Own nothing, rent everything: Welcome to the subscription economy
Imagine this:
You jump in your rented sports car and drive to work, with this month’s positive affirmations (recorded by your favorite motivational speaker) playing in the background. You make a brief stop at your go-to coffee shop where — as a VIP member — your double-shot cappuccino is already waiting for you at the takeaway window.
Sounds convenient, right? Well, this situation could become the new normal in the next few years, as we inch closer to the reign of the membership model.
Of course, this isn’t anything new for SaaS companies — they’ve been capitalizing on our thirst for convenience for years.
Think about all the memberships you already subscribe to. Chances are, you use Spotify or Apple Music to stream your music, Netflix or HBO for your nightly entertainment fix, Amazon Prime to get cheap delivery for online shopping… and so forth.
But, this is just the tip of the iceberg. We’re starting to see the membership model extend beyond software companies and enter unexpected arenas.
Increasingly, we’re seeing legacy brands diversify their product suites with innovative membership offerings. For example, Ralph Lauren’s ‘The Lauren Look,’ where consumers can rent designer items at a lower, fixed cost. Or, BMW’s tiered membership model, where you can pay to unlock certain features like heated seats.
Then, there’s the proliferation of P2P (peer-to-peer) rental services. Now, you can rent everything from clothing and household goods to the use of your neighbor’s swimming pool on a hot summer’s day.
Why the membership model is taking over
By 2025, the subscription economy is expected to reach a market size of $1.5 trillion. Three main factors are driving this status quo shift on the consumer side: the digitization of our daily lives, the increasing importance of access over ownership, and our ever-intensifying “I want it now” consumer mentality.
On the business side, membership-based models are extremely lucrative for a couple of reasons. Firstly, they’re built on loyalty. When someone signs for an ongoing membership to your service, they’re making a commitment. There’s an element of exclusivity to it, as it’s reducing the chance they'll switch to a competitor’s offering.
Another reason the membership business model is so powerful? Because it’s a source of recurring revenue.
Why does recurring revenue matter?
Recurring revenue refers to when regular payments are made over time for a product or service, rather than a one-time payment. You’ll sometimes hear it referred to as MRR in the tech world (monthly recurring revenue) or ARR (annual recurring revenue), as software companies often use these as critical financial metrics. Gartner predicted that by the end of 2023, 75% of direct-to-consumer brands will offer subscription services. Why the hype?
Because recurring revenue is predictable. It’s no secret that we are living in turbulent economic times. But when you have a healthy membership base, it’s much easier to estimate future cash flow (and gauge your capacity to weather financial storms).
That’s why companies with recurring revenue models are valued much higher by VCs and investors. This means that they can raise more money, can borrow more money from banks (for growth), and are simply healthier businesses to run.
How is this relevant for designers?
This shift to a membership-fueled economy is both exciting and terrifying (Can there be such a thing as too much convenience at your fingertips?). But, how is it likely to transform your daily work?
Consider how you can ethically create recurring revenue streams in your organizations. Far too many companies build their entire business model around one key, human weakness — we often forget to cancel our unused memberships. But that’s not genuine brand loyalty. Nor is it sustainable. Instead, focus on designing products and services that are so valuable, they’re worth paying for every month.
We will have to address the issue of ‘subscription fatigue.’ As consumers subscribe to more and more services, they may start to feel overwhelmed or experience decision fatigue. To counteract this, we can work on crafting unique, memorable experiences that help our service stand out. We should focus on transparency, making subscription terms clear and cancellation processes easy, to build and maintain trust with our users.
If you’re a financial decision-maker in your company, consider how you can optimize for cash flow. It may seem more accessible to sign up for a tool or service with monthly recurring payments, as the investment is broken up and you can cancel at any time. However, you can often save considerable money if you pay upfront. Plus, you reduce the risk of collecting a bunch of monthly subscriptions that you don’t use. You’d be surprised how quickly these can add up when you’re trying to run a lean design team!