ONE of the most fashionable ideas in business is that companies should earn their crust from subscribers, who are “locked in” for a period of time, rather than from customers who can easily switch to another provider at any time. Subscription models are seen by many investors and executives as the holy grail, because they promise a recurring stream of revenue. But the approach suffers from three underappreciated problems. Acquiring subscribers can be eye-wateringly expensive. Their urge to run away is often only temporarily suppressed. And consumers may have more than one relationship at a time.
The best-known subscription model is probably Amazon Prime. It has about 80m members in America alone and for $99 a year offers films and music, speedy delivery of goods and even discounts on goods such as baby food. There are many other examples. Netflix offers a wall of TV for a monthly fee. And more are coming. Venture-capital firms are pouring money into subscription-based home-delivery firms that bring to your doorstep meals, pills or even fresh underpants. Zuora, a software firm, talks of the rise of the “subscription economy”.
Several star firms floating their shares this year have subscription models. Dropbox, a cloud-storage firm, listed on NASDAQ on March 23rd and is worth $13bn. It boasts 500m registered users and wants to convert them into “paying users”, of whom there are already 11m, who get a superior service. Spotify, a music-streaming firm that listed on April 3rd, has 159m users but derives its $27bn valuation from 71m “premium subscribers” who pay to listen without adverts. On average each generates 13 times more sales and 27 times more gross profit than users who pay no fee.