoing relationship that gets better over time.

What is the Subscription Economy?

The term “Subscription Economy” refers to the business landscape where brands operate under a subscription-based model as opposed to a pay-per-product (or service) structure. A subscription model moves away from fulfilling individual sales and transactions, instead focusing on ongoing service delivery that customers subscribe to on a periodic basis.

Subscription-based business models succeed because of the win-win situation they provide for both parties. From a business point of view, the model guarantees a regular revenue stream, while from a customer perspective, it provides the flexibility to consume products/services without the obligation of ownership or a long-term contract.

However, this success has not been without collateral damage. March 2015 marks the date when Netflix launched in Australia. At the time, it was widely publicised in the media and welcomed enthusiastically by viewers. This date also signified the beginning of the end for Blockbuster Video nationwide – in the space of less than two years, 97% of all stores closed down, with only 12 outlets remaining to date.

There’s no doubt that the subscription economy is responsible for disruption across a huge range of markets and industries. But the question remains – is it here to stay, or will another business model take its place in the near future?

 

Is the subscription economy growing? The answer may depend on your age group.

Although the subscription business model is thought to have been pioneered by the publishing industry, we often see its applications across a variety of other sectors.

  • Utilities: Mobile phone & internet providers
  • Insurance: Private health & vehicle insurance
  • Services: Pre-packaged meals, local gym memberships

It’s not immediately apparent, but the subscription economy is actually more widespread than we’re led to believe. Yet anecdotes such as how Spotify managed to grow from 6 million to 50 million paying subscribers in less than 4 years regularly remind us that there is undeniable and continuous growth in the subscription economy.

However, this growth isn’t exclusively driven by a particular brand, product, or service. It’s driven, in fact, by two distinct consumer bases, namely the people of Gen Z and the Silent Generation.

Australia embracing subscription

An ANZ-specific survey conducted in December 2016 showed that a typical Australian or New Zealander spends an average amount of $660 AUD per month on recurring goods and services. When broken down into age categories, it becomes apparent that Gen Y and Baby Boomers were the biggest spenders on subscription experiences, but were likely to maintain a similar level of consumption and spend over a 4-year forecast (i.e. no growth in expenditure expected).

This finding should pose no surprises, as we would expect people of these age groups to be well within their professional careers and spending their disposable income.

The not-so-silent growth

The study also revealed that the Silent Generation (age 71+) was the second fastest growing of the emerging spenders, estimated to increase spends by 15% on subscription experiences by 2020. One in three people in this bracket have signed up to a subscription experience – and this number is expected to grow at a faster pace than even the Millennials. Over a one-year span, 37% of Silent Generation have subscribed to goods and services platforms, compared with less than a quarter (23%) of Gen Y.

Factors that will gradually push the Silent Generation to increase their expenditure over the long term include flexible contracts and real-time customer support at any time and on any device. Addressing these barriers to uptake will provide opportunities for more subscription-based businesses to deliver services to the Silent Generation.

Getting ready for Gen Z

In a digitalised world, Gen Z has been a core driver around the globe for subscription-based goods and services, especially for premium rich-media assets that span across more than one device (e.g. smartphones, tablets, gaming consoles, even wearable devices).

In the ANZ market, the aforementioned survey states that 75% of Gen Z have subscriptions for goods and services, and have held them for more than two years.  And as they grow older and obtain more disposable income, they’re predicted to increase their spending on subscription products and services by more than 30%.

Gen Z’s expectations are somewhat different from those of other customer segments. They’re digital natives, and accustomed to having their expectations and demands met, from unlimited access to real-time upgrades and flexible exit options. These factors offer strong indications that enterprises should focus their goods and services on Gen Z, because these services may be subject to greater churn.

The full report by Ovum can be accessed here.

How to leverage the subscription economy to enhance your marketing

The subscription economy is thriving, powered by real-time data and insights on customer activity, and there is only more room to grow. Businesses now have a wealth of data about their customers and how they interact with their brand. This sets the foundation to deliver the quality customer experiences necessary to grow successful subscription businesses.

Brands that want to succeed in the subscription economy need to orient themselves around customers, rather than products. It’s also critical that they understand how services are being used and, based on this insight, create compelling customer experiences. It all comes down to the customer – not the product, not the technology, not the business or the brand.

This shift requires new models of thinking and new flexible systems, and it won’t be without its own challenges. Change is never easy but, in today’s constantly changing business environment, your brand’s success may depend on it.

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Edward Park

Edward is a Performance Analyst at iProspect Sydney. He is part of the Paid Media team and works across major Technology and Hospitality clients. Using data-driven marketing, his aim is to provide solutions for businesses to stand out in their field and encourage sustainable growth for long-term development.