What’s next for pay per use models?

Subscription will grow significantly, according to a new ING report, creating more sustainable business models for many companies.

A new report by ING, Now that we subscribe to music, are tools and toiletries next? predicts that the EU B2C subscription economy, currently estimated to be around €350 billion annually, could grow an additional €190 billion in the coming years as consumers become more comfortable with subscription-based models.

The introduction of subscription-based models has the potential to increase companies’ economic sustainability by generating a stable recurring revenue stream. The report notes that this has multiple benefits. It helps to attract investors (lowering financing costs) while improved predictability makes it easier to operate just-in-time production and manage resources and inventory.

By eliminating upfront costs, subscription models also potentially increase market size and enable companies to build long-term relationship with customers that open up other sales opportunities. The report says that subscription models can lead to better utilisation of products (by encouraging reuse/recycling) and also allow companies to position themselves as more sustainable, which could have marketing advantages.

“Subscriptions have, of course, been around for years,” explains Ferdinand Nijboer, senior economist in the ING Economics Department and one of the authors of the report. “Some people still purchase newspapers on a subscription basis and we are all familiar with internet or mobile subscriptions. However, more recently there has been a significant expansion in subscriptions for tangible goods, including consumables such as razor blades, and durables such as washing machines or even cars.”

While many consumable and durable products have been staples of consumption for decades, the growth of the internet has reduced transaction costs, prompting the exploration of new business models for these products. “As importantly, the use of digital services, such as Netflix for video or Spotify for music, have made people familiar with subscription models. They have also become accustomed to immediate delivery,” says Nijboer.

The subscription economy is already sizeable in terms of value but represents just 5% of total EU household consumption: the rewards for companies that can get subscription-based models right are therefore significant (although it should be noted that about 40% of consumers do not see any benefits in subscribing to tangible goods). “The primary determinant of consumers’ willingness to move to a subscription is added value,” says Nijboer.

For consumables, such as toothbrush heads, added value comes from the convenience of not having to purchase items. As toothbrush heads have a predictable life span, they can be sent at appropriate intervals; other consumables, such as toilet paper, have less predictable usage patterns while a surplus or deficit of the product is more inconvenient to the consumer. Nijboer suggests that there is likely to be continuing experimentation as companies target different product segments.

For durables, the report found that the most valued aspects of a durable subscription for Europeans are avoidance of the risk of maintenance or repair cost; the ability to always have an up-to-date product; and the possibility of accessing a high quality product without paying a high purchase price.

Environmental sustainability is currently much less important for potential subscribers than convenience. But this could change over time, especially given millennials’ greater focus on environmental issues; 15% of 18-24 year olds surveyed said that the environmental benefits of a durable goods subscription, such as recycling and lower energy use, were a primary attraction – a statistically significant 4 percentage points higher than for all respondents. “So younger people seem to be driven more by environmental benefits,” says Nijboer. Demographic change could therefore result in sustainability becoming a stronger selling point for subscriptions in the years to come.

However, subscription-based models may not be more sustainable than traditional patterns of consumption for all types of products. “For consumable items, there are few environmental or sustainability benefits from subscriptions,” says Nijboer. “Indeed, it may increase waste and energy costs as a result of the additional logistics involved.”

For durable goods, the prospects for sustainability and an evolution into a circular model – where production and consumption shifts from a ‘take, make and waste’ approach to a ‘reduce, reuse and recycle’ approach are greater. “Subscriptions enable goods to be re-used and eventually recycled in a more efficient way, rather than simply ending up as landfill,” says Nijboer. “However, at the moment few durable goods are designed for easy reuse or refurbishment.”

Nijboer speculates this may change due to public pressure as environmental concerns gain traction in society. “It could be necessary, however, for government to accelerate progress in this area,” he adds. Last year, the European Parliament passed a resolution calling for the EU Commission, member states and producers to take measures to ensure consumers can enjoy durable, high-quality products that can be repaired and upgraded.

Regardless of the motivation for increased participation in the subscription economy, its growth appears unstoppable. Nevertheless, the potential for tangible goods is lower than for information goods. Ultimately, tangible goods subscription will only gain ground where suppliers are able to add value for consumers. The sweet spot is high-usage, frequency and predictability combined with high transaction costs, such as transport hassle, at every purchase, notes the report.

Subscription successes are most likely in markets with little online competition (facilitating rapid growth to generate scale advantages) with limited discount offerings (reducing churn of price-sensitive customers). However, public attitudes to subscriptions also remain important. Growth is likely to be strongest in Middle and Eastern European countries (Poland, Czech Republic and Romania), Spain and Italy where subscriptions are seen as cheap and flexible. In contrast, Northwest Europeans are least keen on taking on new subscriptions.

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