The monetisation of business models – gaining momentum
As companies look for new business strategies and new monetisation models, a quick look at the subscription economy landscape is required.
Subscription models have been around for a while. During the seventeenth and eighteenth centuries, the publication of different materials by subscription was anything but an isolated economic phenomenon – readers often subscribed to receive books or even news of that time in printed form. Charles Dickens himself sold his novels as a subscription. Four hundred years later, however, there are seemingly endless possibilities for new types of subscriptions, for a wide range of services and products, from cable television, meal packages, gym, music, and video services, to pet food, washing machines, or even razors.
Nowadays, according to an analysis by ING, European consumers alone spend up to EUR 350 billion per year on subscriptions. If a consumer wants to watch a movie, they will probably stream it through Netflix, HBO Go, or Amazon Prime Video, and if they want to listen to music, companies such as Spotify or Deezer usually make it available. The term ‘subscription economy’ refers to the business landscape in which brands function under a subscription-based model, as opposed to a pay-per-product (or service) structure. In the framework of the subscription economy, the service or product, be it digital or physical, is provided for a fixed monthly fee, as part of a contract that stipulates its frequency of usage or delivery, its cost, and its timeframe.
It comes as no surprise that, according to McKinsey, the subscription ecommerce market has grown by more than 100% a year over the past five years. Consequently, according to an analysis by ING, the ongoing growth is enabled by factors such as:
- technological developments, like IoT, big data, and smart devices, which facilitate subscription models, making them more attractive for businesses;
- a shift in consumer preferences, determining the emergence of a different way of engaging with customers; time, accessibility, sustainability, convenience, transparency, and flexibility are some of the benefits that come with subscriptions;
- stronger relationships with customers, therefore companies listen, engage, and continually serve their customers’ expanding interests, helping them discover and sample new products they might not have otherwise known about;
- the current low-interest rate environment, that supports the subscription business model, making subscriptions more attractive for consumers as well;
- the added value – or, simply put, an improvement or addition that makes the worth of a product or service grow – varies from offering to offering and can, for instance, consist of extra services, extra convenience, a lowering in transaction costs, the flexibility to upgrade/downgrade, or even a combination of these.
What is more, Gartner predicts that, by 2020, all new entrants and 80% of historical vendors will offer subscription-based business models.
Subscription-based business models come with specific challenges, which include ensuring the financial data of customers is secure, managing chargebacks and invalid payments (recurring payments typically have higher payment failure rates, as card details expire and cards are often lost or stolen), and controlling customer churn. According to Verifi’s study, chargebacks represent one of the major pain points for companies with a subscription-based business model, with some customers not remembering they had subscribed or simply forgetting to cancel. Another challenge for subscription providers is matching supply and demand, since consumers are more likely to cancel a service when it cannot meet their requirements. Therefore, one of the biggest challenges facing companies that have a subscription-based business model is churn. It can undermine their growth, since the cost of replacing lost subscribers could also make it difficult to meet long-term objectives. That, in turn, leads to a different challenge: the acquisition and then the retention of consumers.
According to McKinsey, conversion is still weak, with only 55% of those who consider a service ultimately subscribing to it. However, there are several things that can be done in order to improve this, such as understanding the key touchpoints in the onboarding process and adjusting it, identifying the needs of different customer segments, using testimonials and reviews from other customers to increase trust, and clearly presenting the key features of a certain product/service.
Moreover, regulations worldwide are changing and the recent ones greatly impact the subscription economy. Strong Customer Authentication (SCA) is part of a broader European law regarding payments, the second Payment Services Directive (PSD2), and will be fully implemented starting with September 2019. Digital Content Directive is approved by the Internal Market and Consumer Protection Committee and it covers B2C contracts for the supply of digital content or digital services, and Mastercard’s new policy for merchants that retain customers’ card information after they sign up for a free trial aims to help increase transparency and ensure a streamlined experience for cardholders.
This editorial was first published in the Monetisation of Digital Business Models 2019 – Insights into Billing and Recurring Payments Report. The Report presents the key trends and developments in monetisation of business models, subscription economy, and billing and recurring payments.
About Raluca Constantinescu
Raluca, Content Editor at The Paypers, is specialising in online payments, e-wallets, PSPs, mobile payments, omnichannel commerce, online retail, and cross-border transactions. She holds a Bachelor’s Degree in Foreign Languages and Literatures and has a wide background in publishing.