The subscription business model - a lockdown trend or here to stay?
Demand for online shopping skyrocketed during the pandemic, with online shopping sales in the UK rising by 48%.
Whilst consumers were forced to stay at home, many were left with time to fill and a desire to find entertainment from the comfort of their lockdown abodes. At the same time, retailers and other hard-hit industries, such as restaurants, found that they needed to diversify in order to make an income whilst they were closed.
As the world turned to Netflix and the like to keep itself entertained, many businesses came to realise that subscriptions were in fact the way forward to meet consumer demand and stay afloat. Many budding entrepreneurs also began to see opportunities in the market.
Whilst subscriptions as a whole are not new, the sheer number and range of subscriptions available increased significantly during the pandemic. But is this trend here to stay?
What is the subscription business model?
The subscription business model refers to a business where the customer pays a set amount periodically (often monthly), in exchange for goods or services each period, usually tailored to their preferences.
Subscriptions for books began as early as the 17th century with subscribers making payments to publishers (or authors directly) in advance for proposed publications. By the 20th century, subscriptions increased and diversified to include things like magazines, milk deliveries and eventually cable TV. The rise of the internet and e-commerce then widened the variety of subscriptions even further.
Today, you can get a subscription for just about anything from digital content like TV, audio books and music, to physical products like clothes, perfumes or food boxes from your favourite restaurant. There's even a subscription box for left handers, complete with different left-hand designed products each month.
Where has this surge in subscriptions come from?
Firstly, the benefits to businesses are huge. Creating a following of customers, who are guaranteed to pay a set amount on a set day, gives them a predictable and secure income. This is attractive to investors and banks which can therefore assist with raising capital. It also allows companies to plan their spending with more certainty.
A further benefit is that subscription companies are only required to persuade each customer to purchase their product once, rather than selling to them time and time again. Subscriptions therefore help build customer loyalty. The creation of an ongoing relationship allows businesses to get to know their customers and collect data on their preferences. This in turn benefits consumers by ensuring that they are getting the products they want. An increasingly personalised service will then likely promote further brand loyalty, making this a positive feedback loop for both the customer and the business.
For consumers, the biggest benefit of subscriptions is likely to be the convenience of receiving products directly to their door. Subscribers will periodically receive goods or services curated to their needs and desires, without requiring much thought or effort on their part. They will also avoid the rigmarole of making online payments as they only need to fill in their details once. Future payments will then automatically come out of their bank until they choose to cancel.
As the world reopens and inflation soars, consumers' disposable income has decreased. The biggest challenge for subscription businesses was already consumer retention and no doubt this will be magnified as we emerge into a post-Covid world. It is noteworthy that Netflix reported its first fall in subscribers in a decade in April 2022. This followed the nationwide increase in energy costs (although other factors may well have contributed to the exodus of subscribers).
Convenience has become even more important to consumers as they return to working in the office and spending more time away from home. It may deter consumers if they have to wait at home for their subscription box or collect it from the post office. On the flip side however, if a personalised subscription box can be delivered easily, without much thought or effort on the customer's part, the desire for subscription services may well increase as consumers' free time decreases.
One method that businesses have used to improve convenience is providing letterbox delivery. Letterbox flowers were perhaps one of the earliest examples of this type of delivery. However, other, rather unexpected, businesses have also found ways to offer convenient delivery. For example, a wine subscription company now offer a unique, flattened 750ml wine bottle to ensure your wine is there waiting for you when you get home.
Such innovations have ensured that consumers continue to pay for subscriptions, and it is therefore predicted that the subscription business model will continue to grow over the coming years. The UK subscription box market was expected to be worth £1.8bn by 2025, however this was accelerated by the pandemic which meant it had already reached £1.4bn by 2020 . Therefore, despite the squeeze on disposable income and other challenges facing the industry, it continues to grow.
Depending on the type of business, a subscription service can be relatively easy to set up with low start-up costs and the thriving market means that there are plenty of opportunities for new businesses. Entrepreneurs are continuing to set up subscription businesses and their success has already attracted a number of big companies. It therefore seems likely that others will follow suit to ensure they remain competitive.
With the pandemic seemingly now behind us, the subscription market remains buoyant despite the other challenges now facing the country. Therefore, it appears that the subscription business model is very much here to stay. Although it will no doubt evolve as trends and tastes do, the underlying model is likely to be around for years to come thanks to the huge benefits it offers to both consumers and businesses alike. It will be interesting to see how subscriptions are incorporated into business models across a variety of sectors in the future.