Life as a Service: The unstoppable rise of the subscription model

Lucy Ingham 23 June 2020 (Last Updated June 25th, 2020 12:31)

In the past few years we’ve witnessed subscription models spread from the software space to almost every industry vertical. But where will it end? Lucy Ingham hears from industry experts on the future of life built on the software-as-a-service model, and why it may not be as positive as it seems.

Life as a Service: The unstoppable rise of the subscription model
Photo by Brandable Box on Unsplash

In the early days of consumer electronics, when prices were high, renting your radio or TV was a commonplace occurrence. But as technology advanced, prices dropped, and paying a monthly fee for something you could afford to buy outright became less and less appealing for consumers.

But now the idea is returning, wrapped in exciting new branding and an air of disruption, after taking a wildly circuitous route on its journey back to mainstream acceptance.

Several years ago, companies began to increasingly embrace the software as a service (SaaS) model, buoyed by lower upfront costs for customers, widespread connectivity and predictable income. But its success did not go unnoticed by other industries, both in the consumer and business to business (B2B) spaces.

Initially, it was largely digital products that saw benefits in the subscription model, with multimedia products such as Netflix and Spotify on the consumer side, and Amazon Web Services on the B2B side, taking their respective industries by storm. Then physical goods joined in, with brands such as Birchbox in the beauty space quickly followed by services catering to almost every interest imaginable.

Now, the range of goods as services available via a subscription is vast. Clothes, furniture, electronics, vehicles and even food can be accessed via the subscription model, and almost every week a new startup or product launch widens the pool further. Meanwhile in the business space, you can not only access office infrastructure, equipment and software on subscription, but even your employees, thanks to the emergence of labour as a service.

“The subscription model has really taken off over the past five years or so, with some brands – such as Netflix, Amazon and Naked Wines – really cornering the market and setting the standard on how to make it work,” says Mel Tymm, industry principal at Maginus, a company that provides e-commerce software and technology solutions to businesses.

“The subscription economy has grown more than 350% in the last 7.5 years,” adds John Phillips, general manager, EMEA at Zuora, a cloud-based subscription management platform.

“While the idea of paying a recurring fee for a product or service on an ongoing basis is nothing new – gyms, magazines and clubs have been using this model for decades – we’re now seeing a global economic shift towards subscription business models across all verticals.”

Why the subscription model is taking businesses by storm

One of the biggest reasons businesses have so readily embraced the subscription model is that it provides a far greater level of predictability than traditional sell-to-own approaches.

“Subscription business models help drive predictable, linear revenue and can help companies differentiate from the competition – benefits that make them uniquely attractive for companies across the globe,” says Phillips.

“It helps with demand and supply,” adds Tymm.

“Knowing how many members will receive services or goods that month helps to ensure correct stock levels, or shift excess stock if they know that subscribers will like the end product.”

However, there is more to it than that. Subscription models provide the chance for companies to transform their relationships with their customers, gaining levels of insight that would have been impossible in the pre-digital age.“Subscription offerings not only help differentiate a company from its competition, but provide companies with rich customer data to gain a better understanding, and a clearer picture of their customers,” explains Phillips.

Then there is the economic reality: companies using this model are out out-performing their rivals by impressive amounts. According to Zuora’s Subscription Economy Index, companies using these models are seeing revenue growth at five times the rate of the S&P 500.“With the incredible opportunity to scale, it’s no wonder all of these companies are turning to subscriptions,” he adds.

What’s in it for customers

While businesses are seeing the benefits, customers are also getting value out of the model.

“A subscription model can provide the convenience, simplicity and flexibility they are craving. There are also added benefits to the customer that come with offering subscriptions – for example cost savings like with Amazon Prime’s free delivery, or convenience like Graze, which delivers healthy snacks to your door,” explains Phillips.

According to Tymm, simplicity has also played a role in the unstoppable rise of the model.

“This simplicity has no doubt contributed to its success – make people happy and they won’t go elsewhere,” she says.

“It’s also the ability to take away the decision-making process from the customer. If they get what they want on a monthly basis, and perceive that they’re saving time or effort by not having to go and purchase it themselves, then retailers or businesses are able to build a loyal fanbase.”

However, for Phillips, it goes a step further, reflecting a transformation in how the goods we own relate to our wider identity.

“In 2020, people aren’t interested in having more possessions. A lot of this thinking has come from a shift in how we measure success. Traditionally, success was materialistic – a big house, expensive car and the latest wide-screen TV,” he says.

“However, today we’re increasingly chasing experiences instead. There are a number of factors driving this shift, including social media platforms like Instagram driving an increased desire to show off our unique experience, as well an increased push for sustainability and living more minimalistic lives.”

Photo by Wynand van Poortvliet on Unsplash

Waste, freedom and cost: The problems with subscriptions

However, despite the apparent benefits of the subscription model, there are also issues.

In some cases, the growth of the subscription model is reducing or even removing the option of ownership altogether.

This is particularly common for software products, with some popular options, such as Office 365 or Adobe Creative Cloud, now only being available through subscription and therefore impossible to buy them outright. And while this remains unusual for non-software subscriptions, it is likely that we will see this become more commonplace in other verticals.

Add to this the fact that subscription services typically have a strong digital presence that collects considerable data from each customer, and you have a situation where customers are forced to allow data about themselves to be collected in order to gain access to products that they cannot acquire through other means.

This is an issue that noted whistleblower Edward Snowden raised during a talk at Web Summit in November.

“My generation, particularly the generation after me, they no longer own anything; they are increasingly not allowed to own anything,” he said.

“You use these services, and they create a permanent record of everything you’ve done.”

Similar concerns have previously been raised by computer programmer and activist Richard Stallman, founder of the Free Software Foundation, over the SaaS model, which he terms service as a software substitute (SaaSS).

“Unlike proprietary software, SaaSS does not require covert code to obtain the user’s data. Instead, users must send their data to the server in order to use it,” he wrote in an article where he argued that SaaSS is “another way to give someone else power over your computing”.

“This has the same effect as spyware: the server operator gets the data – with no special effort, by the nature of SaaSS.”

Away from spying concerns, renting possessions rather than owning them also removes the safety net physical assets provide.

While it is convenient to upgrade your electronics, furniture or clothes whenever you want, monthly fees require a consistent, reliable income. And if an individual loses their job or is forced out of work due to ill health, in a subscription-dominated world they also face losing their possessions too.

Dangers for businesses

The same is true of businesses. If a company rents all or even most of the assets – physical and digital – that allow it to operate, and gets into a position where it falls behind on payments, it faces losing the tools that enable it to make further income.

Even if a customer can continue to pay, there are other downsides. In cases where they are renting high-value items, they may end up being in possession of a product for a similar period of time to that if they had bought it outright. However, the monthly subscription payment would likely total a larger amount than the ticket price of the item in question, and at the end of that period they would still not own it.

Essentially, then, the subscription model can see consumers paying a higher price for the privilege of not actually owning a product.

There are also more everyday risks for those providing products and services through these models.

“There is a risk to this model, especially when it comes to fashion or perishable goods,” says Tymm.

“Where there is a risk that subscribers may return their goods and ask for their money back, retailers must have covered their costs within the subscription to stay profitable. If not, they risk surplus stock and high overheads.

“There’s also the problem that consumers have a tendency to over-estimate how much they will use a product when they subscribe. Initial uptake is often high, but as customers realise they are not using the product or service as much as they estimated, subscriptions can reduce in quantity or cancellations rise.”

Life as a Service: Towards the post-ownership future

Despite the issues, subscription services are undoubtedly here to stay and proliferate.

According to Zuora’s Nation Subscribed survey, 85% of 25-34 year-olds and 77% of 16-24 year-olds in the UK now subscribe to at least one product. What’s more, 51% and 48% of the same respective age groups now believe subscriptions are the future.

For Phillips, this is a sign that “we are entering the era of usership over ownership”.

“The shift to subscriptions is inevitable. Transactions as a whole are dramatically evolving and we are increasingly reliant upon on-demand services as opposed to the owning physical products. In this new economy, consumers are increasingly demanding convenient and flexible ways to engage with brands – and one of the biggest pain points is physical transactions,” he says.

“Payments play a crucial role in delivering seamless experiences, and as our consumption models continue to change, physical transactions as we know it will become increasingly obsolete.”

While Phillips sees subscriptions becoming the overwhelmingly dominant model for the acquisition of goods and services, Tymm does not anticipate it replacing traditional models in all sectors.

“There will always be a demand for traditional procurement of goods – like houses or technology – some people will always prefer to buy as it’s better value,” she says.

“Subscription retail has to suit the business’ operating model, so it won’t be plausible for some. Take phones, for example, or high-worth purchases – providers can’t risk a phone coming back damaged in three months if a consumer decides they don’t want that make or model anymore – there is still a place for contracts and the traditional transactional retail model.”

However, she does see it becoming increasingly dominant in certain industries:

“It may well be that over time more goods and services do increasingly expand to this model exclusively (grocery, wine, music) as the ease and convenience factor overpower impulse buys.”

Meanwhile, Gavin Scruby, CIO at SmartDebit, believes that the model is “not workable” for consumable items such as grocery products, with “supermarket shopping, one-off events like trips to restaurants or bought assets like clothes” remaining resistant to the move.

“That fundamentally limits the number of things that can be subscription based,” he says.

However, where he does see significant expansion is in the B2B space.

“Where post-ownership will really take off is within companies,” he says.

“Several startups I have worked with essentially only own their laptops, with every other service from phones to software and the services they sell hosted and rented from someone else. If they tried, even their laptops could be rented right now.”

But for Phillips, the writing is on the wall.

“Companies are moving away from transactional relationships towards becoming solutions providers who add convenience and value to the lives of their customer,” he says.

“As we continue to see this trend across all industries, it will only be a matter of time until our lives are operated on a subscription basis.”