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Rise of the subscription economy – and what that means for your pocket

People pulling cash out of a wallet stuffed with subscription cards
From razors to music, the switch from owning to leasing items sees firms cash in

“The faster earnings fall, the better off we are,” Mark Garrett told his Wall Street audience.

Even in 2011, so soon after the recession, it was an unusual statement to hear from the chief financial officer of Adobe.

Still, Garrett believed that Adobe’s model of selling software to people for hundreds of pounds was stagnating. The new plan was to switch to leasing its products out for a monthly subscription, meaning a large if temporary fall in revenue.

Shares plunged, but Adobe thrived, and today the allure of the subscription shines brighter than ever as consumers in their millions embrace a range of services paid for via a monthly direct debit yanked quietly from their bank account.

Look at Apple, which has historically drawn its revenue from hardware and a cut of app purchases, and which this year pivoted towards subscription services such as Apple TV Plus and Apple Arcade.

Or look at Google, a titan of free ad-funded services which is now launching a cloud gaming subscription to go with its paid music streaming service. Uber has begun selling a monthly “ride pass”; Amazon has Prime, Kindle Unlimited and Music Unlimited.

Music streaming service Spotify, dating services Tinder, Grindr and Reddit, the news and discussion website, all have premium tiers, and even Cineworld, the cinema chain, has made a subscription tier part of its fightback against video streaming.

Music streaming service Spotify has a subscription-based model Credit:  Christian Hartmann/ REUTERS

Then there is the upstart industry of subscription boxes, estimated by McKinsey to have grown by more than 100pc every year since 2011 and perhaps best represented by meal kit companies such as Blue Apron and HelloFresh.

You can now order subscription boxes containing razors (Harry’s), shoes (ShoeDazzle), clothes (Stitch Fix, Lookiero, Socks in a Box), lingerie (AdoreMe) and make-up (Glossier, Birchbox and too many others to name).

In response, established retailers have tried to co-opt the craze, with Gillette, Sephora and Walmart launching their own versions and Unilever buying Dollar Shave Club for $1bn (£800m) in 2016.

“This is not just for the giant tech companies, not just for the Ubers and Lyfts of the world,” says Tien Tzuo, chief executive of the subscription management firm Zuora and author of the book Subscribed: Why the Subscription Model Will be Your Company’s Future.

“It’s going to be for all companies, including mainstream, traditional companies,” he says.

“For companies, it’s a no-brainer,” agrees Jeff Wlodarczak, an analyst at Pivotal Research specialising in online subscription services. “For the consumer, I suspect that in most cases they are paying more than they need to,” he adds.

On the economic side, subscriptions are affordable to people who could never save up for a lump sum. Tzuo says they also see predictable revenue and increased customer loyalty.

The psychological dynamics at work are more subtle. Nick Kolenda, a researcher who once taught companies how to manipulate psychology and now teaches consumers how to spot such techniques, says that subscription services exploit basic flaws in how the human brain handles numbers.

“Our brains aren’t good at calculating 12 times $25 to get the actual larger value. They just see the 25 and that feels subjectively more pleasing.”

You can now get healthy weekly dinners delivered to your door thanks to meal kit companies such as HelloFresh

Moreover, Kolenda says that we “vastly overestimate” how often we will use our subscriptions, imagining how they will be used by an ideal version of ourselves.

Even so, the path of the subscription does have perils. While Adobe is regarded as a huge success story, not every company could weather the transition period that it had to go through.

Thomas Lah and JB Wood of the Technology Services Industry Association call this process “swallowing the fish”, because the graph that describes it resembles one: costs curve up, revenue curves down, and only eventually do they cross over again to form the “tail”.

The physical subscription box fever has also clearly passed its peak, with venture capital deals falling from just over $900m in 2015 to less than half of that in 2018.

“The business tends not to be sustainable unless you bring in a very unique purpose,” says Sujay Seetharaman of the e-commerce analytics firm Pipecandy. “The number of companies operating in this space is going to reduce.”

Nor is it clear how subscription services will fare in a recession. Tzuo is optimistic, believing that consumers will cut big purchases such as cars and holidays before they shave £20 or so off their monthly budget.

Some subscription services also directly undermine themselves by offering deep discounts to lure in customers, which Seetharaman believes only incentivises people to shop around. Indeed, McKinsey’s data shows that more than half of box subscribers cancel within six months.

A final headwind to consider is the growth of subscription management services, some offered by banks and credit card companies, which help people keep track of their outgoings.

None of this dims Tzuo’s vision of a world where almost nothing is owned and almost everything is subscribed to. Given the number of artists and creatives who saw Adobe’s great pivot as reducing them to feudal supplicants, not everyone will find that enchanting.

But set against the sweet nectar of a regular financial IV drip for the companies concerned, they may not have a choice.