Netflix. Blue Apron. MoviePass. The Washington Post.
From media to entertainment to food, we are increasingly living in a subscription economy. The convenience, service and ease of use all provide attractive options for consumers who want to access products and services without the hassle of heading to the mall, grocery store, or cineplex.
What’s behind the meteoric rise in subscription services and has access replaced ownership?
A recent McKinsey & Co. report in the technology news details the results of a survey of thousands of U.S. shoppers, indicating some of the reasons behind the growth and the implications for retailers.
According to McKinsey, the subscription market has grown more than 100 percent annually over the past five years, from 57 million in 2011 to more than $2.6 billion in sales in 2016.
The growth has driven more retailers to enter the subscription market, selling monthly “boxes,” access to services and optimal pricing, and partnering with providers to offer everything from kids’ activities to movie tickets to razor blades.
McKinsey organizes the subscription offerings into three categories:
- Replenishment, where supplies are automatically resupplied, whether they be diapers or makeup or pantry items.
- Curation, where monthly boxes or packages arrive at your home, filled with new items within a collection or a theme, whether it’s comic books or new foods.
- Access, the place where most subscription modeling began, with services such as Netflix, Spotify and your local cable company giving you access to entertainment or other services and products.
Spotify, a music subscription business, is an example of the access model of subscription services.
McKinsey identified several key demographics about subscription services that could help guide other retailers considering the model:
- Fifteen percent of online subscribers have subscribed to a box service in the past year. Most of those buyers also subscribe to a media service.
- Women account for 60 percent of subscription services, though men are 50 percent more likely to subscribe to three or more services.
- Subscribers are more likely to live in urban, Northeastern communities, have incomes between $50,000 and $100,000, and are between 25 and 44.
According to entrepreneur Tin Tzuo, author of the book, Subscribed: Why the Subscription Model Will Be Your Company’s Future, the shift in consumer mindset has not been a difficult adjustment for most. He argues that customers are less interested in the product itself, but in having problems solved with convenient solutions.
“It’s not about the physical product,” Tzuo said. “It’s about what the customer is trying to do. And that inversion of thinking is at the root of everything.”
Tzuo notes that even products and services that may seem unlikely to be a good fit for the subscription model are emerging, including Caterpillar offering subscriptions for construction equipment. Another, Surf Air, charges a monthly fee for limitless access to flights. He notes that these models have also emerged in real estate, education, pet care, and finance.
Addressing needs and pain points for customers drives the appeal for subscribers to sign on. Keeping those customers is another challenge. The McKinsey study indicates that 39 percent of consumers had churned through and left a subscription model, though replenishment services have a higher stickiness rate.
Subscription models appear to be here to stay. The question for business leadership is how to adapt their existing models to respond.