The era of the ‘home subscriber’

November 11, 2020

This article was originally published in El País by Sandra López Latvian.


Think for a moment about the number of services you are subscribed to. Netflix, Amazon, Spotify, HBO, Google Drive, Dropbox, Tinder, Office 365, PlayStation, Disney Plus, Apple TV? It is just the window of a gigantic back room. The subscription economy is advancing unstoppably across the planet and no one doubts that this model, which has expanded with the health and economic crisis of the coronavirus, will mark the future of consumption. Quantifying it is a daunting task and few have done it.

The investment bank specialized in technology GP Bullhound expects it to exceed 150,000 million dollars annually (126,000 million euros) by 2022. The calculation is based on an annual expenditure of 100 dollars per smartphone in the United States and 35 in the rest of the world, but the study does not include physical products or goods. “We estimate that the subscription economy will grow 10-15% annually over 15 years,” estimates Nolan Hoffmeyer, Subscription Economy fund manager at Thematics AM (a Natixis IM affiliate).

The entertainment industry was a pioneer but now they are everywhere, even in sectors unimaginable until recently: beauty kits, personal care products (razor blades, sanitary towels, diapers, condoms or contact lenses), media, fashion and footwear, jewelry, transportation (cars, motorhomes), beverages (from wine to coffee), food, flights, hotels, fitness, florists, finance, legal services, health, work tools, education, pet products, furniture, hardware and DIY. Dozens of firms operate in each segment that simulate the model of streaming platforms. There is a Netflix for everything you can think of.

The numbers on the underwriting economy are incontestable. From 2012 to 2020, the revenues of companies with payment models have grown by 403%. See the comparison: Sales of companies in the S&P 500, one of the largest stock indices in the United States, increased 130% in those same eight years. This is reported in the latest Subscription Economy Index (SEI) from Zuora, a California-based company that analyzes the health and growth of more than 500 brands, including The Guardian and HBO. From January 2012 to June 2020, with a pandemic in between, “the annual revenues of these firms grew six times more than the entire S&P 500,” says Carl Gold, Zuora’s chief data scientist and creator of the index.

There are several reasons for this boom , but above all of them there are two: technological advances, which allow it to be a model applicable to any industry, and the strength of a generation of consumers who prefer access to subscription services in detriment to the property of the products. “In the genesis of this model is the great change that means going from selling products to selling services. We could say that today we are moving very quickly towards the era of everything as a service (XaaS), ”says Adolfo Ramírez Morales, advisor on digital transformation and author of Digitize or disappear. In fact, product-based businesses are successfully evolving to the subscription model, like Adobe or Microsoft Office.

Battle for Satisfaction

“The economy has gone from capex (to own) to opex (to use). When companies have been able to package services based on products, the world of subscription has developed”, contributes Javier Vello, partner responsible for the Consumer and Retail sector at EY. Already in 2014 The Economist, estimated at 80% the volume of consumers who demanded a different model to the economy of the product. “Companies are putting the customer at the center of all their decisions and a great battle is taking place for consumer satisfaction and loyalty,” says Enrique Porta, partner responsible for Consumption and Distribution at KPMG in Spain.

If the key is found – which is not always the case – this business model is especially attractive in times of crisis. “It is showing more resilience and is recovering faster in this economic crisis due to its better adaptation to demand and the evolution of consumer purchasing power,” explains Porta. “It is definitely more resistant to economic fluctuations, and the last six months have shown it,” Hoffmeyer says.

With such an X-ray, the diagnosis is accurate: “Any company that continues to focus on pure products without a strong focus on customer preferences runs the risk of falling behind its competitors,” says Gold. Big chains like Nike – a pair of children’s sneakers starting at $ 20 a month (17 euros) – have understood this a long time ago. El Corte Inglés has just taken the step to compete with Amazon by launching a flat rate that allows subscribers to have their order at home in less than 24 hours. In a couple of weeks, Endesa launches its energy subscription platform.

But there are also a whole series of small businesses that do not want to give up the advantages of this economy. “It is a very accessible model and a clear opportunity for a large number of companies and SMEs, which can see how they expand and systematize their business,” says Ramírez Morales. The digital transformation advisor believes that “all companies should consider the option of converting their business (or part of it) to the subscription model.”

This is what Cowards and Chickens are doing by selling their eggs (two dozen for 19.90 euros per month). Or Dehesa el Milagro, a farm that offers baskets of fruits, vegetables and meat as often as the customer wants. “Although it is strategic, we do not stick to subscription as the only model,” says Chema Martínez, head of the online store. Joselito Nude has a subscription service for a different cut of meat every week, as well as tips and recipes. The same model is being applied to pastries, cheeses, fruits… In Bebenube, subscribers receive every month a box with six products for babies, such as toys, cosmetics, hygiene products … “Although the pandemic has disrupted some According to the growth forecasts, we currently have about 1,500 subscribed mothers, ”says Álvaro Guitián, its founder. They offer different modalities that go from 24.90 euros per month to 19.90 euros per year. Lovebox’s monthly subscription erotic boxes cost 24.95 euros per month, and at MyAlma, shipments of pads, tampons and panty liners are customizable.

Paying a flat fee is becoming the norm for many consumers. ” Software as a service is the most important leg of this economy, followed by ecommerce and the subscription to durable goods ”, says Aquilino Peña, president of the Spanish Association of Capital, Growth and Investment (Ascri) and founding partner of Kibo Venture. Consumers around the world have more subscriptions than ever and expect to add more in the future. A 2019 Zuora survey of 13,000 citizens in 12 countries reveals that 71% have them, compared to 53% five years ago. In addition, 74% believe that in the future they will pay for more services and own fewer physical assets. In the case of Spain, the figure rises to 79%. According to a 2018 Bankinter report, European households spend a monthly average of 130 euros.

Viral impact

The explosion of the coronavirus pandemic only strengthened this market. In full confinement, subscriptions to applications for mental well-being, education or sports at home soared. Peloton, known as the Netflix of spinning, has reached one million members. Subscriber growth rates increased 12% in the second quarter of the year, surpassing the figures for the second half of 2019, according to Zuora. And, although they have returned to normal and in some cases such as Netflix have slowed down, during the third quarter it seems that companies with recurring business models have weathered the Covid storm better than others, they conclude in Zuora.

It is true that the subscriptions are not from yesterday. They have been with us for a long time, although without making excessive noise (gyms, fascicles or video stores). This is a renamed old idea that fits into a new economic model. The big ones, like Spotify, Netflix and Amazon, have changed the concept that users had. “We can see a decade ago the moment when it began to expand into new sectors and in a different way,” says Porta. Spotify, which was born in 2005, has 299 million monthly active users (data as of June 30, 2020), of which 138 million are premium subscribers .

Amazon launched the Prime program in 2005 with the goal of taking two-day shipments from an occasional luxury to an everyday thing. “This continues to be the number one reason why so many customers sign up for Amazon Prime for the first time. However, it is the entertainment options that make the difference ”, says Javier Ramis, head of Amazon Prime for Spain and Italy. Today it has more than 150 million subscribers worldwide.

Since then, the flat rate model has penetrated a wide variety of industries. It’s just the beginning. N26 is a mobile bank that was a pioneer in talking about subscription banking in Spain. Founded by Valentin Stalf and Maximilian Tayenthal, it was born in Germany in 2013 in response to a banking industry that was crying out for transformation. It is based on a freemium model , where the customer can choose between a free basic service or pay a fixed fee for value-added services. “ N26 is revolutionizing the world of banking with a subscription model, as have some of the most powerful industries in the world: think of Netflix, Amazon and even The New York Times or EL PAÍS ”, argues Francisco Sierra, general director of N26 in Spain and Portugal. With the support of investors such as Insight Venture Partners, GIC, Tencent or Allianz X, it has achieved more than five million clients worldwide (500,000 in Spain) and its current valuation exceeds 3,500 million dollars (3,000 million euros) .

Another way to fly and drive

Before the pandemic, many airlines were skeptical about the benefits of selling subscription flights. Times may be changing. Caravelo, a Barcelona-based start-up , has been working with Volaris for two years to implement Vpass, its monthly subscription program. In March, the airline, located in Mexico, had more than 30,000 subscribers who receive a flight a month for 399 pesos (16 euros) or roundtrip for 639 pesos (25 euros). There are premium services optional, such as checking luggage. They are going to launch the model with two more airlines in the coming months (one is Viva Air and the other they do not want to make public yet). “As a result of the pandemic, many airlines have lost millions of revenues because their business is based on a transactional model. Instead, subscriptions offer guaranteed income each month, ”says Jess Evans of Caravelo.

25% of the European car fleet will be under a subscription model in the next five years, predicts a study by Frost & Sullivan. With the arrival of the covid, the subscription of cars has accelerated. There are several companies that offer these payment services, such as Wabi, Drover or Bipi. The latter claims to be growing at a rate of 200% per month since May and will soon begin its expansion in Europe. Bipi was born in 2017 by the hand of Hans Christ and Alejandro Vigaray and offers more than 40 models: from a Fiat 500 for 199 euros per month, to a Tesla for 999 euros. “There are many issues that we do not take into account when buying a car: depreciation, maintenance, insurance, changing the wheels… If your work or personal situation changes, you don’t have to sell your car; it is as easy as returning it or exchanging it for another ”, says Hans Christ, co-founder of the company. His goal is to put 15,000 cars on the road by 2021.

Another way of dressing and eating

In the fashion sector, subscriptions have caught cruising speed. There are more and more options. From Rent the Runaway, the start-up that leads the US market, through Ouh Lo Là or Ecoadicta, to Stitch Fix, known as the Netflix of retail. This company created in 2011 in San Francisco is listed on the Nasdaq, has 3.5 million active clients and sales of 1.7 billion euros. Four garments a month are 69 dollars (58 euros), eight cost 88 dollars and 16 pieces cost 149. A peculiar company is the Dutch Mud Jeans, with its subscription of jeans in the Netherlands, Belgium and Germany. The customer pays 9.95 euros for the first pair and 8.95 euros for the following. After 12 months you can keep the jeans, exchange them for others or return them.

“The textile sector, together with the health sector, are the ones that will take the cat to the water”, bets Jordi Mur, director of Innovation and Projects of the Association of Manufacturers and Distributors (AECOC). In fact, all those consulted see it very possible that large chains like Zara end up offering some subscription model to increase their consumption.

Subscription has come to hospitality, food and beverages to stay. There are a multitude of home-made food tupper companies , such as Minevera or that of the Galicians in Wetaca. HelloFresh is different.The German company, which has been listed on the Frankfurt Stock Exchange since 2017 and operates in 13 countries, delivers a box with the recipes and fresh ingredients to cook at home. The cost per week is $ 53.94 (46 euros) for three prescriptions. “This model has proven extremely successful. In the second quarter of 2020, we delivered 148 million meals to 4.18 million customers in 14 geographic areas. The year 2019 was our first profitable year and by 2020 we expect to increase our revenues between 75% and 95% compared to last year ”, says Saskia Leisewitz, head of corporate communication at HelloFresh, where they recognize that, with the pandemic, people eat and dine more at home. It is the same model that the FoodStories firm is applying in Spain.

Several firms operate in the wine sector, such as Vinoselección, Winebox or Bodeboca. Although the subscription model has some cracks. “In the world of wine, the consumer is not willing to buy blindly,” says Paula Hernández, Brand & Communication Manager at Bodeboca, whose subscription service, The Box, has 1,000 members. Bodeboca has already made two changes of approach to the model and “even so it costs that it has a considerable volume.” “The income from this line of business is marginal with respect to our turnover, but we maintain this product, which is profitable, as a way to make a brand and to retain young people, ”says Hernández. By subscribing for 19.90 euros per month, each user receives a box that includes two wines selected by experts.

Beauty and care

Birchbox, Bodybox, Essentia Box or LPF Box are just a sample of the subscription beauty brands. Birchbox celebrates a decade delivering boxes that include five products (cosmetics, hair care …) for 10.95 euros per month. The company that succeeds in discovery commerce grew very quickly and today has close to a million users worldwide (more than 50,000 in Spain). “This year, with the pandemic and the impossibility of testing cosmetics or beauty products in physical stores, we are growing above 40%,” says Alex Vallbona, president of Birchbox Europe.

The proliferation of subscriptions occurs because the model has clear benefits for businesses: predictable, recurring revenue stream and stronger relationships with users. It is the goose that lays the golden eggs. “Having recurring income and cash flow health is an important aspect, both for the business and for its planning,” says Adolfo Ramírez. “A company with 100 million dollars (86 million euros) of income and where an average of 75% of customers renew year after year, you already know that next year it will make 75 million dollars (64 million euros) of revenue without selling a single new subscription, ”explains Nolan Hoffmeyer.

In addition, it allows calculating the amount of stock that the business has to have each month, which reduces economic risk. And “they generate a stable and periodic relationship with the client, which can be used to retain them and get them to buy superior plans or products ( up selling ) and even related products ( cross selling or cross selling )”, develops Javier José Megías, head of the Startup Program of the Bankinter Innovation Foundation.

Logically, it is much easier said than done. “That all companies are testing it is logical because you have brutal loyalty and brand stability, but the formula is difficult,” says Sandra Sieber, director of the Information Systems Department at IESE.

On the tightrope

They are not immune to failure. Profitability is your Achilles heel, especially for growing companies. Not all of them will survive because it is difficult and expensive to build a large subscriber base, but even more so to retain them and know what percentage to unsubscribe and when. “They usually require a high minimum volume of consumers and as long as that point is not reached they are economically deficient models and that, therefore, require a significant amount of investment”, adds Megias.

An uncontrolled increase in the cost of acquiring customers can lead to bankruptcy, especially if they cancel before recovering the amount invested in them. “The margin they leave must be at least three times the acquisition cost,” says Vallbona, from Birchbox. “We can establish the time to see if the business is profitable in two years. What is relevant is that subscribers stay at least six months, ”says Ramírez. There is another critical point. Customers must find value, either because it covers a recurring need ( food containers ), because buying the asset would be very expensive (cars), or because it is a consumption based on fashion (clothing and makeup).

Therefore, these firms need significant capital injections. “There is a lot of venture capital, private equity and business angels behind these companies, which must invoice between 50,000 to 60,000 euros a month to attract the attention of professional investors,” says the president of Ascri. This is the case of Accel, which led the investment in Facebook. Or CVC Capital Partners, one of the largest private equity in Europe. The problem, Jordi Mur believes, is that at this time of instability, “investments may temporarily disappear, leaving some growth-phase firms on the tightrope.”

The ace up your sleeve

Dollar Shave Club sends millions of subscribers in the United States each month a box that includes razors, shaving cream , aftershave , wipes and deodorant. Five products are $ 35 a month (30 euros). A simple idea that made this start-up touch the top based in California. The spectacular success of Dollar Shave Club did not go unnoticed by the giants of the sector and Unilever ended up buying it in 2016 for about one billion dollars (856 million euros) to face its main rival, Gillette. What do consumers see to elevate a business that sells razor blades? “An algorithm thinks for you. It brings you the exact blades and foam and you forget to think about replacing them ”, says Jordi Mur, Director of Innovation and Projects of the Association of Manufacturers and Distributors.

It is comfortable. But the subscription models have more advantages, such as “systematic replenishment, discounts and special prices and access to news,” says Adolfo Ramírez Morales, advisor on digital transformation. Regarding discounts, in the first months of the pandemic, mired in tremendous economic uncertainty, companies used this powerful weapon to retain members. The average downgrade was 18% higher than in 2019. “This not only generated new customers across all industries, it also created trust in an existing user base,” says Carl Gold, Zuora’s chief data scientist.

For example, during this year’s Amazon Prime Day (October 13 and 14), the e-commerce giant has offered its customers “great deals and incredible discounts on more than a million products in all categories, as well as dozens thousands of promotions on products from small and medium-sized companies around the world ”, explains Javier Ramis, head of Amazon Prime for Spain and Italy. According to eMarketer estimates collected by Statista, the global business volume generated during this event could approach 10 billion dollars this year (9.91 billion euros), after an increase of 43% compared to the 2019 edition.

The form of payment helps the customer to get hooked. For the consumer “they are micropayments that he does not give importance to. 90% of people prefer to pay 15 euros per month than 100 euros at once, ”says Javier Vello, partner responsible for the Consumer and Retail sector at EY. “Subscriptions favor and democratize access to the product or service in a more flexible and universal way, adapting the payment to the economic availability of the consumer. In fact, on many occasions these models are perceived as a cheaper alternative to one-off purchase ”, says Enrique Porta, partner responsible for Consumption and Distribution at KPMG in Spain. Although we must not forget that “in the medium and long term they block a part of their income every month”, warns Javier José Megias, head of the Startup Program at Fundación Innovación Bankinter.

Young Europeans report the highest subscription costs on tangible goods, as they are used to Internet platforms and home delivery. Also, being able to use expensive products without having to buy them is especially appealing to this age group. “It connects better with the new generations of users”, believes Porta. Although the greatest potential is among people between 34 and 44 years old because they have time limitations and more capacity to spend. In addition, the impact of the COVID crisis is causing a greater adoption and frequency of use of digital channels in all age ranges, even in non-digital native generations. For example, 36% of consumers over 65 in Spain claim to buy now online usually (14 percentage points more than before the covid), according to a study by KPMG.