Subscription is a business model that has been adopted in many industries. Companies have realized that they can earn more revenue in the long term and increase their profitability. Subscription models often use specific pricing techniques to reduce the perceived price paid. The subscription business model is so profitable that it leads some companies to abuse it to prevent you from terminating (e.g., Amazon Prime). In this article, we analyze 11 strategies based on subscription.
Subscription-based software: the dawn of a new era
The introduction of the subscription model has turned the software world upside down. While perpetual licenses were still the rule 10 years ago, all software vendors have turned to subscriptions to increase revenue and better control usage. This has been made possible by the advent of the Cloud and SaaS.
Here are a few examples that are symptomatic of this conversion to the subscription business:
- Adobe proposes its consumer software only through its Creative Cloud
- Adobe Lightroom now costs a minimum of €11.99/month, whereas we could previously purchase a perpetual license starting at €120
- Microsoft proposes its Office 2021 “Home and Student” suite for $149.99. In parallel, Office 365 (which gives access to the same applications while adding some peripheral features) costs between 69€ and 99€/year.
The subscription business model was a breakthrough for the software industry. Today, this model is accepted by consumers even though it does not objectively favor their interests in most cases.
The “Dash button” precursor of subscription-based services
Amazon’s Dash Button was a real revolution in subscriptions. It was the first time an object made order recurrence tangible. Dash Buttons were launched on March 31, 2015, and discontinued on August 31, 2019, because the system was unsuccessful.
The “Dash Buttons” were not just for ordering Dash detergent. These little boxes were programmable to order different items via AmazonFresh. Glued in different places of the house, they allowed ordering with one press a product which one needed: dishwasher capsule, powder for the washing machine, toilet paper, … The “Dash Button” was then connected to the house’s WIFI, and the order was effective. It was a transposition in the real world of the order in a click.
The Dash Button has been rivaled by the Dash Replenishment Service, a subscription delivery service. This recurring delivery feature is available on Amazon’s website for certain consumable products (food, home care). The subscription formula is even the one that is proposed by default (for a discount).
The Dash Button had everything of a revolutionary invention. However, the Dash Button had 2 drawbacks:
- it had to be configured
- you had to press it
What should we learn from this failure? The less effort the consumer makes, the more likely the system will work.
Amazon Prime: The Jackpot
Amazon Prime is a subscription-based service that gives you access to several benefits with Amazon:
- Faster, unlimited delivery on 350 million SKUs
- Photo storage
Amazon hit the Jackpot with Amazon Prime. In fact, according to a September 2021 research, American Amazon Prime subscribers spend 4 times more than non-subscribers! The annual ticket for Prime subscribers reaches 1968$.
A subscription is not just about generating an immediate income. In the case of Prime, subscribers feel “motivated” to spend more to make their “investment” profitable. The calculation is, therefore, excellent on the part of Amazon. The only concern is that the cost of the benefits tends to increase:
- Amazon spent $15 billion on the creation of video content (available via the VOD offer)
- Taking care of delivery costs is a significant additional burden in the current inflationary environment
900.care: hygiene products by subscription
900.care is a DNVB (Digital Native Vertical Brand) that proposes selling hygiene products in refill form. We did a podcast with its founder that you can listen to again below.
900.care proposes that you receive hygiene products based on a frequency that depends on your choices and the number of people in the household. So far, it looks like the subscription-based box model. Except that 900.care has designed its products to be environmentally friendly by eliminating plastic packaging.
900.care mixes ecological awareness and a subscription business model to differentiate itself. The products proposed are quite different from what is proposed via the monthly “box” model.
Nespresso: coffee by subscription
Capsules were Nespresso’s golden goose for years until the patents that protected them fell into the public domain. A subscription was imposed to “capture” demand and prevent customers from switching to the competition. Finally, Nespresso uses nudge marketing techniques to push the subscriptions that bring in the most money. Nothing is more dangerous than customers who “tide themselves over” by buying compatible capsules at the supermarket. They might discover that cheaper coffee is just as good ?.
In the case of Nespresso, a subscription is a way to “capture” demand and lock it into a more expensive system than the competition. With its connected machines, Nespresso is also trying to automate the sending of capsules by calculating the amount of coffee left since the last order. This connection to the real world is similar to what has been done with Amazon’s Dash Button.
Costco: the subscription as an entry fee
To enter Costco, you must pay an entrance fee. This is a subscription that is renewed on an annual basis (36€/year in France). The promise is to benefit from lower prices than those of the competitors.
The challenge for Costco outside the US is to build a compelling offer to recruit the right targets. Costco’s business model is based on the assumption customers want to “make their subscription profitable” and spend more. Amazon Prime is a good example of how this strategy can work.
Beauty products by subscription
Blissim proposes boxes that allow you to receive 5 beauty products each month for 14,90€. The concept has been adapted for many products (razor blades, cleaning products, hygiene products, beers, wines, …). It has almost become a business model of its own.
Boxes by subscription are now a very classical business model. However, there are plenty of candidates, but few are elected. A website is no longer enough to sell boxes. Operational marketing is crucial, and mastering online promotion (especially on social networks) is essential. If this business model seems simple on the outside, it is currently very complicated to apply successfully. The competition is very tough, and the consumers’ wallet is less compatible with this excessive expense.
Netflix: unlimited VOD
Netflix has transformed from a DVD rental company to n°1 of VOD by subscription. The business model is so good that everyone else has joined in (Disney+, HBO, Amazon, etc.). Americans have an average of 4 VOD subscriptions per household. Faced with eroding growth and increasingly fierce competition (Netflix has an 18% market share in 2022), Netflix has announced the launch of a cheaper offer with advertising.
The weight of VOD platforms has become a threat to national players. The recession announced in 2023 should lead to an unprecedented wave of consolidation. American households, the most significant contributors to these platforms, will make choices and eliminate superfluous subscriptions. The catalog of available titles and the “breadth” of content will be the key to success.
Darty Max: subscription-based repairs
Darty Max is an offer related to Darty’s historical activities. The principle is simple. Members can maintain and repair all their appliances for a subscription whose price varies from 9,90€ to 19,90€/month. The subscription fee varies according to the number of appliances to be covered. For a normally equipped household, the bill climbs quickly, and the subscription at 19,90€/month is quickly the one advised. This is an interesting offer for those who want to adopt a responsible approach and bet on the “reparability” of appliances.
Darty must convince subscribers to commit to a one-year contract to break even. However, the risks are limited for Darty because a whole series of precautions are taken to avoid the most expensive repairs. The terms and conditions of sale allow Darty to declare a product “irreparable” to avoid the obligation to repair it.
Decathlon proposes a subscription to rent sports equipment (tents, bikes, …) This subscription includes a maintenance and repair service. The “bike” offer thus highlights a bike that is always suitable for your child.
On closer inspection, this subscription offer looks like leasing but without the purchase option. It’s a very smart move on Decathlon’s part, and the rental represents a real added value compared to purchasing new equipment.
Casino Max is a subscription formula (10€ per month or 90€/year) that allows you to access a permanent 10% discount on the whole Casino assortment. The subscription amount is thus “refunded” from 900€ of annual purchases or 100€ of monthly purchases.
At first sight, the formula seems attractive because with inflation, the price of shopping has increased significantly, and the 100€ monthly mark (110€ without discount) is easily reached.
The Casino Max model leads us to make 2 remarks:
Is it profitable for Casino to offer a 10% discount knowing that the average margin on consumer products is generally low? Casino claims that it is. Doubtless, impulse purchases realized in higher margin categories have something to do with it.
The challenge is to build customer loyalty by capturing their purchases and preventing them from going to the competition. The subscription makes the customer desire profitability, making him buy, in priority at Casino.
Posted in Strategy.