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The Rise in the Subscription Economy

By Hottinger Investment Management 

The subscription economy is a term coined by the Zuora ‘Subscription Economy Index’ which highlights the rise among companies shifting from a traditional product sales model to selling recurring subscriptions in exchange for access to products or services over time. Whilst the idea of subscriptions is not particularly new, we have historically only seen this concept in a small handful of industries such as magazines and gyms. Due to technological developments subscription-based models are now seen across a much wider array of industries including media, groceries, makeup, transportation and even clothing.


Over the last seven and a half years the subscription economy has grown by more than 350%[1] as economic, societal, and technological changes have allowed subscription-based business models to thrive. The pandemic facilitated a significant shift toward e-commerce and away from traditional retailers. Subscription services shift the idea of physical ownership towards the provision of services and customer discounts. This type of business model proved to be especially resilient during the pandemic, with the Economist reporting that subscription-based firms saw revenue growth of 9.5% during Q1 2020 while revenues of the wider market (as measured by the S&P 500) contracted by 1.9%[2].  Once a customer has enrolled on a subscription service it typically implies a more continuous stream of revenue, which makes it much easier for a business and its investors to predict future revenues; in comparison to pay-per product retailers which can face huge demand fluctuations due to seasonal factors, evident by the pandemic. Moreover, subscriptions tend to increase brand loyalty, 64%[3] of consumers feel more connected to companies they have a subscription with, opposed to companies they engage with for a one-off transaction. Furthermore, the longer a consumer has been with a service the more value they derive from it, making their demand more inelastic and raising their switching cost.


The growth and success of subscription service offerings can partly be attributed to the shift in consumers sentiment away from ownership and towards usership. Recent surveys conducted by Natixis Thematic Asset Management, suggests that 68% of adults no longer value ownership and care more about flexibility and convenience in the products they consume[4]. Why purchase a car and deal with the burden associated with ownership, when you can purchase a subscription and receive a new model monthly?


Technological innovation has meant that we are living in an era where we have instant access to any service or product that we desire. Consumers have become obsessed with instant gratification and crave immediacy in the products and services that they consume, the subscription-based model caters perfectly to this new mind-set. Netflix, for example, has capitalised on our desire for both instant gratification and convenience; it has taken away the burden and cost that once came with the ownership of DVDs, and its unlimited media library enables users to “binge-watch” entire seasons in a single sitting, providing instant gratification.


Spotify is another successful subscription-based model, however, with a slight twist. Spotify operates on a “freemium model”, offering a basic free ad-supported service and a premium paid membership option. The advantage of a freemium model is that the free service encourages users to join the platform without having to commit financially. However, users quickly become frustrated with the basic plan; ad-breaks and the inability to select certain songs prohibits users need for instantaneous consumption, spurring them to switch to the premium version. This is simply just one factor behind Spotify impressive 46% conversion rate, from free to premium users[5]. The flexibility and convenience of its service has made CDs obsolete, as it provides users access to an unlimited music library, a concept that would have been in-feasible with CDs.


Companies that develop a subscription-based service that satisfies our demand for immediacy and provide a convenient and flexible service for users will probably excel. There are reportedly 1.3bn payment enabled smartphones sold annually and currently 6.4bn smartphone subscriptions worldwide[6]. In addition, the significant potential growth from the developing world becoming more tech-enabled should see the total addressable market for the subscription economy continue to expand. We believe technological innovation will only amplify our need for instant gratification and obsession with consuming services on-demand.


[1]  John Phillips, general manager, EMEA at Zuora, a cloud-based subscription management platform.

[2] How the pandemic has changed the weather in the technology industry – the Economist – October 30, 2021

[3] Zuora Financial

[4] Thematics Asset Management Subscription Economy Fund, Manager Nolan Hoffmeyer.

[5] The Fader, 2015

[6] https://www.statista.com/topics/840/smartphones/#dossierKeyfigures

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