Why Subscription Services Can Yield the Most Profits for Companies
The market for online subscription services accounted for roughly $70 billion in 2021. A recent report suggests this figure will be $900 billion—more than ten times larger—by 2026. Though stories abound describing the consumer value of subscriptions, new Berkeley Haas research provides a novel insight into why businesses may also benefit from the model.
A recent article by J. Miguel Villas-Boas from Berkeley Haas and Z. Eddie Ning from the University of British Columbia, published in the journal Marketing Science, reveals that subscription services often permit companies to reap the most profit from a given product or experience—a result that extends far beyond streaming platforms.
Villas-Boas offered the case of a luxury handbag company. “One option is to sell the bag and another option is to rent it,” he says. “We find that renting would be more profitable.” If a customer buys a bag and then realizes how much she likes it—realizes that she would, in fact, gladly have paid a higher price for it — then the company has left that money on the table. A subscription or rental program instead allows for a larger profit over time.
The article, which is rooted in a mathematical model of consumer decision-making, offers another key finding. When consumers are able to learn deeply about a product or service prior to purchase, then they are both slower to buy and more loyal; repeat purchases account for a larger share of their value. When most of the information about a product or service is instead gathered post-purchase, then the opposite is true: value is generated by the first purchase, which is less likely to be repeated.
For Villas-Boas, two important implications flow from this result. First, managers ought to consider where they focus their energies based on how customers learn about their products. If information is gained from owning a product or taking part in an experience, then managers should put their energy into generating that first purchase. If lots of information is available before purchase, then managers should invest instead in customer retention and repeat purchases. They should also do what they can to increase the availability of information through channels like online reviews. The research shows that online reviews are thus quite valuable to companies, in addition to their value to consumers.
Second, and more counterintuitively, companies that cannot offer a subscription can use high prices to defer consumer purchases. A high price, in essence, can be strategically used to force people to do more research before buying. This, in turn, makes it more likely that they will be satisfied with the purchase and become repeat customers.
“When the price is relatively high the consumer delays the purchase quite a bit until she finds really good information,” Villas-Boas says. “For products that last longer, you end up getting greater revenue by pricing higher.”