Kae Subscription White Paper

What’s driving the global subscription economy?

SECRETSOFSUBS-CESS

1 Introduction 3

2 Whatarethedriversofsubscription? 5

3 Whatmakesasuccessfulsubscriptionsbusiness? 7

Thekeysuccessfactorsofsubscriptions

Challenge&choice-makingsubscriptionsworkinmusic–Spotify

Challenge&choice-makingsubscriptionsworkinvideo–Netflix

4 Thefutureforsubscriptions 12

Contents

K AE SecretsofSubs-cess Contents 2

1Introduction

TheCustomerStrategyteamatKAEhasspentsometimeassessingthehealthofthesubscriptionbusinessmodel,bringingtogetherourprojectexperiencewithashallowdiveintosomecasestudiesofthosebrandsthathavemadesubscriptionscentraltotheiroffering,includingSpotify,Netflix,SkyandVirgin.

Despitebeingaqualifiedsuccessstory,thesubscriptionmodelcontinuestobeanenigma.Aswewrotethispaper,newsbrokethatYouTubeistolaunchapremiumsubscriptiontierforvideocontent(inadditiontoitsscheduledMusicKeyservice).Buthavingahugebaseofusersforfreeisnoguaranteedplatformforbuildingaviablepaid-forservice.Willingness-to-payneedstobeestablishedamongabroaduserbase(i.e.beyondinnovatorandearlyadopterconsumers)–butatapricehighenoughtosustainabusinessmodelthatcarriessignificantcosts(contentacquisition,technologyandservicingcosts).

ArecentstudybytheIAB(InternetAdvertisingBureau)intheUK(perhapspredictablyforanadvertisingassociation)suggestedthatwillingnesstopayforcontentsubscriptionsispresentinthemassmarket,butonlyatverylowprices.UKadultsarepreparedtopayanaveragepriceofonly£1.10permonthforvideocontentand92pamonthtoaccessnewswebsites,accordingtothestudy.Thesurveyofmorethan2,000adultsfoundthatconsumerswerepreparedtopayevenlessforsocialmediaandonlinegames.

Because of highly sensitive factors like willingness to pay, price and costs, subscription is a notorious business model to get right when it comes to profitability. In this private white paper, produced for KAE clients and close contacts, we explore what it takes to get subscription right, and how the future looks for one of the most popular business models of our time.

K AE 1Introduction 3SecretsofSubs-cess

Forthispaperweconductedsecondaryresearchcoupledwithsomeexpertandexecutiveinterviews,coveringthefollowingbrands:

Subscriptions have spread across many sectors Overthepastfiveyears,thesubscriptionmodelhasbecomethekeydriverofentertainmentcommerceandproductinnovation,drivenbythesuccessofmajorplayerssuchasSpotifyandNetfl ix.Gartnerhaspredictedthat35%oftheglobaltop2000companieswillhaveasignificantcontributiontotheirrevenuesfromsubscriptionsin2015andthatthetotalrevenuesfromSaaS(softwareasaservice)productswilltop$22billionthisyear.

Inthesoftwarebusiness,subscriptionhasbeenthepreferredcommercialmodelofsuppliersforsometime,ledbySalesforce.BothMicrosoftandAdobehaveshiftedtheirbusinessmodeltosubscriptionrecentlytoo.

Butthesubscriptionmodelhasspreadtomorebusinesssectorsthanyoumightexpect.Gamesconsoleplayersarerampinguptheirsubscriptionofferingsinanattempttobuildlong-termcustomerrelationshipsaswellasmanagetheformatshifttoonlinegaming.

‘Subscriptionboxes’–forbeautyproducts(e.g.Birchbox)andfood(e.g.Graze)–havebeengrowingintheUSandUKmarkets.OurfavouriteistheDollarShaveClub(“agreatshaveforafewdollarsamonth”)–doingwellintheUSdespitethebeardyrevival.Thesesubscriptionboxplayersareinteresting,notleastbecausetheyareproductbased,requiringaphysicalfulfilmentdimensionontopoftheothersubscriptionbusinesschallenges.Theirstrategyistoownasliceofanyparticularcategory–forexampleGrazehasfocusedonhealthysnackingandbreakfast–competingwithsupermarketsandfoodchains.

Mostindicativeofallthatthesubscriptionmodelisadaptableacrossproductcategories,iscars.ApartfromsuccessfulnewcarrentalbrandslikeZipcar,mostcarbrandsaregrowingtheirleasebusinesses.Accordingtoautomotiveblogs,morethan50%ofBMW’ssalesnowcomevialeasing–aformofsubscriptionalbeitwithcontractcommitment.

The‘subscriptioneconomy’isalsopoweringdigitalcommerceplatformandcloudtechnologyproviders,suchasZuoraandAvangate,sothereisagrowingB2Beconomybehindthetrendaswell.

K AE 41IntroductionSecretsofSubs-cess

2What are the drivers of subscription?

We’vetakenadeepdiveintothesubscriptionmodelatKAE,acrossallsectors,usingplayersbothnew(includingNetflixandDropbox)andestablished(includingo2andSky),ascasestudies.

Thesubscriptiontrendisnotdrivenbyspecificindustryconditionsorcharacter(seeboxonpage4),sothereisverylittleholdingthemodelback.Wediscoveredtwocorephenomenabehindthegrowthofthebusinessmodel.

Thefirstisawell-balancedformulaofsupplier‘push’andconsumer‘pull’.Often,withtechnologydrivengrowth,suppliersdrivemarketgrowthbeforeconsumersareready(asdemonstratedbyGartner’stechgrowthmodel,the‘hypecurve’),butthesubscriptioneconomyisbeingfuelledbyaplentifulsupplypushalongsidea

naturaldemandpull.Thedemandstemsfromconsumers’desireforasimple,non-transactionalrelationshipthatprovidesthemwithmorevaluethanthesumofthetransactionstheywouldnormallyexpecttomakeinthegivencategory.

Theexampleparexcellenceismusic.ConsumerspaythesamepermonthonSpotify($9.99)aswhattheywouldpayforonealbumdownload(orCD,ifanyonestillbuysthose).ButwithSpotify,theypayforaccesstoamassivecatalogue,playablefromanywherewithawirelessconnection,oronanydevice.Theonlydownsideofcourse,isconsumersdon’townthemusic–somethingthatcauseddebateaboutthevalueof‘rentingmusic’intheearlyyearsofmusicsubscriptions,butisperfectlyunderstoodandacceptedbyconsumersnow.

K AE 1Whatarethedriversofsubscription? 5SecretsofSubs-cess

• Increased predictability of revenue

• Better tracking of revenue and cost (i.e. cash position)

• Technology changes in the software industry (SaaS)

• Demand for more flexibility and pricing options

• A relationship beyond the transactional

• A way of avoiding abundant choice

Supplier Push Customer Pull

A well-balanced formula of supplier ‘push’ and customer ‘pull’ – subscription offers a clear set of benefits to both suppliers and consumers

Forexample,suppliersbenefitfromaregular,predictablerevenuestreamandconsumersgainadifferentwayofaccessingandchoosingtheproduct,withthestressoftransactionalshoppingtransformedintoaconvenience

K AE 6

Thesecondmajordriveristheglobalnatureofthesubscriptionmodel,particularlytheaggressive‘worlddomination’strategiesofmajorsubscriptionplayerslikeNetfl ix,Spotify,Adobe,Microsoftandothers.

Inaddition,somebusinessesareintroducingsubscriptionaspartofaportfolioofofferings(andthereforerevenuestreams).Thisisthecaseinpublishingforexample.Following

thesuccessoftheFTandEconomist,mostmajornewsbrandsarenowpushingtheirsubscriptionofferswithacombinationofdigitalandphysicaleditions,plus‘experiences’–suchastheGuardian’s‘Masterclass’series.

Whetherpartofglobaldomination,oradefensivemovetodiversifytheportfolio,subscriptionseemstobepartofthegrowthstrategyofnumerousbusinessesinadiversesetofsectors.

1Whatarethedriversofsubscription?SecretsofSubs-cess

Subscription strategies go way beyond a shift in the pricing model, requiring clear market positioning, single-minded strategy and ruthless, operational excellence

Forexample,newspaperpublishersarecurrentlymanagingthetransitiontodigitalsubscriptions–albeitwithverydifferentstrategies.TheTimeshasstucktoitsgunsbykeepingitscorecontentwithinapaywall,whereastheGuardianhaskeptitsdigitalcontentfree(advertisingfunded)andismarketingsubscriptionsbasedonadditionalfeaturesandpartnercompanyoffers

GLOBAL

LOCAL

SINGLEPRODUCTPORTFOLIO

Balance•One-price•KPI:ARPU•Mixofsubs+advertising•Manageablerisk

Adapt & broaden•Modularproduct&pricing•Mixofsubs+ala

cartemodels•KPI:ARPU/

productsperuser•Mediumrisk

Scaleplay•Freemiumtier•One-price•KPI:premiumsubs•SupportedbyB2Bpartnerships•Highrisk

Sustainable growth•Discounttrialmarketing•KPI:revenues&margin•Member-get-member•Physicalfulfilmentoftenrequired

(hencelocalmarketoffer)•Mediumrisk

3What makes a successful subscription business?

Thereareclearriskswithsubscription,particularlyforthosebusinessesattemptingtoshifttosubscriptionafteroperatingadifferentmodel.Subscriptionisnotjustanewwayofpricing.

Withsubscription,acompleteoverhauloftheoperatingmodelisrequired.Acrosspeople,systems,processesandstrategy,organisationalresourcesneedtofocussingularlyaroundvalueprovisionandcustomerexperience.Asputbyoneexecutivewespokewithinanestablishedsubscriptionbusiness:

“Youareaskingforalotofmoneyeachmonth,sotheorganisationmustbehavelikeit!”

The key success factors of subscriptionsThemorewelearnaboutthesubscriptionbusinessmodel,wefindthatorganisationalcompetencesareakeydriverofsuccess,sowechosetoexplorethisinmoredepththroughaseriesofshortcasestudies.Successfulsubscriptionplayersseemtohaveadifferentphilosophyofdoingbusiness,andaspecificskill-setinmanagingthecustomerjourneythroughtheclassicstagesofacquisition;retention;loyaltyandchurn.

K AE 3Successfulsubscriptionbusiness 7SecretsofSubs-cess

1. Strategic use of KPIs Withsubscriptions,it’seasytofallintothetrapoflayeringKPIuponKPI–trialusers,conversions,productsperuser,revenueperuser,‘active’usermeasurement,churnetc.WefoundthatbusinessesthatsuccessfullygrewsubscriptionstendedtofocusonjustonecoreKPIatatime,guidingstrategyanddrivingfocus.Forexample,Sky.Foralongtime,Sky’sprimaryfocuswasacquiringnewusers(a10millioncustomerbaseforexample,wasamajorgoal).However,oncethe10milliontargetwasachieved,Sky’sfocusswitchedto‘productsperuser’–drivingthestrategyofcross-sellingquad-playservices.Morerecently,Skyisfocusedonceagainoncustomeracquisition,thistimeforitsdigitalservices,bothwithinitscustomerbase(SkyGo)andinthewider‘OTT’space(NowTV).

2. CRM-centred Inmanybusinesseswherewe’vedonecustomerstrategies,CRMplaysanactiverole,butisverymuchatacticalactivity.CRMstrategycomesafterthecoremarketingstrategyisinplace.Successfulsubscriptionbusinessesareanexceptiontothisrule.CRMiscentraltodecisionmaking,marketing

strategyandthebuildingofcustomerknowledge.Subscriptionbusinessesarebetterat‘customercloseness’thanpurelytransactionalbusinesses.WeexaminedCRMcommunicationslikee-mailandtext,andfoundsuccessfulsubscriptionplayerswerebetteratrelevant,frequentcommunicationsthatinformedorencouragedcustomerstotrynewthingsandstayengaged.

3. On-boarding strategy Inconjunctionwithattractingthebestcustomers,wefoundvariablestrategieswhenitcomestowelcomingnewcustomersandintroducingthemtotheirservicestogetthebestfromthem(again,encouragingnewcustomerstounderstandthevalueoftheirsubscriptions).VirginMediahasanoutstandingapproachtothe‘on-boarding’process,witha‘wowfactor’welcomeandhighlyengaging,informalcommunicationaboutwhatservicesareavailableandhowtotrythem.Withsubscriptionbeingamajorcommitmentbycustomers,thishigh-effortwelcomeprocessisbothimpressiveandreassuringandthebeststarttoalong-termvaluerelationship.

K AE 8

SUBSCRIBE

1. Strategic

use of KPIs2.

CRM Centred

3. On-boarding

strategy

4. Brand-led

5. ‘Whole

product’pricing

6. Customer

Service

7. Product

Innovation

We have identified seven Key Success Factors that make successful subscription players tick:

3SuccessfulsubscriptionbusinessSecretsofSubs-cess

4. Brand-led KAEhasworkedwithmanyproduct-basedcompaniesthatlaunchimpressive,individualproducts,butdon’tdoenoughtocontinuouslyinnovatefortheirbrands.Oursubscriptioncasestudieshowever,seemedtobeproudlyfocusedonbrand.O2forexample,continuouslytopsbrandtrackerstudiesformobile,duetoitsbigbrand-ledinitiativeslikeO2RewardsanditsprogressiveproductslikeRefresh.Likewise,Sky’scontinuousinvestmentinbothcontent(majornewprogrammesandrenewedsportsrights)andinnovation(SkyGO,NowTV)isnicelyintegratedwithitsover-arching‘BelieveinBetter’brandstrategy.

5. ‘Whole product’ pricing Ourdiveintosubscriptionsprovedtousthatsubscriptionisanorganisationaldiscipline,notjustapricingstrategy.However,thepricingofsubscriptionsisinitselfisahighlycriticalfactor.O2hasrecognisedthatpricecomplexityinthemobilespacehashelpeddrivemarginsovertime,butiswearingthinwithcustomers,henceitsRefreshproposition.Skyrecentlyreducedthenumberofcontentbundleoptionsforcustomerstojustfour(atonestagethecompanyhadover100differentlypricedoffers).ServiceslikeSpotifyandNetflixhavestucktotheirgunstokeeppriceassimpleaspossible–justonetierandoneprice.Subscriptionbusinesseshavetobepassionateaboutdemonstratingcontinuousvaluetotheircustomers,andthereforeneedtoconstantlybeawareofhowtheirpricepointsreflectthisvalue.Sinceincreasingpricesisalothardertodothandiscounting,thesedecisionshavetobespot-on.Wecallthisprocess‘wholeproductpricing’asthepricingdecisionissointertwinedwiththeoverallproductstrategy.

6. Customer Service Mostsubscriptionserviceshaveanongoingrelationshipwiththeircustomersviatheplethoraofdigitalchannels–alreadyanadvantageovertransactionalbasedbusinessesintermsofcustomercommunicationandfeedback.Themosttransactionalofbusinesses,Amazon,isanexemplarwhenitcomestoservice.ButAmazon’sshifttosubscriptionviaitsmusic,videoandPrimeserviceswillrequirethecompanytoofferamorebalancedandperhapspersonalisedapproachthanitscurrentlevelofdigitalefficiency.Wefoundthatthesuccessfulsubscriptionplayersutilisedalltheusualtouchpointswell,andinbalance.Tutorials,trainingandrecommendationswerealsoafamiliarpartoftheoffering–oftendonewithgreatcare.Insectorssuchasmobileandentertainmentcontent,newplayerscanoftenenterthemarketdemonstratinganabilitytodisruptcurrentoffersintermsofvalue,socustomerservicecanbecomeakeydifferentiatorfortheestablishedplayers.

7. Product InnovationWefoundaveryspecificcapabilitytobepresentamongsubscriptionleaders,whenitcomestoinnovation.Inaword,steadyseemstobethesecrettosuccess.Ifproductfeaturesaretoonumerous,orloadedtooquickly,customerscangetconfusedorfrustrated.Spotify’sraftoffeaturelaunchesin2013(ledbyanautomaticallyloadedDiscoverpage)wereindangerofalienatingcoreusers,forexample.Sincethen,itsfeatureshaveevenedout,andappeartobemuchbetterresearched.Subscribersappreciatesteady,continuousimprovementsthataddvalue,butkeepthecoreexperiencesimple–thereasontheysubscribedinthefirstplace.

K AE 93SuccessfulsubscriptionbusinessSecretsofSubs-cess

Challenge & choice - making subscriptions work in music – SpotifySpotifywasn’tthefirstmusicbrandtolaunchacompellingsubscriptionservice.BothRhapsody,andalegalisedversionofNapster,hadlaunchedyearsbeforeinarangeofmarketsincludingtheUSA.Butthoseservicesstruggledtoreachthemassmarketwithmusicstreaming.Thetrueinnovatorofthesubscriptionmodelarrivedin2009withafreetierserviceactingasabroadacquisitionfunnelforpremiumcustomers(‘freemium’),andaveryslickmusicplayerappthatallowedfullmobilityforthosewillingtopay.Followingasingle-minded‘globaldomination’strategy,Spotifyhasreached58countriesand60millionusers.

Spotifyhassuccessfullykeptitscorepropositionsimple,whilemakingcontinuousimprovementstoit.Anythingthathasn’tworkedhasbeenquietly,unceremoniouslyremovedfromtheproductportfolio.Ithasmanagedtodivertindustryargumentawayfromchurn–thekillerforearlysubscriptionplayersandstillprobably,forSpotify’speers.

ArecentreassessmentoffreemiumbySpotify’smusicsuppliershas,however,putnewpressureontheservice.Itsconversionratefromfreeuserstopayingsubscribershasbeenwidelybroadcast:15millionpremiumsubscriptionsfrom60millionusers–animpressive25%.Butthishassloweddown,andthemusiclabelsandpublisherswantmorewaystomonetisethebroaderbaseofusers.Sofar,advertisingrevenue(althoughstillincreasing)hasbeenadisappointmentcomparedwiththatfromcoresubscribers.

Spotify’s strategic choicesSpotify’spresentoptionsaretocreaterevenuestreamsthataugmentthecorepremiumsubs.Theseincludelowerpricedtiers,familyupgrades(Spotifyhasrecentlyexperimentedwithits‘Family’productatanincrementalpriceof$14.99),sellingmerchandise(&perhapstickets),andmajorpartnerdeals(Spotifyalreadyhasnumerousdealsinplacewithtelcoprovidersaroundtheworld).

Spotifyhashowevertriedtheseoptions,tosomedegreeofsuccess,butnothingtomatchtheincomefromitscorepayingusers.Itappearstohavealimitedsetofchoices,butsimplyhastokeepitspremiumsubscriptionacquisitionratesup.Moreover,itismorecriticalthanevertokeepacquiring‘real’,committed,customers–thoselesslikelytochurnafteraninitialtrialormobilebundleoffer.

Withorwithoutthefreemiumfunnel,thebiggerquestionis,howcanSpotifycontinuetogrowitscore?Drivingpremiumsubscriptionsintothemassmarketistoughenoughwithlow-costcompetitorslikeYouTubeandPandoraonthemarket,butitwillgetevenharderasartistsgetmorevocalabouttheirdissatisfactionwiththecurrenteconomicsaroundthestreamingmodel.

Itseemsinevitablethatmoreartistswillchoosetowithholdnewalbums(thosethathave,seemtohavedonewelloutofthedecision).AmajornewstreamingcompetitorhasalsoarrivedintheshapeofApple–whichappearstobepushingforwindowedexclusivesfromhighprofileartists.

Spotifyhascrammedsomuchintovalueforcustomersintoitscore$9.99pricepoint,itseemstohavecreatedamassivecommercialchallengeforitself.

K AE 103SuccessfulsubscriptionbusinessSecretsofSubs-cess

Challenge & choice - making subscriptions work in video – Netfl ixFoundedin1997asamailordervideorentalbusiness,Netfl ixisnowavailablein50countries,butwantstoexpandto200withintwoyears.Ithasnowreachedover60millionsubscribersaroundtheworldandcontinuestogrowatanimpressiverate.ItsrecentarrivalinScandinaviaandFrancehasdriventheondemandvideomarketsinthosecountriesandexceededallexpectationsintermsofgrowth.

Whenitstruggledtolicensefrommanyofthemajorfilmstudiosandtelevisionnetworks,Netfl ixmadeamajorstrategicdecisiontoinvestinoriginaltelevisionprogrammes–amovethatpaidoffhandsomelywithHouseofCards,butmayhaveprovedmorechallengingwithMarcoPolo.Inexplainingitsdecisiontolaunchoriginalprogramming,ReedHastingssaidthatNetfl ixwastryingtobecomeHBOfasterthanHBOcanbecomeNetfl ix.

Amazon,AppleandHBOareNetfl ix’sbiggestglobalthreats,alongwithanincreasingnumberoflocalTVnetworksnowlaunchingtheirown‘overthetop’videoservices(includingSky,ITVandChannel4intheUKforexample,alongwithBBCiPlayerofcourse).

IntheUSA,HBOhasrecentlyannouncedanewpartnershipwithAppleforitsownoverthetopserviceHBONow,joiningDishandothermajorrivalsfromComcast,HuluandSony.WhatcanNetfl ixdotodefenditspositionundersuchmajorthreats?

Netfl ix’s strategic choicesDespitethegrowingcompetition,Netfl ixlaunchedearlyenoughtobuildrealmomentum,andhasbecomeamajorforceinonlineviewing.Itstucktoitscorepropositionofpay-only(noadvertising)atavaluepricepoint(originally$7.99intheUSA,increasedto$8.99in2014).Intheprocess,itchangedviewerbehaviours,especiallyforitscoredramaHouseofCards,whichwasmadeavailableinitsentireseries.

Netfl ix’smainbarrierremainsitslimitedcontentcatalogue.Thoughtheserviceoftenespousesbigtalkaboutbigdata,andtheuseofalgorithmstomakecontentselectioneasy,choosingwhattowatchonNetfl ixisaseriouscustomerpainpointbecauseofthelackofcontentavailable.

Netfl ixwillneedtocontinuetoworkaroundthisissuewithanumberofcombinedstrategies.Itwilldoanythingandeverythingtoavoidincreasingpricesagain,havingbeenforcedtodoitonce.Andithassetaclearmissiontoavoidanynotionofanadvertisingfundedmodel.

Netfl ix’sstrategicchoicesaretocontinuetoinvestinmajorTVseriesandmoviecontent,andtoobtaingloballicensingforthecatalogueitcanacquirefromstudiosandnetworks.Itcouldexpanditsgenrestocovercomedy,reality,orevenperhaps,nichesports.LikeApplewilldoinmusic,Netfl ixislikelytouseitsmarketpowertonegotiateforexclusivesfromthosestudiosthatlikethelookofthechequesizes.Withnocurrentglobalsourcefor‘deepVoD’(videoondemand),Netfl ixseemswellpositionedtobecometheplacetogoforlongtail,nicheandarchiveprogrammes.

K AE 113SuccessfulsubscriptionbusinessSecretsofSubs-cess

4The future for subscriptions

K AE 4Thefutureforsubscriptions 12

Weuncoveredasetofchallengesforsubscriptionplayersthatmightmakeithardertodrivegrowthfromnowon.Inparticular,fromthepointofviewofconsumerdemand,twochallengesstandout:

• Potentialsaturation–howmanysubscriptionscanconsumerssustain?

• Risingexpectations–withvaluesuchadriver,cansubscriptionplayersmakedecentenoughmarginstothrive?

Would you like another subscription to go with that?Fromthepointofviewofconsumerdemand,amajorquestionisjusthowmanysubscriptionscaneachindividual,orhousehold,sustain?InTVandfilm,contentisbeingcarvedupamongseveralsubscriptionproviders,somethingthathasheldbacksubscriptionsinonlinegames.InTVforexample,canwereallyexpectconsumerstocarrysubscriptionsfromeachofSky,Netflix,AmazonandApple?Arecontentsupplierspotentiallymissingoutonbiggeraudiencesbynotsupplyingtojustonemajoraggregator?Certainly,recentreportsaboutthevolumeofillegaldownloadsforprimecontentsuchasGameofThrones(season5)suggestthatfanswilldowhatever’s

necessarytoaccessthecontent,withoutchoosingtherequiredsubscription.

However,wheremoreuniversalcontentcoveragedoesexist–inmusicforexample–thismodelappearstobecomingunderseverecommercialstrainsandstresses.Indeed,musicmaybegintolookmorelikevideo,ifSpotify’srivalslikeAppleorTidalaresuccessfulinconvincingartiststoputexclusivesontotheirservicesandwithholdthemfromSpotify.

Ifsubscriptiongrowthisheldincheckthroughthefragmentationofsupply,perhapscontentownerswillmoreactivelypursuewindowingstrategies,managingtheirportfoliosfrommarkettomarketwithacarefulstrategyofbroadcast,pay-per-view,pay-to-ownandfinally,subscription.

Lookingmorebroadlyacrossallsectors,withsubscriptionsbecomingsoprevalent,justhowmuchwillthemodelkeepongrowingbeforesaturationisreached?Moreover,intimesofausterity,wemaylooktothebigticketitemssuchasongoingsubscriptions,inmakingcutbacks.AddtogetherapayTVsubscriptionwithNetflixandSpotify,anaveragemobilepackage,andweareapproachingorevenexceeding£100permonthpurelyonentertainmentandcommunications.

SecretsofSubs-cess

Such great value for customers, can it be good for business?Thesecondchallengefromthepointofviewofconsumerdemandisrisingexpectations.Spotifyhassetthebarhigh–accesstoallmusiconalldevices–forthepriceofanalbum.It’sagreatvaluemodelandamiracleformusicfans,butdoesitleaveenoughmarginforSpotifytobreathe?Andisthereanyscopeforincreasingprices?

ThelowmarginshaveforcedplayerslikeSpotifyandNetflixtogoforglobaldominationstrategiesandthesebusinesseshaveperhapsbecometooobsessedbythedriveforscale,ratherthanfocusonaprofitable,sustainablemodel.Dedicatedsubscriptionplayersalsoleavethemselvesexposedtocompetitorsthatcanaffordtosubsidisecontenttoselldevicesorotherservices–likeAmazon,AppleandGooglecan.Thismakessustainabilityevenharderforstandalonesubscriptionbusinesses.

Intheenditcomesdowntovalue,andthefeelingofattachmenttothesubscriptionfeltbytheconsumer.Isitsomethingtheycan’tlivewithout?Thebusinessesthatthrivewiththesubscriptionmodelunderstandvalue,andarepassionateaboutit.However,whilethefocusonvalueisacoredriverforsubscriptionplayers,havetheymadearodfortheirownbacksbysettingthebartoohigh?

Wepredictthatsubscriptionplayerswillsoonintroduceanumberofadd-onpayextras,orrequireconsumerstocommittocontractterms–likethetraditionalsubscriberbusinessesinPayTVandmobile.Howthiswillimpactcustomervalueperceptionswillbeinterestingtosee.

Staying the course – playing to strengths and exceeding with innovation, service and brandWebelievethereisahighdependencybetweenthreesuccessfactorsinparticular:whole-productpricing,innovation,andbeingbrand-led.Moreconfidentinnovatorsarebetteratbeingbrand-ledandsubsequentlyhavemorecapitalwithcustomers.Thismayallowthemtoprotectpremiumpricing(orincreaseprices)eveninthefaceofheavycompetitionfromupstarts.Wethinkit’salsopossibleforcustomerservicetoplayasimilarroletoinnovation,orpotentiallybeasubstituteforit.Greatservicemayhelppreservebrand,andinturn,sustainpremiumprice.

Market leaders must protect price, requiring a strong brand, underpinned by innovation, customer service or other forms of excellence.e.g. Sky ‘Believe in Better’

Subscriptionisnoteasy.Whileitisn’tpossibletoexcelateverything,wefoundthatsuccessfulsubscriptionbusinessesmasteredatleastthreeofthesevensuccessfactors(sometimesmore),anddisplayedahighlevelofcompetenceordesire,inothers.Theideaoftradingoffsuccessfactorshowever–excellinginsometocompensateforfailingsinothers–doesn’tcutit.Weaknessinjustacoupleofareasexposeseventhebestperformerstotheriskofbeingusurpedbycompetitorsabletoexploittheweakestlinks.

K AE 13

Innovation or Customer

ServiceBrand

Price

4ThefutureforsubscriptionsSecretsofSubs-cess

ThiswhitepaperwasputtogetherbytheKAECustomerStrategyTeam.Forfurtherdetailsandaconversationaboutsubscriptions,acquisition,retentionorloyaltystrategies,contactusasfollows:

Keith Jopling, SVP keith.jopling@kae.com07796548524

Baber Ahmed, Senior Consultantbaber.ahmed@kae.com

Salman Sharif, Senior Consultantsalman.sharif@kae.com

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