Subscribing to the Future

Ride sharing company Lyft is experimenting with a subscription service alongside its pay-per-ride model. Among the options are:

  • $199/month for 30 rides. The value of an individual trip cannot exceed $15. Still, the discount is sizable, potentially saving the customer over 50%.
  • $399/month for 60 rides. Same restrictions as the first option, and similar possible savings.
  • Both price points target heavy users and seek to convert them to a contractual instead of an as-needed relationship.

The benefits to Lyft are substantial:

  • Subscriptions offer a more predictable revenue stream than as-needed service.
  • They also boost customer loyalty versus the competition (Uber and others) by tying the client’s ride activity to a prepaid balance.
  • Fixed pricing allows consumers to easily compare the monthly cost of vehicle ownership/leasing to a Lyft subscription.

All this got us to thinking about how much technological disruption is funded by “old school” subscription models. Paying for goods and services on a monthly basis is nothing new. Telephone landlines, milk delivery, and newspapers all used subscription models 100 years ago to help fund capital investment, order inventory accurately, and provide a base of predictable revenues to pay staff.

In a case of “What’s old is new again”, subscription-based business models underpin much of what we associate with the new and novel in the world of tech-enabled disruption:

  • Amazon Prime is a subscription service for “free” shipping and video streaming. It took the company 10 years to debut the offering after its launch, but it has been highly successful getting customers to consider purchasing a wider array of goods. With shipping costs out of the consumer decision-making process, they can focus on direct price comparisons to brick and mortar stores. It has worked fantastically well.
  • Netflix started by offering a month DVD subscription plan for 1 to 8 discs to compete with brick and mortar stores that charged for each rental and levied sizable late-return fees. As fast as you could watch a movie and send it back, you could get a new one off your list. That morphed into the current streaming offering, which has disrupted everything from the movie industry to network-based television.
  • Online radio services are all subscription based at $10-12 month and have displaced the traditional consumer model of paying for a song or album.

While it is tempting to tightly draw the old-new comparison around the subscription business model, the reality is different. A hundred years ago, it took substantial capital to start a business. Subscriptions were a way to generate reliable cash flow and repay startup-related debt or pay investors’ dividends.

Now, the cost to start a business is low thanks to the Internet. Growing the enterprise, however, requires substantial investment in the form of advertising, marketing and hiring tech-savvy talent. Subscriptions allow for predictable revenue to pay for those predictable and necessary expenses. The Internet is too fragmented to allow an advertising-based revenue a long runway. And other approaches to customer monetization are too unpredictable.

Our takeaway: companies with a subscription model may not always succeed, but those who rely on more episodic forms of customer monetization face much larger challenges. Properly structured, subscriptions are beneficial to consumer and company alike.

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