The subscription economy is all the rage at the moment, and we’re getting very excited talking to our customers about it.
“The what economy?” you ask.
Of course the first thing you will do when seeing a new term like that is Google it, and expect to see an informative Wikipedia entry at the top. But as of the time this article was written (early 2013), there was none. In fact, all you will find is evangelism and whitepapers about the topic from billing companies like ours.
The subscription economy is a term used to describe a new way of buying things – often things that in the past were sold in a more traditional way. One of the great examples of this – razor blades – is now coming to Australia, and is a great way to understand what it is, and more importantly its potential impact.
For an industry hardly known for disruptive innovation, this is a something special. A service called Dollar Shave Club will, for a small monthly charge, deliver a fresh razor to you every month. For a regular customer, this is a compelling proposition: you know that you need to replace your razor regularly anyway, so for less than you usually spend, you get them delivered to your door!
What really intrigues me about this is when we turn around and look at how this simple change has impacted the traditional marketing processes associated with FMCG (fast moving consumer goods).
Here is what usually happens:
• Customer goes to the retail outlet, and purchases razor blades for the first time.
• At some time in the future, the razor in possession stops being useful but the customer still needs it (i.e. has not chosen to grow a beard or switch to electric shaver), so the customer chooses to make a repeat purchase.
• Customer goes to the retail outlet, and based on their previous experience and what is on offer, makes a repeat purchase.
The subscription economy turns this process upside down, and particularly has a huge benefit to the incumbent supplier.
Firstly, the timing of the repeat purchase is now in the hands of the supplier, not the customer. Some customers might find a razor lasts them 6 weeks. But if a new razor shows up after just a month, they’re not going to horde – they will throw out the one they are currently using.
Secondly, the repeat purchase is taken out of the customer’s hands because it happens automatically. They don’t have to actively choose to either buy the same brand again or select a new brand that might offer them a promotion – another one shows up on the doorstep for them to use. The default action has changed from “beard keeps growing until customer buys a replacement razor” to “customer keeps buying until he tells us to stop” which is exactly what the vendor wants.
The subscription economy vendor has taken choice and control away from the customer, and has also put themselves at an advantage with respect to their competitors. Because the customer has made a one-off subscription purchase, they don’t make repeat purchases, so they don’t even consider alternative razors. They just walk straight past that section in the supermarket thinking “there’s one less thing I have to bother buying – wouldn’t it be great if I could purchase more things this way”. There is much more effort required on the part of competitors to convince the customer to “churn” – to switch their regular supplier. Indeed, if the competitor is not also a subscription economy vendor, they also need to convince the customer that this wonderful new service isn’t the best thing for them after all.
This significant power shift is cleverly couched as an advantage for the buyer – the subscription vendor is “looking after them” by making sure they always have a fresh new razor when they need it, and saving them the time and effort of repurchase.
One of the biggest impacts of the subscription economy is not on customers, but on changes in marketing vendors must adopt to combat the implicit power shifts between customers and vendors.
And this is only the beginning.