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The Growth of the Subscription Economy

Remember the good old days when you’d buy something and actually own it? Ok, it’s far-fetched to suggest that doesn’t happen anymore. But the subscription economy has taken off considerably, having grown by 435% from 2012 to 2020. In the same time period subscription businesses have grown 5 to 8 times faster than traditional businesses for the simple reason that customers find the model cost effective and convenient. Netflix, Amazon Prime, Uber One. These businesses, among many others, benefit from recurring monthly customer payments and have influenced one-time sale businesses to hop onto the bandwagon. With such a shift taking place, there are pros and cons.

Without ownership, customers have access to vast catalogues of products and services. Netflix, for example, is estimated to have 50,000+ titles. Canva Pro gives users get 1TB of storage, AI tools and 100 million+ photos, videos, graphics and audio. The cost of owning each of those 100 million+ digital assets would require some deep, deep pockets. Businesses benefit too from more predictable revenue streams and not having as much pressure to constantly acquire new customers.

So, how does a business get customers to sign up to their subscription model in the first place? Enter the ‘free trial’. Free trials are the magic sauce that’s propelled the subscription economy to new heights. As a user, you feel as if you’re getting a great deal. For the business, it learns more about their customers and the product gets exposure. Win-win!

The free trial concept has been around for decades, even used to introduce tea in a rural village in India in the 1940s. Back then tea was a rare drink reserved only for the upper and middle classes. In other words, people who could afford it. Tea sellers wanted to change this. They had witnessed enormous sales growth in the latter years of the 19th century and saw the potential of sales to the common person in even the remotest villages.

In this village, a truck would make a morning visit to dispense ready-made, boiling hot tea. Villagers would hold out their cups and flasks as the truck attendant poured out this wondrous concoction of tea leaves, milk and sugar. The drink tasted great. But better yet, it was free! The villagers would eagerly anticipate the arrival of the truck every morning so they could savour another taste of what was quickly becoming their favourite drink. Before this, the villagers’ morning drink was plain milk. The truck continued to visit the village for 2 years. Then one day it stopped.

The business owners of the tea company knew it was time. And how right they were. Morning tea had become a habit. It was a routine. People were addicted. A few people grumbled about not getting their free tea anymore but it didn’t matter. If you needed your morning tea and it wasn’t free anymore, you’d pay for it. The free trial was a major success. The tea company had great sales in the village and elsewhere where they executed the same strategy. By providing free tea over a 2 year period, they had formed a population of lifetime customers.

Apple TV+ free trial
Apple TV+ offers a free trial for 7 days.

A subscription service also has downstream effects that are beneficial to the business. Consider a coffee shop chain that offers a subscription service. For $30 a month you can get 5 drinks a day, including coffees, teas, frappes, smoothies and hot chocolates. It’s a great deal if you’re a regular coffee drinker. You can more than make up the cost of the subscription fee within a few days.

With the subscription, you’re essentially locked into the coffee chain. Why would you go anywhere else? If you go to a different chain, you’ll have to pay. But in your existing coffee shop, the cost has already been taken care of in the monthly subscription. And when you have your drink, you may want to eat something too. That’s where the subscription really comes into play. The objective of the subscription is to get people into the store. Without the subscription, a customer could have gone anywhere to get food. Now they’re in the coffee chain, ordering food and taking away sales from other businesses. The more often you go, the more familiar you become with the menu. One starts buying food more often, and when meeting colleagues or friends, you suggest meeting at the coffee chain so you don’t have to pay for drinks elsewhere. There ends up being a social domino effect whereby coffee chain gets sales beyond the person who has the subscription.

But while the subscription economy is resulting in more customers for businesses, it’s not all roses and daffodils. If we consider the coffee chain, what’s the impact on staff? During rush hour and lunch times, coffee shops are generally bustling with customers and staff are working flat out to serve them. Now because of the subscription there are even more customers who add to the influx. Take a moment to consider staff in this high pressure environment. They are overworked. Some drinks take a longer time to make than regular coffees. Now customers can come in 5 times a day and ask for these drinks. Having to serve more customers means staff won’t always get it right. Customers might get the wrong drinks and may even be served after those who were behind them in the queue. Chaos ensues and the result is a damaged brand for the coffee chain.

The subscription model, sometimes referred to as the ‘end of ownership’, doesn’t work for everyone, and it often prices out many otherwise interested customers. Adobe Photoshop is a pertinent example. For years Photoshop was sold as a one time purchase software package. Photoshop was an expensive product but when you bought it, it was yours to keep. Adobe now charges $28/month for Photoshop or you can pay $73/month for all Creative Cloud apps that includes design and video editing applications as well. The argument from proponents of the subscription model is that you actually save money. If you’re a student you get a discount, the apps are frequently updated and you have features added regularly. By the time the subscription costs match what you would have paid for the standalone package, the product would have evolved considerably. For a perpetual license Photoshop used to cost around $700 and $200 to upgrade.

Not everyone agrees with this line of reasoning. Many Photoshop users didn’t need the most up-to-date features, so a perpetual license could last for a considerable amount of time, making it more cost effective than a monthly subscription. In 2011 when Adobe announced its plans to move to a subscription service, there were many disgruntled users who were upset by Adobe’s “draconian” plans. Many in the Photoshop community talked about using their existing Photoshop software for as long as they could and then moving on to competing products.

And some users have taken the illegal route by searching for cracked or pirated software; an inevitable consequence Adobe would’ve surely foreseen by introducing their subscription service. Others, not knowing any better, have bought cracked software from online stores claiming to be official Adobe resellers. But most users who were disgruntled by Adobe’s entry into the subscription economy either took the hit or simply moved to competitors, of which there are many. There are various open-source alternatives to Photoshop such as GIMP, Pinta and Darktable, applications that have acquired many users since Adobe decided to stick with its subscription model. Although there remains pushback against the subscription economy, more businesses are taking the plunge. Microsoft Office did it in 2013 with Microsoft 365, spawning the adoption of open source alternatives such as LibreOffice and WPS Office. While ‘ownership’ still has its perks, things are increasingly moving to the cloud and the subscription economy is set to grow even larger with the market size of the global digital subscription economy projected to be worth $1.5 trillion by 2025.

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