The consumer subscription business model is certainly not a new concept. And as we’ve been investing in more B2C companies recently, we’re reminded just how popular this strategy to monetization continues to be.
Even marketplaces, which traditionally just took a piece of each transaction, are now looking to charge monthly or annual fees. For example on Amazon, professional sellers pay a monthly subscription as well as a per sale closing fee, and buyers pay an annual subscription for unlimited delivery.
In entertainment, subscriptions have taken off as more and more services unbundle. We are now left to purchase a mix of individual services like YouTube, Spotify, Apple Music, HBO, ShowTime, Disney+, Netflix, Hulu, etc. every month to cover all of our content needs. The average American subscriber watches 3.4 services, paying an average $8.53 per month for each one. Forbes has a good article on the state of the subscription economy.
Subscriptions are such a predominant part of our lives and financial spending that Trim’s (a V1 portfolio company) first wedge into the personal financial market was being a subscription manager, surfacing subscriptions you didn’t know you had and canceling those you don’t want.
It makes sense why B2C startups would want to adopt the subscription model: it offers repeatable and predictable income. However, this approach doesn’t work for every business, especially if it adds to subscription fatigue.
A few years ago, my friend Zal Bilimoria wrote a great post about when “Mass SaaS” works. His definition:
Mass SaaS seems to work best when consumers can: plan their frequent consumption ahead of time and enjoy a bundled set of tiered offerings, all at fixed prices.
Mass SaaS is a loaded definition and you can explore all the details in his post. His thoughts are still very much relevant today, but I’ll add two points:
- SaaS at home vs. work
Not surprisingly, consumers view subscriptions at home very differently than at work. In the workplace, SaaS promises increased productivity and organizations are happy to buy software that improves the efficiency of their employees – whether it is through better collaboration, streamlined invoicing and scheduling, etc. And even individuals are willing to pay out-of-pocket to perform stronger at work, i.e. Superhuman.
On the other hand, the idea of increased productivity is a harder sell in the home. Generally speaking, consumers prefer subscriptions when there’s a clear cost savings for the “all-you-can-eat buffet” vs. a la carte purchases. For example, it’s easy to do the math and determine if it’s better to buy individual movies on Apple vs. access an entire collection on Netflix/Hulu, or pay for unlimited delivery on Amazon Prime vs. paying individual shipping fees.
However, consumers find it harder to place a monetary value on “time saved.” For instance, how much would you pay for SaaS that manages the inventory of what is in your fridge to come up with menus for your meals?
- Necessity vs. aspiration
This point may be obvious, but consumers are less likely to churn when they subscribe for a product or service they need. Aspirational services (e.g., gym/fitness memberships, audiobooks, meal kits) are usually the first subscriptions to go when consumers find that they can’t live up to their aspirations for being healthier or reading more.
As SaaS is increasingly taking over our personal lives, I’d love to hear your thoughts. Which consumer products could benefit from a subscription model? Where do you appreciate paying an annual or monthly fee?