From software that once came in a box to phone apps that do simple tasks, more products and services are moving to a subscription model—and consumers are feeling it.
The average US consumer last year spent $273 a month on 12 paid subscriptions. People were already used to paying for streaming content, cell phone service, and meal delivery, but now there are subscriptions for toothbrushes, razors, pet food, and apparel.
With its attractive recurring revenues for companies, the subscription model has grown so popular that nearly 75 percent of companies that sell directly to customers have some sort of subscription offering, according to a new industry and background note coauthored by Harvard Business School Professor Elie Ofek. And they’re expected to multiply in the years ahead, with subscription billings by companies likely to grow anywhere from 50 to 100 percent over the next five years, according to some estimates.
“There is such a thing as a poorly thought-out subscription model.”
At the same time, companies should be worried about “subscription fatigue,” warns Ofek. Companies can’t assume that they will secure a guaranteed revenue stream just by charging customers monthly. In fact, they can just as easily lose great customers in the process.
“There is such a thing as a poorly thought-out subscription model,” says Ofek, the Malcolm P. McNair Professor of Marketing at HBS. “You have to be careful in terms of what subscriptions you think people will want. The pricing structure also has to be ‘right’ in order to be successful.”
Benefiting from subscriptions while guarding against subscription fatigue
For companies, the benefits of the subscription model include more stable and predictable revenue streams, improved inventory management, “stickier” customer loyalty due to consumers’ reluctance to change vendors, and the ability to sell more products to this seemingly captive group.
“A lot of startups are incorporating subscription models into their business plans, partly because investors are pushing companies toward these models.”
“More and more firms are starting to see the benefits,” Ofek says. “A lot of startups are incorporating subscription models into their business plans, partly because investors are pushing companies toward these models.”
A recent analysis revealed that subscription-based companies have grown 3.7 times faster than the S&P 500 over the past decade, according to coauthor Amy Konary, senior vice president of the Subscribed Institute & Marketing Strategy at Zuora. Consider companies like the cloud storage provider Dropbox; Apple, which charges monthly for cloud storage, music, and more; and Facebook parent Meta, which offers subscription services for creators and virtual reality gamers.
For consumers, subscriptions help spread out costly payments over time, allow people to choose flexible usage and product-feature options at different price levels, and enable customers to rely on certain products or services being delivered at regular intervals and automatically enjoy any upgrades.
However, subscriptions have become so widespread that many consumers are starting to feel overwhelmed with what some are calling “subscriptionitis.” And customers have made it clear that subscriptions aren’t appropriate for all products and services.
In their piece, Ofek and Konary note that BMW generated headlines in 2022 by announcing plans to charge $18 a month for heated front seats, $12 a month for heated steering wheels, and extra subscription-like payments for other options on its cars in some countries—only to irk car buyers who felt they had already paid for the installed features when they bought the cars.
“The ubiquity of subscription offerings has led many customers to feel that ‘everything today is a subscription,’” Ofek and Konary write.
Choosing the subscription that makes sense
In addition to subscriptions for consumer products, B2B deals are also taking off, including software-as-a-service (SaaS) contracts that allow client companies to avoid hefty upfront payments. For example, Microsoft has recently shifted gears to SaaS at both the enterprise and consumer levels.
“With the cloud, a company can now run a vendor’s software without having to physically load it, which saves time and upkeep effort,” Ofek says.
Some firms are also offering maintenance-as-a-service (MaaS) contracts, such as heavy-equipment manufacturer Caterpillar, which allows customers to pay annual fees to have their equipment monitored and optimally maintained. Amazon Web Services and IBM are some of the leaders in the platform-as-a-service (PasS) market.
To be clear, there isn’t a one-size-fits-all model when it comes to subscription-based revenue streams, Ofek says. At the moment, popular options include offering:
- A single flat price, where customers pay a fixed rate at regular intervals no matter how much they use a product or service.
- A “freemium” option, in which the base tier is free, while other more advanced tiers include escalating charges.
- Multiple tiered options that charge a variety of prices for different combinations of product features, usage levels, and number of users.
“Subscription models that have been successful are ones that build tiers that align well with the needs and preferences of different customer segments,” Ofek said.
Zoom, the video conference company, is a best-practice example of a company that provides a free introductory service that’s “good enough to get people hooked,” says Ofek. “Zoom then does a good job of creating additional [paid] tier versions that are attractive to small business and enterprise-level customers.”
Making the transition to subscriptions
Ofek warns that a firm’s transition from a traditional one-off payment system to a subscription model isn’t always clear or easy. For one thing, many firms initially miss the one-time large upfront payments for a product or service. They also need time to convince and retrain their salespeople and others about the benefits of switching to a subscription model.
“There can be this hesitancy to move all out,” says Ofek. “But as the benefits of the subscription model become evident, [more] firms find it worthwhile to do it.”
“Harvard Business School is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA program, management-related doctoral programs, and executive education programs.”
