“All you can eat” offers

I’ve been thinking about subscription models recently – specifically unlimited usage models.

It isn’t right for all business or all sectors, but generally they seem a good thing. Service industries, for instance, would struggle to cope with an increased demand without a commensurate increase in revenue. And premium good sellers would be reticent to participate in a model where price is to an extent commoditised.

Subscription models can be effective where:

  • The product is disposable (in the sense that it is impermanent) yet potential customers are price sensitive. Each purchase is a transaction, and this transaction requires careful consideration. People will only buy when they can guarantee they will get their money’s worth – they will generally be unwilling to risk a substandard product
  • A product suffers from a great deal of indirect competition. The customer doesn’t face a zero-sum choice in product A or product B, but has a range of alternative sectors to choose from. Growing the market is arguably more important than growing share.
  • A new product category is introduced and people aren’t aware of or don’t understand the benefits that they can receive from changing their behaviour
  • Complementary products are able to benefit from an increase in use of a separate product

Subscription services can transform industries:

  • Film rentals: No longer do people have to decide whether each title will be value for money. With an unlimited subscription from the likes of Netflix or LoveFilm, they can afford to experiment. Not only does this benefit the company, but the industry as a whole grows
  • Mobile phone packages: The mobile internet only took off when unlimited data charges were introduced. This post from Vic Gundotra of Google has some nice stats showing growth resulting from these new packages
  • The food industry originated “all you can eat” offers, but this is too short-term to create real value. People still eat a meal; they are just encouraged to eat more food. Rather it is the more long-term offers that create more value e.g. free refills encouraging people to stay in a coffee shop longer, where they then buy more snacks. I wonder if there are any examples of monthly subscriptions for restaurants? This could work well e.g. pay a monthly fee and then eat there as often as you wish.
  • While not quite “subscription”, loyalty/reward cards can help retain long term business. Chris Stephenson has a great example from Starbucks.

I have actually been persuaded to participate in two subscription services recently:

  • At Cineworld I pay £12 a month for unlimited screenings. This has changed my behaviour for the benefit of both Cineworld and the film industry. Last year I went to the cinema twice. In the past month I have been 5 times. I have purchased overpriced snacks there, but most importantly I am not cannibalising revenue. I am a new customer and I haven’t yet been to a sold-out showing – so the marginal cost of me sitting in an empty seat to watch a screening is effectively zero. A win for cinema and a loss for the other entertainment industries where I am now spending less time
  • I have paid $80 for a season’s access to MLB.TV where I can watch live, archived and “condensed” versions of every baseball game (as the regular season before play-offs is 162 games per team, that is a lot of content). I like baseball but I am not a diehard fan. However, Sky Player’s sports package (£35 a month for non-subscribers) seems overpriced for the marginal cost of adding a newuser who unable to have a dish installed in his flat. It is their prerogative to keep premium pricing, but they risk losing out to specialised services such as MLB.TV and Footyonline.TV, (£23 for a season; HT Graeme Harrison). Infrastructure and rights issues notwithstanding, could Sky not offer single sport or genre packages online, and look to upsell with additional services? That would have persuaded me to buy.

Subscriptions make me question the long-term viability of some services. iTunes has been phenomenally successful in its transactional model, but if someone gets a subscription model correct (or if Spotify can make an ad-funded model work), will that spell the end? Purely transactional models seriously inhibit overall consumption – for instance this is the primary reason why the French VOD offering is so far behind that of comparable countries (they have little free catch-up; it is predominantly pay per view). Is iTunes capping legal consumption of digital music and video?

Finally, is there scope for unlimited subscription models in research? For the large part, no. Industry currencies and syndicated surveys cater to a niche, but research is rarely objective data and the greatest value is derived from the service i.e. interpretation of results, not the results themselves. Companies such as Mintel and Forrester may be able to build a small amount of face time in their fees, and then upsell further consultancy or ad-hoc research, but for the most part I view this as a potential limitation to the core offering.

However, where there is indirect competition, a struggle to communicate benefits or opportunities to upsell complementary products, subscriptions appear to be an enticing prospect.

sk

Image credit: http://www.flickr.com/photos/lexnger/

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