Purchase vs subscription models

In recent years, many markets have shifted from a model of one-off purchases to subscription models.

  • One-off purchases involve a single transaction and the consumer gets a product permanently
  • Subscription models involve monthly transactions and the consumer gets the product for only as long as they keep paying.

For example, we used to buy records and CDs, now we subscribe to music services like Spotify and Apple. We used to be able to purchase software, e.g. Adobe Photoshop, now the product is sold as an annual subscription with automatic updates from the cloud. The advantage to firms is that it can enable a continued revenue stream and less need to always make new sales. For consumers, the initial payment is lower making services seem more affordable, but over time, we can become locked into contracts, which we don’t use much or end up paying more than we used to.

Whether a business chooses subscription or one-off purchase depends to a large extent on the product, but in recent years there is a clear trend to trying to move to subscription-style services.

Advantages to business of subscription-style services

Regular payment. Generating subscribers can be a powerful way to build a regular income. For example, new business models like Netflix and Hulu have developed impressive revenues from the monthly subscription. In 2019, Netflix gained total revenues of US $20.156 billion (2019)

Less intimidating than a large one-off payment. To buy a suite of Adobe products, could cost several hundred pounds ($699). A price that could put off many consumers. By contrast an annual subscription comes in at less than $120 a year.  ($9.98 a month) When marketed as monthly payment $9.98 it is a psychological effect of appearing affordable.

Raises more for charities. Charities find the most effective fund-raising is not one-off donations but building subscriptions. Charity subscriptions also make the donor become more connected to the charity. If you give a one-off donation to the Red Cross, it will fade from your mind, and next time you may give to a different charity. But, if you sign up to monthly donation, then you develop a different relationship with the charity – they are able to send monthly newsletters and this sense of commitment to charity can encourage more donations over time.

Frequent subscription encourages consumption. Evidence suggests that if people make monthly subscriptions it can actually encourage them to consume more – to get their money’s worth. By increasing consumption, it encourages brand loyalty and makes consumers more likely to re-order. The Harvard Business Review notes the case of a Colorado gym that offered payment by annual, monthly or quarterly. Their findings showed a clear link between making payment and then using a gym. It is related to behavioural economics and how consumers do value sunk-cost payments. When we pay for something, we want to use it to feel we got ‘value for money’ and we didn’t waste anything. The hope is that getting consumers onto subscription payments will provide a reminder to use the product and get value from it.

Free monthly trial. A subscription service makes it easy for a firm to offer a free monthly trial (as long as you give credit card details). This means that there is a strong hook to get consumers to give the product a try.

Inertia effects. Once we have a subscription to a service paid by direct debit it is easier to keep the customer paying because of consumer inertia and not wanting to make effort of change.

Brand loyalty. Amazon are now increasingly offering products as monthly subscription rather than one-off purchase. For example for office products like printer cartridges, the monthly subscription fee offers a discount on a one-off purchase. The advantage for the firm selling is that once on monthly subscription they won’t be switching to rival firms as easily. Printer companies are also trying similar deals where they automatically send new cartridges just before the ink runs out. If you buy one-off cartridges you may be more likely to buy compatible ink cartridges or refill with ink.

Disadvantages of subscription

May discourage consumption. Although it is good for business, consumers may become burnt out from having to sign up to more subscriptions. When looking for say theme for a website, I’d only choose one with a one-off payment. I try very hard to resist subscription payments as it is always difficult to disentangle yourself.

Requires different product with continual advantages. With a subscription, there is greater need to add more services. For example, a service like Netflix needs to keep producing content which will keep subscribers engaged. For a successful firm like Netflix this is fine, but not all business models can maintain constant upgrades and new offerings.

Can be hard to get consumers to renew. It depends on the product, but some subscriptions can be hard to renew. For example, 50% of magazine subscribers do not renew for more than a year.

Administration costs of checking usage. With subscription models, the firm will have more administration costs in collecting regular payments but also monitoring whether those who have paid continue to get access. For some subscription services, a consumer may be able to get most of the benefits for only paying one-month of subscription.

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