Beyond Binging: Unraveling the Subscription Phenomenon
Issue 11 (30/08/2023): Exploring the subscription landscape through the lens of Netflix and Spotify, this article delves into the allure and challenges of subscription services in various industries
I write this whilst watching Suits probably the 6th time now, given that it’s finally back on Netflix and will probably edit this on my way to work listening to The Weeknd on Spotify. These subscription services, beyond just Netflix and Spotify, account for a large tranche of my weekly expenses. From trying to catch the F1 races, to Champions League games, to even watching Marvel on Disney+, subscriptions have remained a constant source of entertainment for half a dozen years and has impacted my efficiency when I work on my PSETs during the semester. They also pose an interesting challenge, one that was not evident years ago: Subscriptions have taken off and now are a necessity in practically every industry in some form , but that induces competition and perhaps more importantly, a need to differentiate your brand. This article will track this notion through the lens of Netflix and Spotify.
Introduction
We can all agree, a subscription may just be the most lucrative business nowadays. The thought of “only” paying a handful of dollars every month for a seemingly unlimited service and realizing two years later that you have spent what could have been the price of your next laptop or your holiday to Iceland. Then you realize the sheer magnitude of the subscription industry. Companies like Netflix are becoming even more stingy by cracking down on subscriptions shareability as well as ramping up the price. But the price inelasticity on such goods have become insanely low to the point where I’m more than happy to pay the extra dollar a month or even get a whole new subscription.
Most subscription companies fail
A reason for subscription companies gaining traction is in the notion of familiarity. Investors and executives, if they understand the churn, acquisition cost, and lifetime values of customers, can feasibly predict the inflow of cash into the company. This respite coupled with the ability to hedge investments based on future income allows the company to overshot some of their investments with little fear for it going sideways. But, to obtain a committed, constant, and active user base, the quality of the product needs to be significantly superior to the status quo, which is where most subscription companies fail.
Oftentimes, you see companies built because you could charge a subscription fee instead of good ideas that happen to illustrate the subscription model to be the best method. This gave rise to the notion that subscriptions are the new thing leading to the subscription market growing more than 300% between 2012 and 2019. Gartner even stated that by this year (2023), 75% of companies who have a direct-to-consumer option, will offer some variation of a subscription service[1]. However, only 1 in 5 of these companies will improve retention by doing so which reaffirms the status quo that subscription models are not for all companies - and may even be bad in certain instances.
To inspire me for this article, I wanted to learn more about why subscriptions work. Currently, I’m taking a behavioral economics class where we determine the drivers of change for consumer goods and it got me wondering, why are subscriptions so enticing and so hard to roll out of. Apparently, it’s due to what Harvard calls the “hooked model”. This aptly named idea discusses the prompts of customers starting to use the product, the habit that it builds, the reward system it generates , and the hedging on future value of the product increasing the longer you use it (think of Spotify wrapped as an example). Should a service fail to cater to any one of these four aspects, it may have a high tendency to fail. In the interest of not elaborating too much but providing a gist of what this might look like, have you experienced any of the following?
Decision Paralysis: It takes you longer to find the right show to watch on Netflix than the length of an actual show and to no avail, you resign to watching something you have already watched
Lack of Anticipation: Nothing on the site is exciting anymore. You have seen the covers of all the content, nothing is appealing and it seems like the same monotonous selection each day as you scroll through Netflix.
Hedonic Adaptation: Also known as “the hedonic treadmill”, it’s our tendency to return to a set level of happiness regardless of the rollercoaster of emotions, feelings, and changes in any given situation. Imagine a highly anticipated movie is set to release on Netflix. You watch it. It changes your life. Hedonic adaptation states that after a day, you will stop caring and that feeling of accessing quality content only because you pay for Netflix is gone.
Stored Value: Personally, this is the biggest reason I maintain my Spotify subscription. The tracking of my top artists, spotify wrapped, rankings on how much I listen to artists in comparison to the general population all remain integral data points that for some reason mean so much to me. It’s similar to the “watched” list on Netflix and gives me the same feeling as I would get with streaks on Snapchat four years ago. They are seemingly manipulating my sense of value for subscriptions and this willingness to not cancel my accounts.
Rising Competition
I have been so frustrated with shows moving from one streaming service to another or different shows being offered in certain regions and not others. This complicated endeavour has not only made me dissent certain companies, but sadly has encouraged me to purchase more subscriptions depending on the season (e.g. Paramount for Champion’s League, Peacock for “The Office”, etc.).
Consumers are more likely to stop subscriptions and only start them for an anticipated show that they have been waiting on or continue to hop around subscriptions to ensure that they have access to everything and still feel like they are paying what they used to. This rising competition is changing habits and companies are needing to adapt. Perhaps not for the older generations, but give a college student a way to watch all their favourite shows and sports and not have to pay for all the subscriptions every month? We will find a way to hop around subscriptions.
How Subscription Companies are Fighting
Cutting Basic Plans
If you are currently on the basic plan for Netflix, be warned. If you pause, cancel, or change your plan you will not be able to go back to the basic plan. Netflix has officially removed the plan in Canada, U.S. and the U.K. and has essentially replaced it with an ad-supported standard plan. Although the ad supported plan is $3 cheaper than the initial basic plan, the pain of ads certainly makes this a painful pill to swallow.
Increasing Prices
We forget sometimes how much power these companies have and how willing we, as consumers, are to just get in line.
Figure 1: Netflix Price Increase intervals (source: The Verge 2022)
Although Netflix has not officially increased prices in over a year, and has focused its emphasis on other aspects to increase revenue, it remains an easy opportunity. Given that the price hikes previously, have been in the realm of $1 - $1.5, it seems like a small fraction of what is currently being paid so we choose to continue the subscription. But, within a few years, the change is noticeable and what was previously $12 has suddenly in a decade become almost twice that.
Technically Netflix hasn’t increased prices, but technically, it has. Now the cheapest ad-free option is $6 higher than the previous ad-free option. This removal of basic plan, although making the cheapest plan on offering cheaper, the fact that the value has depreciated encourages users to cough up that additional $6 just to ensure the same ad-free experience. We don’t like change as customers and after that fourth advert about Fanta halfway through you binging Suits, you will do a cost/benefit analysis to justify that the $6 is just as much as a cup of Joe.
Spotify is the most recent giant who raised prices. In July, the company sent out a press release stating the new prices which were roughly between $1 - $2 up from what was previously expected. This roughly adds $24 per customer and with over 200+ premium subscribers, that’s ought to be a whole lot of money coming in (assuming the churn from the price increase is inelastic).
Password Sharing Crackdown
We had been hearing numerous reports of how Netflix is going to crack down their password sharing and they did just that. After a loss of 970,000 subscribers last year, they recently reported, it has gained 5.9million subscribers globally which puts their total rate of subs at 238.4 million[3]. According to the Antenna Network, it revealed that Netflix gained almost 100k daily signups immediately after launching the password crackdown initiatives
Additional Member Fees
Similar to credit cards, when you want to add an additional user, you have to pay an additional monthly fee. This is in light of the new wave of password sharing crackdown, Netflix calls this a “paid sharing” opportunity. For any additional user under an existing account, it will charge users $7.99/month should they reside “outside their main household”[4].
Netflix has also attempted to cut the transition costs down significantly. Users have the option to “transfer profiles” from an existing account to ensure their beloved recommendations and history doesn’t change and has made it even easier to change passwords and user settings. Netflix has always been an industry leader in optimizing and making change the easiest possible, now it’s just to make them a lot of money.
What I think Subscription Companies Can Do
It’s always a tough sell on how subscription companies can improve their business. There always comes the discussion of should subscription companies charge only on the quality of the subscription (e.g. 720p vs HD, vs UHD) or also on utility. An option always remains where Spotify could set up a subscription based on the total hours listened in a given month per user - similar to a prepaid phone plan. Either users recharge to get access to songs, or purchase a monthly subscription of say 200, 500, or 1000 songs.
Yes, this is a mere idea however, usage-based business models have come oftentimes incredibly close to subscription based pricing models and can be a good food for thought. Let’s abstract out of Spotify, Netflix, or companies we traditionally view as subscription based, and let’s jump ship to AWS, Stripe, Snowflake, Mailchimp, among others. These are all B2B companies and perhaps that is where such a model should belong, but let’s rationalize for the sake of rationalization.
To sweeten the pot, it would most effectively impact individuals who expect to have an extremely low utilization but still wish to partake in the service. Say you are a busy 21-year-old and you perhaps have time to watch one movie a month. Wouldn’t it be fantastic to be able to pay $2 per movie on Netflix instead of the monthly subscription? Although this may churn some existing customers who pay for a subscription, it may enable new customers to trial the feature, get access to the look and feel for the UI and give more points to convince the user to transfer into a monthly subscription. Whether I watch one movie a month or have too much curiosity but remain unconvinced of a service, it could effectively act as a cheap trial. (would love to get your thoughts on this and/or other ideas).
Of course there’s considerations for surge pricing depending on months or Pay-Per View options for headline movies or content on subscription sites which would encourage increased revenue. However, for the sake of the customer’s happiness and appreciation, I doubt these would ever be implemented.
Subscription prices will continue to rise, but in such a saturated market with so many competing subscriptions, it’s only time where the companies need to start innovating. We are seeing waves of such ideas with bundles such as Disney+, Hulu, ESPN but that’s more of a “Disney owns all” reason and less a “let’s collaborate”. It would be incredible to see collaborations, offers, among other things but one thing I do know is that subscriptions are here to stay. Whether we as customers like it or not, it isn’t going away anytime soon.
Reference
[1] https://www.gartner.com/smarterwithgartner/top-10-trends-in-digital-commerce
[2] https://hbr.org/2022/10/3-reasons-subscription-services-fail
[3] https://techcrunch.com/2023/07/19/netflix-gains-nearly-6m-subscribers-as-paid-sharing-soars/
[4] https://techcrunch.com/2023/05/23/netflix-begins-its-password-sharing-crackdown-in-the-u-s/
[7] https://www.vulture.com/article/netflix-password-sharing-ends.html
[8] https://variety.com/2023/digital/news/netflix-no-price-increase-one-year-paid-sharing-1235674569/
Cover Image from https://www.thestreet.com/streaming/nflx/netflix-vs-spotify-which-is-the-better-streaming-stock