The average American pays for five or more subscriptions services monthly. These services range from streaming and food delivery apps to beauty supplies and car washes. While some consumers are feeling bombarded by the number of products and services that require subscriptions, the companies billing monthly don’t show any signs of slowing down the subscription model.
Edward Nelling, PhD, a professor in the LeBow College of Business, spoke with the Drexel News Blog about the surge in subscriptions, who is benefiting and what consumers need to consider when clicking subscribe.
Many consumers feel like more and more businesses are moving to subscription models for some or all of their products and services. Is the subscription model increasing?
The subscription model has increased over time, and it’s likely to become even more popular.
There are certain subscription models that have emerged over time that we can subscribe to like streaming services or something like Amazon Prime, where the consumer is paying a fee but then is able to participate or have this opportunity for online shopping, sometimes with accelerated shipping and other advantages.
Something like that didn’t exist 40 years ago, not even really 20 years ago, in a meaningful way. Technology has made it easier for companies to implement these models. And technology has also made it easier for consumers to participate in things that they wouldn’t have long ago. I think that technology will continue to evolve. And there will be opportunities for subscription models five years from now that we probably couldn’t even think of today. But that’s just the nature of technological evolution over time.
Evidence that the subscription model has grown is that we now see advertisements or opportunities for services that will help consumers to reduce the number of subscriptions they have. When you start to see the emergence of how to reduce your subscriptions, you know that the subscription model has become quite crowded.
Who benefits from subscription models?
It definitely benefits the companies.
I think of a health club or gym membership, where you would sign up and pay a monthly fee, which authorizes a club to continue to bill your credit card every month. That’s recurring revenue. It’s a more predictable revenue stream. More revenue is better than less, obviously, and the more predictable the revenue is, that’s even better.
For the businesses it’s mostly upside and very little to no downside.
For example, streaming services have control over pricing. They’re not going to raise their rates every month or even every year, but they can build into their longer-term business plan that they’re going to raise subscription fees 3% a year, or maybe once every three years. It helps them in terms of revenue this year, and also longer-term planning.
They also have data on their customers. For example, if someone subscribes to a high-end clothing line, then that might be valuable lead information to know for a business that sells high-end jewelry.
What are the advantages for the consumer?
Convenience. For example, if someone is subscribing to one of those chef-in-a-box type services for dinners, that’s convenient because then they don’t need to go out grocery shopping or think about planning meals.
There’s fun or enjoyment. With the meal prep subscription, the consumer may have never thought to pair these ingredients together, but somebody who knows a lot more about cooking did. And they might look forward each week to getting the box and seeing ingredients they never tried before.
Another advantage is lower prices. So, for example on Amazon or some other e-tailers, you might have the option to subscribe and save when purchasing some items. If you click subscribe, and now you’re ordering it every month and you could save 5 or 10%. If you were going to order it every month anyway, now you’re saving money.
Some deals or perks are available only to subscribers – whether it’s free shipping or specific discounts. It can be as simple as joining the “Beer of the Month” or “Mug Club” at a local brewery, where you pay a fee, but then you’re going to get first access to releases of new products, and some people might like that.
What are the drawbacks to the subscription model?
The main disadvantage is the cost. One always has to ask themselves whether the perk they’re receiving justifies the cost of the membership.
Let’s go back to the gym membership. Maybe someone joined the gym and started working out. They were enthusiastic, but then over time their enthusiasm waned a bit. Now, instead of going three times a week, they’re going once a week, or didn’t go at all last month. But they are still paying money for the membership.
That notion of continuing to pay for goods or services that you don’t use or don’t want, there’s a psychological aspect of this type of purchase. Even if it’s easy to discontinue the membership, it still takes a conscious action on the part of the consumer to cancel it and many people will just never get around to it. There is this inertia, or stickiness, where consumers have that recurring billing. It just takes people a while to actually make that decision, even if it’s just a click of a mouse to hit cancel or unsubscribe. The behavioral aspects of it work in favor of the business and they work to the detriment of the consumer.
Is there a concern that subscription models are going to be the only option to consume products and services?
I don’t think so, because I think that there are still alternatives to the underlying products, services and those delivery channels that people are subscribing to.
What else is important to note about subscription models?
Under the broader umbrella of managing one’s finances properly or responsibly, that it’s important for individuals to be very intentional about budgeting, how you shop and how you spend your money. In all of these examples of subscriptions, there is a point where the cost could eventually exceed the benefits. It’s easy to identify the costs, they’re billed monthly. It’s harder to identify the benefits. We can think about convenience, we can put a word on it. But can we put a dollar value on it? The big question for consumers is, what is this worth to me?
Reporters interested in speaking with Nelling should contact Annie Korp, associate director, News & Media Relations, at 215-571-4244 or amk522@drexel.edu.
