The Subscription Economy

Jörg Ladner, 2020,

A New Old Business Modell

Subscription Economy refers to an economic model based on the temporary use of goods and services through a subscription rather than the acquisition of ownership of goods and services. A subscription is associated with the right to use a defined service over an agreed period of time. The provider is obliged to supply its subscribers with at least the defined scope of services.

The US company Zuora claims to have coined the term Subscription Economy. At least Zuora CEO Tien Tzuo recognized early on the emergence and importance of the subscription-based business model. And he doesn’t seem to be alone in this insight: after the IPO in 2018, the company he founded was worth around 2 billion US dollars.

The use of goods and services on a subscription basis is not an invention of the 2000s. Newspaper subscriptions already existed in the 19th century. Theater and concert subscriptions, ringtone subscriptions or vegetable crates are also classics of the subscription economy.

Today, we see a rapidly growing range of subscription services in many industries, which has been growing rapidly for over 10 years: work (WeWork), IT (Salesforce), clothing (Tchibo), mobility (Flinkster), food (HelloFresh), entertainment (Netflix), living (Airbnb) etc. This applies equally to the B2C and B2B sectors. Companies are founded exclusively based on business with subscribers. Others convert their existing product range or introduce new offers. Important old companies are among the suppliers: Adobe, Apple, AutoCad, Microsoft, Oracle, SAP (to name some examples from the IT industry).

On the customer side there are millions of potential subscribers (Netflix approx. 160 million subscribers worldwide, Statista, 2019). Business relationships based on subscriptions are therefore no longer an isolated case or limited to specific industries.

The business model of the media industry has given rise to an economy that is worth billions of dollars worldwide.

Why is the subscription based economy now successful?

The Subscription Economy Index™ (Zuora, 2019) published by Zuora shows the impressive growth rates of the Subscription Economy compared to the traditional subscription economy.

Why see this development towards Subscription Economy? I think two factors play a crucial role:

  • Information processing is basic technology
  • the other demand thinking of the “Internet generation

In their book The Second Machine Age (W.W. Norton, New York, 2016), Brynjolfsson and McAfee explain the development of the computer into a basic technology and its impact on the economy and society. The entry of information technology into almost all areas of life and the economy, the performance of end devices and the ever shorter innovation cycles enable an almost infinite number of offers – and give consumers the opportunity to discover and use them.

However, these subscription offers also require acceptance. In his book The Zero Margin Cost Society (St. Martin’s Griffin, New York, 2015), Rifkin explains how property has lost its fundamental importance for the personal feeling of freedom. The ties and restrictions arising from property are in contrast to the concept of freedom of the Internet Generation and its successors. The resulting change in consumer behavior provides the acceptance for subscription economy offers.

What are the challenges?

Who buys bears the risk of whether or not the hope of benefit associated with the purchase of an offer is fulfilled. Whether the comparison of offers carried out before the purchase led to the right decision is usually only revealed afterwards. The seller has then already turned to the next interested party. The purchase is completed. The buyer has committed himself for years. The further expectations of the seller are usually low.

In the Subscription Economy the cards are distributed differently: Often a freemium offers the customer the opportunity to try it out for free. If the offer does not fit, there are enough alternatives to choose from. The decision for an offer no longer means a year-long commitment to a provider; because subscriptions can be cancelled or have short durations. The risk shifts towards the provider. The added value depends on the subscriber’s booking period and whether the period of use is extended or even additional services are booked. Marketing and sales are given a different focus. Before the sale – i.e. the booking of a service – the value must be demonstrated and trust in the offer and the provider must be created. After the sale, the perception of value must be cultivated and confidence in the decision must be strengthened.

Offer care and maintenance, billing system, subscriber management and other aspects of operation are challenges for providers in the Subscription Economy.

In two sentences: Based on the subscription business model, a multi-branch economy has emerged as an alternative to the buy economy. The risk has shifted to the side of the providers.