11th April 2022
Rise of Subscriptions and Continuous Payments
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The subscription model has been around for a long time and was growing even before the pandemic. In the past, the focus was on goods, but as our economy shifts online, more are becoming dependent on services, like delivery and streaming video. It’s easy to see why subscriptions took off: the ease of a continuous payment plan takes much of the cognitive load off of the consumer and by splitting the payments up by month, force people not to think about the long-terms cost.
Brands are putting more emphasis on subscription offerings. Apple has long pushed their hardware like phones and computers. But recently Apple TV, News, Fitness, Podcasts, and games are making up larger parts of their revenue streams.
The idea of ownership has also been upended by the rental market. Once reserved for large goods like cars and appliances, now we can rent everything from furniture to clothing. That’s especially appealing to young people who live in smaller spaces and are more concerned about their environmental impact. This younger cohort has lived most of their lives under the idea that access trumped ownership. Why buy a DVD that you’ll only watch once a year?
Even restaurants like Taco Bell are offering subscriptions as a way to continuously generate income. This model also offers a constant touchpoint with consumers, entrenching their loyalty to the brand throughout the year, instead of a one-off purchase. These continuous engagements then provide additional data that the company can use to personalize the experience or monetize.
Consumers are also increasingly turning to payment options like buy-now-pay-later (BNPL). Popular with younger shoppers and those with insufficient funds, BNPL offers a way to delay payments without interest. Valuations of these companies have skyrocketed since the pandemic, and retailers and banks are jumping into the fray. It’s a no-brainer why retailers are excited: shoppers are spending more and there are fewer abandoned carts.
But as anyone who has tried to get out of their gym memberships will know, it can be difficult to extract yourself out of your contract, so regulators are stepping in to help. Another downside is that having different offerings for paid subscribers will stratify those who can afford to pay. Those who cannot, will be relegated to lesser services and products.
There are signs that some consumers have reached a plateau, as video subscription services like Netflix and HBO Max are seeing slower growth despite people staying in more. Many platforms are looking for alternatives like free ad-based tiers to win over new members.
But the ease of use has many concerned: some believe that there simply isn’t enough room in the process for people to truly understand the ramifications of their purchases, pushing many to live above their means.
As more of our lives are being turned to continuous payments, we lose the sting of single purchases, instead, delaying and spreading the pain of paying to our future selves. Consumers are also becoming frustrated as content is further divided across different platforms and subscription fatigue begins to settle in.
Key Implications for Brands
- Expectations of ownership has changed, but many customers have reached a plateau on how many subscriptions they own. To get people to subscribe, you have offer a unique value proposition or provide an immediate value that others don't have. But problems like churn and cost of acquisition can quickly over overrun its benefits, so you always have to monitor and evaluate consumer’s satisfaction and adjust accordingly.
- The tiered payment systems have segregated populations by income, entrenching some to certain content others aren’t exposed to. Lower priced or free ad-based tiers may not reach higher income consumer’s, and brands will need to look at other ways to reach them like self-produced branded content.
- Newer payment methods like buy-now-pay-later are moving away from traditional credit rating models like FICO in favor of their own models that better predicts credit worthiness in the short term for installment payments. By challenging the long held industry standards of using FICO to rate a customer's credit, these new financial institutions are able to win over audiences that have historically been overlooked, such as students, immigrants, and the underbanked.