Subscription services, previously common in the software and e-commerce industries, began spreading to other industries after the profound success of high-profile companies like Netflix and Spotify, with 2020 being dubbed by some “the year of subscription-service growth.” Among the current market leaders are sites like Ipsy, Dollar Shave Club, Blue Apron, and Birchbox. According to a 2019 annual report from the Subscription Trade Association, the global subscription commerce economy has a 17.33% Compound Annual Growth Rate. Other statistics illustrating the industry’s growing influence are:
- 53% of all software revenue will be generated from a subscription model by 2020
- The car subscription market is expected to grow 71% by 2022
- 60% of households subscribe to one or more video streaming subscription services
- 41% of households subscribe to at least one streaming music service
- The average subscription billing vendor is growing a rate of 30% to 50% annually
Most notably, 70% of business leaders say subscription models will be key to their success in the years ahead, per the Global Banking and Finance Review. US online visits to subscription box sites have also risen nearly tenfold over the past four years, according to Forbes.
While all these figures paint a rosy picture of subscriptions as a business model, their widespread usage has revealed new challenges, making it difficult for some businesses to succeed long-term on just subscription services. European technology partner to Microsoft, Bluefort, identified some of the core challenges to the market, including top areas of massive revenue loss and risk for subscription-using businesses:
- Manual transactions requiring time and manpower leading to revenue leaks
- Delayed customer service to adjust subscriptions increasing churn
- Costly external billing systems
- Security risks using external systems and platforms
- Real-time insights that are difficult predictors of future usage
“Whilst some businesses have been able to sustain subscriptions successfully, competition is brutal and many struggle with managing aspects of the subscription lifecycle: easy sign-ups, automatic billing, complex plans, cancellations, predictive insights and reducing customer churn,” reads a news release from Bluefort.
Logistical loopholes pose a massive threat to companies trying to capitalize off subscription models. In fact, 48% of businesses say they have struggles meeting accounting and reporting challenges. The problem is that because of recently passed regulations, subscription revenues have to be recorded by very specific standards — thus, if not properly handled, businesses face audits and compliance issues.
Due to its relative newness as a model — or at least, its newness as being used across a wide range of different industries — there are many logistical troubles like this that are stifling growth.
Another big threat is over-saturation. As more and more businesses start to use a subscription-based model, it’s become increasingly difficult to differentiate. While the online subscription market has more than doubled every year over the past five years and the largest players generate billions of dollars in sales, the wealth is concentrated to a small number of high-performers, making it difficult for the little guy to nudge its way in.
“We are eating from the same share of wallet,” said Paul Chambers, co-founder of the Subscription Trade Association.
Consumers also continue to play the system, with nearly 40% of online subscribers canceling their subscriptions. McKinsey warned against subscription boxes syphoning off too much money into free trials as they are usually taken advantage of with little long-term gain. In the meal-kit category, three-fifths of users cancel within the first six months.
Nonetheless, if entrepreneurs can find their own unique niche — something no other subscription service is doing — and iron out the logistics of running this sort of model, there is a lot of money to be made in subscriptions. Companies are becoming more and more creative in their approaches; finding their own differentiating factors. For example, you may have noticed Uber’s monthly pass, a creative subscription model. If you’re looking to veer into the subscription space, try to think outside the box and remember the devil’s in the details.
About the Author
Jemima is a journalist who enjoys reporting on business, particularly small business and entrepreneurship.