Subscription Economy
August 04, 2024
I haven’t bought a new car in years – living in Manhattan, I haven’t needed to. So I hadn’t realized that in recent years, more and more car companies have been requiring subscriptions to allow drivers to have access to certain car features. Tesla has been doing this for years for features like it’s full-self driving capability and connectivity packages, but BMW even tried rolling out a subscription for heated seats, a feature that most people would consider to be a part of the car and not a feature that needs upgrading and so should not be subject to subscription fees. (After consumer uproar, BMW walked back on the heated seat subscription, but does still charge a monthly fee for parking assistance, another feature most car manufacturers used to include in the car purchase price.)
Of course, in a world where cars are practically computers (and in the case of some electric vehicles, cars are actually computers on wheels), we shouldn’t be surprised to see the need of constant upgrades and new features being periodically rolled out. It’s one of the reasons Software-as-a-Service (SaaS) companies have done so well (like Salesforce, a pioneer in the model when Siebel and Oracle were the standards), and why perpetual software companies have adopted SaaS models (like Microsoft and Adobe). Customers love getting the latest and greatest version of a product, and companies like the recurring revenue. On top of SaaS models, there is of course entertainment as a service, like Netflix and Spotify. Even companies in the business of serving food, something that isn’t as highly scalable as the aforementioned categories are getting into the subscription trend – Pret A Manger has a coffee club and Taco Bell offers a limited time taco pass. Needless to say, subscriptions are here to stay, and based on their recent trajectory, are likely only going to increase from here (see chart below):
For consumers, subscriptions offer a number of benefits including:
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Lower upfront costs: in digital services, a subscription fee is a fraction of what a perpetual license would be.
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Built-in upgrades: new versions of a software with increased functionality are automatically rolled out, eliminating the need to purchase the latest edition of the product.
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Variety: Subscription services allow access to a wide array of content, precluding the need to make individual purchases of songs, movies, tv shows, etc.
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Cancellation: Ability to cancel subscription if the product/service is no longer needed or doesn’t meet expectations
For businesses, subscriptions also offer a number of benefits:
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Recurring revenue: revenue tends not to be as choppy as they would be for one-time or perpetual services.
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Stickiness: subscriptions tend to build stickiness and loyalty as long as customers continue to see value in the offering.
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Price increases: For critical or often used applications, businesses can generally raise prices gradually in order to continue providing benefits to their customers.
Of course, some of the major downsides of subscriptions are paying for subscriptions that are not used (on the consumer side) and churn (on the business side).
At Somar, we have long been fans of subscription models as revenue tends to be more predictable and growth can be scalable (for digital products anyway). Subscriptions for non-digital products can be rather tricky, particularly if the subscription pricing is off and/or COGS is high. MoviePass comes to mind as an example of when subscriptions don’t work with high costs and low revenue. Those businesses have to rely on customers signing up and not using the product/service (the business model for most gyms). We will continue to be on the lookout for the next great subscription service, both from an investment perspective, and from a consumer one.