The Rise of Subscription Services: Origins, Economics, and Predictions

FAQs

• What is the scale of the "subscription economy" and what types of products are driving its growth?

  The subscription economy, which facilitates the acquisition of regularly purchased products through home delivery, is set for substantial growth, projected to reach $1.5 trillion by 2025. This projected worth is more than double the estimated value in 2021, according to The Washington Post. Subscription services are emerging across a wide range of consumer verticals, including food, clothing, prescription drugs (e.g., Nurx), houseplants (e.g., The Sill), beauty products (e.g., Birchbox), and pet supplies (e.g., Chewy.com).

• What key factors are driving the popularity of modern subscription models compared to traditional retail?

  The increased popularity of subscriptions is largely attributable to the rise of eCommerce, which allows consumers to purchase virtually any product without needing to leave their homes. When compared to traditional retail, subscription services offer greater flexibility and convenience, enabling consumers to schedule deliveries according to their personal timetables. Moreover, sophisticated online eCommerce platforms support consumer confidence in purchasing the correct products. Modern technology further supports this trend, as many new services offer websites with in-depth details, experiences, and options for self-service or person-to-person consultations with experts before subscribing.

• How do the economics of subscription services allow B2C companies to offer better value or quality than in-store retail?

  Subscriptions are often less expensive than buying equivalent products in stores because the underlying economic model locks in value and reduces B2C companies’ traditional supply chain costs. These cost savings, stemming from reduced logistics and administrative expenses associated with aligning distribution with traditional in-store retailers, allow companies to either lower product prices or provide more premium-quality products at reduced costs. Additionally, unlike physical retail—which must rely on market metrics and corporate distribution decision-making—subscriptions permit the customization of products based on individual consumer needs. For example, a customer can easily find a service that provides only organic produce or only products from specific brands.

• Beyond cost savings, what are the primary financial and brand benefits for B2C companies that adopt a subscription model?

  In addition to reducing shipping, handling, and packaging costs, adopting a subscription model allows B2C companies to effectively pass on distribution responsibilities to small package goods providers, such as FedEx and UPS, saving administrative and logistics expenses. Perhaps the most critical benefit is the opportunity subscriptions provide for building loyalty with customers in an increasingly competitive marketplace. If a company offers customizable products based on specific consumer needs, it becomes easier for that company to appeal to and retain a wider variety of potential subscribers.

• What are the potential pitfalls and risks that B2C companies should consider before transitioning to a subscription model?

  One significant risk is that the company becomes the sole responsible party for all customer experience problems incurred by consumers, responsibilities that might otherwise be mitigated or shared by in-store retailers or online marketplaces. Furthermore, not all products are suitable for this model; products that are already highly affordable and convenient in traditional retail settings, or products that consumers do not require on a regular basis, are generally poor fits for subscriptions. Finally, subscription models can create rigidity, potentially locking both the business and consumers into certain production, product, and distribution models that may eventually become unappealing or unprofitable. It is notably difficult for a company with existing ongoing subscriptions to switch out one product for another, even if the original product becomes too limited or less profitable.

• What factors suggest that the popularity of subscription services will endure and improve in the future?

  The popularity of subscription services is unlikely to subside, even after the COVID-19 pandemic, as the exposure consumers have gained has made these services “stickier” in terms of market appeal. Future predictions are based on several trends: Saving time will remain valuable, as subscriptions eliminate time spent standing in line, driving, or walking through physical store aisles. Furthermore, remote-work models mean consumers are increasingly available at home to receive deliveries, addressing past reluctance to have packages delivered while away at work. Subscription services also offer higher quality combined with cost savings by avoiding the complex, volume-based distribution chains and physical space limitations faced by in-store retailers. Finally, the entire service sphere is predicted to perform better over time as companies hone best practices and as high-speed internet, eCommerce, and communication technologies become more sophisticated.

• For a B2C company considering launching a subscription service, what are the essential foundational steps for success?

  A B2C company must keep three essential steps in mind when launching subscriptions:

   

  • Offer Value: Ensure the subscription is either cheaper than buying the products in stores, provides greater convenience and accessibility, or both.
  • Ensure Flexibility: The subscription must be easy for customers to change, delay, or cancel. This step helps ensure customers do not feel trapped and provides peace of mind, strengthening their relationship with the brand.
  • Ensure Profitability: The ideal products for a subscription model are those that consumers buy on a recurring basis, those that are difficult to access in retail stores, or products with both characteristics. Ultimately, successful brands will utilize a customer-centric approach to offer the right combination of value, flexibility, product options, and novelty to create customer devotion and business resilience.