The subscription business model has been around since our great-grandparents had their milk and coal delivered to their door, but over the last two decades it has been increasingly adopted by technology and media companies. And now in 2014, it is fast becoming the defacto business model for any company looking to accelerate growth, maximize cash, and increase its value. Here are the four factors that have boosted the growth of the subscription economy.
1. The Access Generation
The home ownership rate in the United States is at a 20-year low. One reason lies in the behavior of the millennial generation. Unlike their baby boomer parents, for whom the American Dream meant a house in the suburbs, today's twenty- and thirtysomethings are delaying marriage, kids, and a house in the suburbs in favor of renting in the city.
Given a mountain of student debt and a difficult job market, many young people couldn't afford to buy a house even if they wanted one; but for many millennials, assets are viewed as a yoke restricting their mobility.
Call them 'the access generation': a growing cohort of mobile, technically savvy young people who value access over assets. They prefer to rent a home rather than own one; listen to a song on Spotify rather than buy it from iTunes; and subscribe to Oysterbooks.com or Scribd rather than buy from a Barnes & Noble store.
The access generation is behind the explosion of the new 'sharing' economy. Sharing stuff has been around since stuff itself, but technology allows sharing to scale. Websites like Airbnb match buyer and seller; your GPS-enabled iPhone allows you to find the closest Zipcar; Facebook and LinkedIn enable you to vet anyone you're thinking of doing business with; and sites like PayPal allow you to safely pay for what you're renting.
2. Lightswitch Reliability
When you walk into a room and turn on the light, you don't hold your breath hoping the room will illuminate; you just expect the lights to come on. The Internet is becoming almost as pervasive and reliable. Today we just expect Wi-Fi wherever we go: a hotel, a friend's basement, a plane 30,000 feet in the air.
When you can rely on a subscription service like Salesforce.com to house all your company's private customer data, or your bank's website to pay your electricity bill, buying a $19-per-month subscription to dog treats from BarkBox.com doesn't seem that risky. Matt Meeker, BarkBox's founder, told All Things Digital: "BarkBox wouldn't have made much sense back when there wasn't much trust in online commerce and the Internet was slower."
3. Delicious Data
Do you remember the old distribution channel structure they taught in high school? Manufacturers sell to distributors; distributors sell to retailers; retailers sell to the end customer. But today, businesses are closer to their end users. Many consumers buy directly through an online channel, and those who don't often interact with the producer directly for post-sale service or support. And all those customer interactions are being fed into mathematical models, which are run by computers capable of storing and processing billions of data points in seconds. After you rate The West Wing with five stars, Netflix's data can predict you'll like House of Cards.
Data has become an asset, and nobody has more customer information than a subscription business. Traditional companies are launching entire subscription offerings just for the data they provide.
Between 2012 and 2013, Walmart's innovation incubator @WalmartLabs ran the subscription business Goodies Co. For a flat fee of $7 a month, Goodies delivered a box of sample-size treats to your doorstep. If you liked the product, you could purchase the full-size version on the Goodies Co. website.
Walmart gained insight on subscribers not only through their purchases but also via a product-rating system on the Goodies website. Goodies then rewarded reviewers for their contributions with loyalty points, and if subscribers earned enough points, they could trade them in to get their next month's box free.
The world's largest retailer didn't launch Goodies Co. for the purpose of making a measly $7 a month; Walmart wanted to know which snacks resonated enough to make the customer want to buy the full-size version.
4. The Long Tail
As former Wired magazine editor Chris Anderson argued in his bestselling book The Long Tail, the Internet has lowered the cost of distribution for many products and services, and our appetites have broadened as a result.
As Anderson recounts: there was a time when you bought your books in a bookstore. The bookstore paid rent and therefore had to stock only the bestselling books to ensure sales revenue per square foot was high enough to cover its rent and staff. If you liked John Grisham or Jim Collins, you were fine; but if your reading tastes were a touch more exotic, you were screwed.
Today, the cost of merchandising products digitally is close to zero, so companies are no longer confined to carrying just "hits." As a result, we can indulge in our specific preferences. If you have a thing for salsa dancing, you can listen to hundreds of hours of cha-cha-cha with your subscription to Spotify. If you like British crime drama, there's no need to wait for the movie of the week on cable; you can watch Inspector Morse any time of the day or night with your streaming subscription to Netflix. If you love chocolate, you can subscribe to New York-based Standard Cocoa for $25 per month and receive a handpicked monthly selection of chocolate from around the world.