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Rise of the subscription economy: What it is and how it works
The subscription economy is reshaping consumer habits, offering flexible access over ownership. It drives convenience, loyalty and predictable revenue.
Although subscription services have long existed, they have boomed and expanded exponentially in recent years.
Subscription services have expanded from mostly media outlets to everything, including meal deliveries and vehicle rentals. The average American spends $924 on subscriptions per year, according to Bango research. The e-commerce subscription market is projected to hit more than $900 billion by 2026, according to a report by The Business Research Company.
The rise of the subscription economy shows a clear shift in consumer behavior and business practices: Customers want a more convenient, lower-cost option, and businesses that can provide it will have higher customer retention and loyalty.
What is the subscription economy?
The subscription economy describes the shift from a traditional pay-per-product business model to a subscription-based access model. In other words, instead of paying for one product, consumers pay for a subscription that lets them access a certain product or service for a set amount of time. The term comes from Zuora's Subscription Economy Index, which measures the growth in the volume of business for subscription-based products and services.
The subscription economy relies on recurring revenue. Instead of completely owning a product or service, consumers can pay for ongoing weekly, monthly or yearly access.
The subscription economy includes the following:
- Streaming services. This includes Netflix, Hulu, Disney+, Spotify and Pandora services.
- SaaS. This includes vendors such as Salesforce, Adobe, Zoom and Microsoft.
- Vehicle rentals. Businesses such as Zipcar enable subscribers to access rental vehicles as needed.
- Subscription boxes. These include physical products such as books, wine, meal deliveries and beauty items.
- Digital content. This includes paywall access to news and media, such as The New York Times, The Washington Post and CNN.
Many businesses use a tiered pricing strategy, where consumers can choose from various price points based on the features they want or how often they are likely to use it.
Key characteristics of the subscription economy
Some key characteristics of the subscription economy are the following:
- Recurring revenue model. The subscription economy relies on recurring customer payments -- usually monthly or yearly -- to provide companies with recurring revenue. This can make revenue relatively predictable and stable, making it easier to forecast future needs and gain data-driven insights to inform future business plans.
- Access over ownership. Buyers' mindsets have shifted, and many now care more about accessing the product or service when needed rather than owning it. This lets consumers use products and services for a time that's convenient for them and stop when they no longer need it, enabling more flexibility than traditional models.
- Continuous value delivery. With one-time purchases, once a product or service is bought, its value typically stays steady, and there is nothing new that the product or service can offer. But subscription models can provide ongoing value to consumers with regular updates, new features and personalized content.
- Customer-centric focus. Because subscription models rely on regular payments, long-term customer relationships are built and maintained more easily than traditional ones. Instead of constantly reengaging buyers after a purchase, companies in the subscription economy can focus on customer engagement and satisfaction. The customer-forward mindset pays off -- 64% of subscribers reported they feel more connected to companies they have subscriptions with compared to one-time purchases, according to research from the 2021 Subscription Economy Index.
What is driving the growth of the subscription economy?
Although the subscription model has been around for decades, its popularity has grown exponentially in the past decade. In fact, the subscription economy has grown 437% since 2012, according to the 2021 Subscription Economy Index.
So, what's enabling the subscription economy to continue to thrive? There are a few factors driving growth, including the following:
- Consumer needs. Buyers value flexibility, personalization and convenience when it comes to purchases. With subscription services, consumers can try new offerings for a limited time without the full commitment of a purchase and can change their subscription plan when needed. To make subscription services even more convenient, many also offer advanced options for consumers, such as pausing the subscription for a while instead of full cancellation, offering consumers more flexibility in how and when they access services.
- Technology advancements. Technological advancements, such as cloud technologies and automation, have paved the way for more companies to offer subscription-based services. These advancements let companies implement and manage subscriptions more easily and efficiently.
- Economic outlook. A small monthly fee can be worked into a tighter budget and is a more cost-friendly option to purchasing high-cost products and services outright. Even when consumers cut back spending, the subscription economy provides a lower-cost alternative to one-time purchases, with the ability to cancel or pause when needed.
- Business advantages. A subscription-based business model provides more stability and predictability and can be scaled to adapt to business needs. This can also free up time and resources for businesses to focus on building a loyal customer base, improving offerings and preparing for future needs rather than constantly chasing the next sale.
Advantages of the subscription-based business model
With a strategic plan in place, switching to a subscription-based model can bring big benefits to consumers and businesses.
Some key advantages to switching to a subscription-based business model are the following:
- Predictable revenue. Recurring revenue gives businesses a steady and predictable revenue stream. In turn, businesses can more accurately forecast future income and needs to plan for future growth. The predictable, passive income these services bring in can be helpful during economic hardships, as it provides a steady source of income when traditional business models are less effective.
- Lower acquisition costs. Because subscription models rely on recurring customers, less time and money are spent acquiring new customers for each purchase. Instead, marketing efforts are geared toward building and strengthening the existing customer base through ongoing engagement and communication.
- Increased loyalty and engagement. The customer-centric focus on the subscription economy leads to stronger customer loyalty and engagement. Instead of the finality of a one-time purchase, the continuous use of a product or service means that customers are loyal to not only the product or service, but also the company providing it. Recurring payments also offer businesses an opportunity to engage with customers regularly and cross-sell other services or products.
Alison Roller is a freelance writer with experience in tech, HR and marketing.
