Subscriptions are regular, recurring charges or fees billed monthly, quarterly or annually to an individual or company.
Subscription services can be traced back as far as the 15th century when newspaper publishers using the newly-invented printing press realised they could generate recurring revenue by charging readers a set amount to receive their publications on a regular basis.
The obvious business benefit of a ‘set and forget’ subscription is that it is a much easier business model than having to resell a product or service every time. It is not only a relatively low cost way of retaining clients - it also generates a reasonably predictable revenue stream.
This is especially valuable to digital companies in fast growth mode that don’t have a lengthy track record but are going through a series of funding rounds and want to demonstrate their credibility to potential investors.
Giving customers more
E-commerce subscription services also make it easier for businesses to upsell services.
A good example of this is the app market, where major brands have been successful in adding incremental services to customers’ accounts, often without the customer realising they are paying more for these services. In many cases this is because of the frictionless nature of payment services, where customer details are already in the system.
The analogy here is that if a customer makes five purchases of $20 rather than a single $100 purchase, they are exposed to the brand more often and therefore more likely to spend more money. Subscriptions also make it easier to increase prices to keep pace with inflation or rising business costs.
For many transactions the power in the relationship ultimately sits with the consumer, but this dynamic varies depending on the service being offered. So a streaming service will want offer as many options as possible because it has a lot of competition, whereas a utility company will have less motivation to provide the same variety of payment options.
Impacting new market segments
The subscription model is well established in markets ranging from software to gym membership. Two very different sectors where it has gained significant traction in recent years are fashion and electric vehicles. In the former, many brands offer monthly clothes subscription services, some of which are delivered by the brands directly although service providers are becoming increasingly influential.
In addition, electric vehicle owners pay a subscription to access charging stations, but this business model is being extended to other aspects of ownership. For example, drivers can pay extra for additional features such as the ability to increase the horsepower of their vehicle.
These services highlight how technology-enabled businesses can make incremental services more accessible and how the subscription model enables these revenues to be captured in a way that is more acceptable to the customer.
Regional variations
The way subscription-based models are offered differs between North America and Europe, the Middle East and Africa (EMEA). In the US, credit cards payments dominate and the wallet concept is more of a fringe play than it is in Europe, where open banking is much further advanced.
Even within western Europe there are significant differences. UK consumers favour card payments, and although direct debits have evolved to become more digital and therefore more viable as a means of subscription payment, they are not the ‘go to’ option for pure e-commerce companies.
However, in France and particularly Germany, direct debit is by far more prevalent and credit card usage is much lower, not just for utility payments but also when paying for streaming services.
As payment services continue to evolve it is important that new payment methods facilitate repeat transactions, which has been one of the major challenges in designing and launching new alternative payment methods in an environment of tight regulation and strong customer authentication.
In some of the more advanced open banking markets, variable recurring payments is a hot topic on the basis that repeat transactions are more challenging than one-off payments because of the need to store customer data. But it is vital that repeat transactions are facilitated, particularly for newer payment types.
Where will we sign up?
Looking ahead, future innovation in the subscription services e-commerce space will come from a combination of existing and new businesses. Newer payment methods will support subscription and there will be a proliferation of checkout options as businesses start to realise there is value in providing services outside their own ecosystem.
The likely evolution of point of sale is a quasi-subscription model where the merchant has wallet and/or card details stored. Examples of this include fully automated stores (where the customer walks in, shops and walks out) or ‘car as a payment’ where the driver goes into a gas station, fills up and drives away because the smart technology has identified who they are and what they have consumed and there is a payment embedded in that journey via a wallet with a card that is automatically debited.
This perhaps has more to do with the ‘set and forget it’ nature of being a consumer than it does the subscription business model, but that checkout experience will nonetheless become ubiquitous.