Is the subscription model dying?

SpongeBob doesn't think so

As humans we’ve evolved to simplify things in order to make decisions. Too often today we’re confronted with binary arguments - like the one below of usage based pricing versus subscriptions. In life and in particular in business things are rarely that simple or rather it’s much more subtle. When considering any business model we need to look at the detail of the product being offered, the customer being served and the context in which it operates. There is huge value in borrowing ideas and tactics from other businesses and markets - but too make this work requires real thought on the detail of how ideas are applied and a recognition of the context.

Usage based pricing kills subscription model

Not for the first time I’ve fallen for a click inducing headline. To add an ironic twist I signed up for a trial subscription to Business Insider to read an article about the death of the subscription model. The article argues that for software the subscription model, which replaced the licensing model is now being killed by usage based pricing.

This shift in business model was first seen in cloud services, most notably Amazon, Microsoft and Google’s hosting and storage businesses. Other examples such as Snowflake, Twilio and Stripe are offered as evidence for usage based pricing and for software companies to shift their business model.

Why will usage based pricing replace a subscription model? The central argument appears to be that customers pay only for exactly what they use and this can be very granular eg for cloud computing it can be down to seconds of computing power you consume.

Like many “death of….” stories I think the arguments are thin. Usage based pricing works really well in some instances (the examples given) but it won’t work even for all software companies let alone other subscription services. Usage based pricing has some flaws:

  • it can encourage rationing - I’ve seen plenty of businesses culling email lists to reduce Mailchimp spend

  • it can be too narrow - in lots of software used across a business, different users will get value from different features of the software

  • there’s a danger that usage based pricing positions the service as a commodity (this is happening with cloud computing)

Could usage based pricing be applied outside of software? The technology exists to enable the business model anywhere - it’s easy to imagine a news site charging only for the articles you’ve read or a streaming service for the programmes you’ve watched. But unless the usage based approach was being used to gain or protect a market it could destroy a lot of value. What is more likely is an evolution from fixed subscriptions to some form of hybrid model. Read more.

New York Time’s subscriber growth slows

In the first quarter of this year the New York Time’s added another 301,000 digital subscribers. In the same period last year they added 587,000 subscribers - that’s a drop of 48%. The NYT could use the same argument given by Netflix that 2020 had seen subscribers pulled forward due to the pandemic and in this case the election news cycle as well. Other points that stand out from the results:

  • The company has now reached 6.9 million digital subscribers so are on track to hit their target of 10 million by 2025

  • Digital subscription revenue grew by 38% - as customers were retained and moved off trial pricing

  • Although numbers weren’t disclosed the company stated that audience, registered readers and subscriber engagement were all up

  • Advertising revenues increased by 8.5% - so subscriptions and advertising are compatible?

  • Digital news only subscriptions grew by 34.9%, but other product subscriptions for games, cooking etc showed strong growth at 57.1%

The last point particularly interests me. Legacy publishers seem overly focused on news. Newspapers have always been an aggregation of content. People subscribed to a paper for multiple reasons, the same can apply digitally and perhaps there is value to unlock here both in adding and retaining subscribers.

Subscription benchmarks

Piano a supplier of subscription, data management and analytics software released new benchmarks for its extensive customer base. Below are a selection:

  • Subscription growth of 58% was the median for their customer base - likely driven by the pandemic and the fact that many companies have introduced subscriptions recently

  • 33% of conversions were driven by first day visitors - this was a marked change and pronounced where companies had used a subscription model for longer - my guess would be these weren’t first time visitors at all. The highest number of conversions still came from users visiting 5 times or more

  • “Sleepers” - paying subscribers who don’t use their subscription make up 40% of subscribers. Bizarrely they fall asleep quickly, 60% become inactive within the first two months of subscription - how are customers being failed?

  • There is still an issue with the number of users being shown a message to subscribe, according to Piano it’s still short of 15%. Even more worrying most of the messages users are being shown are ineffective

  • A shift away from free trials, most publishers have moved to low price eg $1 trials

  • Get users on an annual subscription - 74% of annual subscribers will renew, only 46% of monthly subscribers will last 12 months

  • Black Friday promotions more than triple daily conversion rates

There are more benchmarks and details provided in the article - read more.

Quick links

The unlikely duo of SpongeBob and Captain Kirk appear to be helping to attract subscribers to Paramount+. Although subscriber numbers aren’t disclosed streaming revenues grew 65% in the first quarter. The growth might also be helped by the tiered pricing approach with a subscription plus adverts at only $6 a month.

A Disney+ subscription was apparently the go-to last minute gift for Mother’s Day in the US. Which is likely a barometer for the value consumers put on the streaming service. Disney’s consumer marketing is impressive and their approach to gift subscriptions reflects this. Although it does seem a bit at odds with the company’s brand that a gift subscription can only be given to new subscribers.

GoPro stock jumped 9.7% last week on their first quarter results which saw revenues grow by 71% year on year. Founder Nicholas Woodman attributed the performance to the camera companies shift to a direct to consumer subscription centric business.

Wondery, the podcast studio owned by Amazon will offer its Wondery+ subscription service through Apple podcasts. Wondery’s appearance on Apple’s platform reflects the reach Apple has in podcasting - Wondery will give up a share of revenue to Apple for the distribution they offer.