SECRETS

OF
SUBS-CESS
Whats driving the global
subscription economy?

Contents

1 Introduction

2 What are the drivers of subscription?

3 What makes a successful subscriptions business?

The key success factors of subscriptions

Challenge & choice - making subscriptions work in music Spotify

Challenge & choice - making subscriptions work in video Netflix

4 The future for subscriptions

12

K AE

Secrets of Subs-cess

Contents

1
Introduction

The Customer Strategy team at KAE has

spent some time assessing the health
of the subscription business model,
bringing together our project experience
with a shallow dive into some case
studies of those brands that have made
subscriptions central to their offering,
including Spotify, Netflix, Sky and Virgin.
Despite being a qualified success story,
the subscription model continues to
be an enigma. As we wrote this paper,
news broke that You Tube is to launch
a premium subscription tier for video
content (in addition to its scheduled
Music Key service). But having a huge
base of users for free is no guaranteed
platform for building a viable paid-for
service. Willingness-to-pay needs to be
established among a broad user base
(i.e. beyond innovator and early adopter
consumers) but at a price high enough
to sustain a business model that carries
significant costs (content acquisition,
technology and servicing costs).

K AE

Secrets of Subs-cess

A recent study by the IAB (Internet

Advertising Bureau) in the UK (perhaps
predictably for an advertising association)
suggested that willingness to pay for
content subscriptions is present in the
mass market, but only at very low prices.
UK adults are prepared to pay an average
price of only 1.10 per month for video
content and 92p a month to access news
websites, according to the study. The
survey of more than 2,000 adults found
that consumers were prepared to pay even
less for social media and online games.
Because of highly sensitive factors
like willingness to pay, price and costs,
subscription is a notorious business
model to get right when it comes to
profitability. In this private white paper,
produced for KAE clients and close
contacts, we explore what it takes
to get subscription right, and how
the future looks for one of the most
popular business models of our time.

1 Introduction

For this paper we

conducted secondary
research coupled with
some expert and executive
interviews, covering
the following brands:

Subscriptions have
spread across
many sectors
Over the past fi ve years, the subscription
model has become the key driver of
entertainment commerce and product
innovation, driven by the success of
major players such as Spotify and
Netfl ix. Gartner has predicted that
35% of the global top 2000 companies
will have a signifi cant contribution
to their revenues from subscriptions
in 2015 and that the total revenues
from SaaS (software as a service)
products will top $22 billion this year.
In the software business, subscription
has been the preferred commercial
model of suppliers for some time, led
by Salesforce. Both Microsoft and
Adobe have shifted their business
model to subscription recently too.
But the subscription model has spread
to more business sectors than you
might expect. Games console players
are ramping up their subscription
offerings in an attempt to build longterm customer relationships as well as
manage the format shift to online gaming.

K AE

Secrets of Subs-cess

Subscription boxes for beauty

products (e.g. Birchbox) and food (e.g.
Graze) have been growing in the US
and UK markets. Our favourite is the
Dollar Shave Club (a great shave for a
few dollars a month) doing well in the
US despite the beardy revival. These
subscription box players are interesting,
not least because they are product based,
requiring a physical fulfi lment dimension
on top of the other subscription business
challenges. Their strategy is to own a
slice of any particular category for
example Graze has focused on healthy
snacking and breakfast competing
with supermarkets and food chains.
Most indicative of all that the subscription
model is adaptable across product
categories, is cars. Apart from successful
new car rental brands like Zipcar, most
car brands are growing their lease
businesses. According to automotive
blogs, more than 50% of BMWs sales now
come via leasing a form of subscription
albeit with contract commitment.
The subscription economy is also
powering digital commerce platform
and cloud technology providers, such as
Zuora and Avangate, so there is a growing
B2B economy behind the trend as well.

1 Introduction

2
What are the
drivers of
subscription?

Weve taken a deep dive into the

subscription model at KAE, across all
sectors, using players both new (including
Netflix and Dropbox) and established
(including o2 and Sky), as case studies.
The subscription trend is not driven
by specific industry conditions or
character (see box on page 4), so there
is very little holding the model back. We
discovered two core phenomena behind
the growth of the business model.
The first is a well-balanced formula of
supplier push and consumer pull. Often,
with technology driven growth, suppliers
drive market growth before consumers
are ready (as demonstrated by Gartners
tech growth model, the hype curve), but
the subscription economy is being fuelled
by a plentiful supply push alongside a

Supplier Push
Increased predictability of revenue
Better tracking of revenue and
cost (i.e. cash position)

K AE

natural demand pull. The demand stems

from consumers desire for a simple, nontransactional relationship that provides
them with more value than the sum of
the transactions they would normally
expect to make in the given category.
The example par excellence is music.
Consumers pay the same per month on
Spotify ($9.99) as what they would pay
for one album download (or CD, if anyone
still buys those). But with Spotify, they
pay for access to a massive catalogue,
playable from anywhere with a wireless
connection, or on any device. The only
downside of course, is consumers
dont own the music something that
caused debate about the value of
renting music in the early years of music
subscriptions, but is perfectly understood
and accepted by consumers now.

Customer Pull
Demand for more flexibility
and pricing options
A relationship beyond the transactional

Technology changes in the

software industry (SaaS)

A way of avoiding abundant choice

A well-balanced formula of supplier

push and customer pull subscription
offers a clear set of benefits to
both suppliers and consumers

For example, suppliers benefit from a

regular, predictable revenue stream
and consumers gain a different way of
accessing and choosing the product,
with the stress of transactional shopping
transformed into a convenience

Secrets of Subs-cess

1 What are the drivers of subscription?

The second major driver is the global

nature of the subscription model,
particularly the aggressive world
domination strategies of major
subscription players like Netfl ix,
Spotify, Adobe, Microsoft and others.

the success of the FT and Economist,

most major news brands are now
pushing their subscription offers with
a combination of digital and physical
editions, plus experiences such as
the Guardians Masterclass series.

In addition, some businesses are

introducing subscription as part of a
portfolio of offerings (and therefore
revenue streams). This is the case
in publishing for example. Following

Whether part of global domination,

or a defensive move to diversify the
portfolio, subscription seems to be part
of the growth strategy of numerous
businesses in a diverse set of sectors.

GLOBAL

Balance
One-price
KPI: ARPU
Mix of subs + advertising
Manageable risk

Scaleplay
Freemium tier
One-price
KPI: premium subs
Supported by B2B partnerships
High risk
SINGLE
PRODUCT

PORTFOLIO
Adapt & broaden
Modular product & pricing
Mix of subs + a la
carte models
KPI: ARPU /
products per user
Medium risk

Sustainable growth
Discount trial marketing
KPI: revenues & margin
Member-get-member
Physical fulfi lment often required
(hence local market offer)
Medium risk

LOCAL

K AE

Subscription strategies go way

beyond a shift in the pricing model,
requiring clear market positioning,
single-minded strategy and
ruthless, operational excellence

For example, newspaper publishers

are currently managing the transition
to digital subscriptions albeit with
very different strategies. The Times has
stuck to its guns by keeping its core
content within a paywall, whereas the
Guardian has kept its digital content free
(advertising funded) and is marketing
subscriptions based on additional
features and partner company offers

Secrets of Subs-cess

1 What are the drivers of subscription?

3
What makes
a successful
subscription
business?

There are clear risks with

subscription, particularly for those
businesses attempting to shift
to subscription after operating a
different model. Subscription is
not just a new way of pricing.
With subscription, a complete overhaul
of the operating model is required.
Across people, systems, processes
and strategy, organisational resources
need to focus singularly around value
provision and customer experience. As
put by one executive we spoke within
an established subscription business:

The key success factors of subscriptions

The more we learn about the
subscription business model, we find
that organisational competences
are a key driver of success, so we
chose to explore this in more depth
through a series of short case studies.
Successful subscription players
seem to have a different philosophy
of doing business, and a specific
skill-set in managing the customer
journey through the classic stages of
acquisition; retention; loyalty and churn.

You are asking for a lot of money

each month, so the organisation
must behave like it!

K AE

Secrets of Subs-cess

3 Successful subscription business

We have identified seven Key Success Factors that

make successful subscription players tick:

1.
Strategic
use of KPIs
7.
Product
Innovation

2.
CRM
Centred

SUBSCRIBE
6.
Customer
Service

3.
On-boarding
strategy
5.
Whole
product
pricing

1. Strategic use of KPIs

With subscriptions, its easy to fall
into the trap of layering KPI upon KPI
trial users, conversions, products
per user, revenue per user, active user
measurement, churn etc. We found
that businesses that successfully grew
subscriptions tended to focus on just
one core KPI at a time, guiding strategy
and driving focus. For example, Sky.
For a long time, Skys primary focus
was acquiring new users (a 10 million
customer base for example, was a
major goal). However, once the 10
million target was achieved, Skys focus
switched to products per user driving
the strategy of cross-selling quad-play
services. More recently, Sky is focused
once again on customer acquisition,
this time for its digital services, both
within its customer base (Sky Go) and
in the wider OTT space (NowTV).
2. CRM-centred
In many businesses where weve done
customer strategies, CRM plays an
active role, but is very much a tactical
activity. CRM strategy comes after the
core marketing strategy is in place.
Successful subscription businesses
are an exception to this rule. CRM is
central to decision making, marketing

K AE

Secrets of Subs-cess

4.
Brand-led

strategy and the building of customer

knowledge. Subscription businesses
are better at customer closeness than
purely transactional businesses. We
examined CRM communications like
e-mail and text, and found successful
subscription players were better at
relevant, frequent communications that
informed or encouraged customers
to try new things and stay engaged.
3. On-boarding strategy
In conjunction with attracting the
best customers, we found variable
strategies when it comes to welcoming
new customers and introducing
them to their services to get the best
from them (again, encouraging new
customers to understand the value
of their subscriptions). Virgin Media
has an outstanding approach to the
on-boarding process, with a wow
factor welcome and highly engaging,
informal communication about what
services are available and how to
try them. With subscription being a
major commitment by customers, this
high-effort welcome process is both
impressive and reassuring and the best
start to a long-term value relationship.

3 Successful subscription business

4. Brand-led
KAE has worked with many productbased companies that launch
impressive, individual products,
but dont do enough to continuously
innovate for their brands. Our
subscription case studies however,
seemed to be proudly focused on brand.
O2 for example, continuously tops
brand tracker studies for mobile, due
to its big brand-led initiatives like O2
Rewards and its progressive products
like Refresh. Likewise, Skys continuous
investment in both content (major
new programmes and renewed sports
rights) and innovation (Sky GO, NowTV)
is nicely integrated with its over-arching
Believe in Better brand strategy.
5. Whole product pricing
Our dive into subscriptions proved to us
that subscription is an organisational
discipline, not just a pricing strategy.
However, the pricing of subscriptions
is in itself is a highly critical factor. O2
has recognised that price complexity
in the mobile space has helped drive
margins over time, but is wearing thin
with customers, hence its Refresh
proposition. Sky recently reduced the
number of content bundle options for
customers to just four (at one stage the
company had over 100 differently priced
offers). Services like Spotify and Netflix
have stuck to their guns to keep price
as simple as possible just one tier and
one price. Subscription businesses have
to be passionate about demonstrating
continuous value to their customers,
and therefore need to constantly be
aware of how their price points reflect
this value. Since increasing prices is a
lot harder to do than discounting, these
decisions have to be spot-on. We call
this process whole product pricing as
the pricing decision is so intertwined
with the overall product strategy.

K AE

Secrets of Subs-cess

6. Customer Service
Most subscription services have
an ongoing relationship with their
customers via the plethora of digital
channels already an advantage over
transactional based businesses in
terms of customer communication and
feedback. The most transactional of
businesses, Amazon, is an exemplar
when it comes to service. But Amazons
shift to subscription via its music, video
and Prime services will require the
company to offer a more balanced and
perhaps personalised approach than
its current level of digital efficiency. We
found that the successful subscription
players utilised all the usual touchpoints
well, and in balance. Tutorials, training
and recommendations were also a
familiar part of the offering often
done with great care. In sectors
such as mobile and entertainment
content, new players can often
enter the market demonstrating an
ability to disrupt current offers in
terms of value, so customer service
can become a key differentiator
for the established players.
7. Product Innovation
We found a very specific capability
to be present among subscription
leaders, when it comes to innovation.
In a word, steady seems to be the
secret to success. If product features
are too numerous, or loaded too
quickly, customers can get confused
or frustrated. Spotifys raft of
feature launches in 2013 (led by an
automatically loaded Discover page)
were in danger of alienating core users,
for example. Since then, its features
have evened out, and appear to be
much better researched. Subscribers
appreciate steady, continuous
improvements that add value, but keep
the core experience simple the reason
they subscribed in the first place.

3 Successful subscription business

Challenge & choice - making

subscriptions work in music Spotify
Spotify wasnt the first music brand
to launch a compelling subscription
service. Both Rhapsody, and a
legalised version of Napster, had
launched years before in a range of
markets including the USA. But those
services struggled to reach the mass
market with music streaming. The
true innovator of the subscription
model arrived in 2009 with a free tier
service acting as a broad acquisition
funnel for premium customers
(freemium), and a very slick music
player app that allowed full mobility
for those willing to pay. Following a
single-minded global domination
strategy, Spotify has reached 58
countries and 60 million users.
Spotify has successfully kept its
core proposition simple, while
making continuous improvements
to it. Anything that hasnt worked
has been quietly, unceremoniously
removed from the product portfolio.
It has managed to divert industry
argument away from churn the killer
for early subscription players and
still probably, for Spotifys peers.
A recent reassessment of freemium by
Spotifys music suppliers has, however,
put new pressure on the service. Its
conversion rate from free users to paying
subscribers has been widely broadcast:
15 million premium subscriptions
from 60 million users an impressive
25%. But this has slowed down, and
the music labels and publishers want
more ways to monetise the broader
base of users. So far, advertising
revenue (although still increasing) has
been a disappointment compared
with that from core subscribers.

K AE

Secrets of Subs-cess

Spotifys strategic choices

Spotifys present options are to create
revenue streams that augment the core
premium subs. These include lower
priced tiers, family upgrades (Spotify has
recently experimented with its Family
product at an incremental price of
$14.99), selling merchandise (& perhaps
tickets), and major partner deals (Spotify
already has numerous deals in place
with telco providers around the world).
Spotify has however tried these
options, to some degree of success, but
nothing to match the income from its
core paying users. It appears to have
a limited set of choices, but simply
has to keep its premium subscription
acquisition rates up. Moreover, it
is more critical than ever to keep
acquiring real, committed, customers
those less likely to churn after an
initial trial or mobile bundle offer.
With or without the freemium funnel,
the bigger question is, how can Spotify
continue to grow its core? Driving
premium subscriptions into the mass
market is tough enough with low-cost
competitors like You Tube and Pandora
on the market, but it will get even
harder as artists get more vocal about
their dissatisfaction with the current
economics around the streaming model.
It seems inevitable that more artists
will choose to withhold new albums
(those that have, seem to have done
well out of the decision). A major
new streaming competitor has also
arrived in the shape of Apple which
appears to be pushing for windowed
exclusives from high profile artists.
Spotify has crammed so much into
value for customers into its core $9.99
price point, it seems to have created a
massive commercial challenge for itself.

3 Successful subscription business

10

Challenge & choice - making

subscriptions work in video Netflix
Founded in 1997 as a mail order video
rental business, Netfl ix is now available
in 50 countries, but wants to expand
to 200 within two years. It has now
reached over 60 million subscribers
around the world and continues to
grow at an impressive rate. Its recent
arrival in Scandinavia and France has
driven the on demand video markets
in those countries and exceeded all
expectations in terms of growth.
When it struggled to license from
many of the major fi lm studios and
television networks, Netfl ix made a
major strategic decision to invest in
original television programmes a
move that paid off handsomely with
House of Cards, but may have proved
more challenging with Marco Polo. In
explaining its decision to launch original
programming, Reed Hastings said
that Netfl ix was trying to become HBO
faster than HBO can become Netfl ix.
Amazon, Apple and HBO are Netfl ixs
biggest global threats, along with an
increasing number of local TV networks
now launching their own over the
top video services (including Sky, ITV
and Channel 4 in the UK for example,
along with BBC iPlayer of course).

K AE

Netflixs strategic choices

Despite the growing competition,
Netfl ix launched early enough to build
real momentum, and has become a
major force in online viewing. It stuck
to its core proposition of pay-only
(no advertising) at a value price point
(originally $7.99 in the USA, increased to
$8.99 in 2014). In the process, it changed
viewer behaviours, especially for its
core drama House of Cards, which was
made available in its entire series.
Netfl ixs main barrier remains its
limited content catalogue. Though the
service often espouses big talk about
big data, and the use of algorithms
to make content selection easy,
choosing what to watch on Netfl ix is a
serious customer pain point because
of the lack of content available.
Netfl ix will need to continue to work
around this issue with a number
of combined strategies. It will do
anything and everything to avoid
increasing prices again, having been
forced to do it once. And it has set
a clear mission to avoid any notion
of an advertising funded model.

In the USA, HBO has recently announced

a new partnership with Apple for
its own over the top service HBO
Now, joining Dish and other major
rivals from Comcast, Hulu and Sony.
What can Netfl ix do to defend its
position under such major threats?

Netfl ixs strategic choices are to continue

to invest in major TV series and movie
content, and to obtain global licensing
for the catalogue it can acquire from
studios and networks. It could expand
its genres to cover comedy, reality,
or even perhaps, niche sports. Like
Apple will do in music, Netfl ix is likely
to use its market power to negotiate
for exclusives from those studios that
like the look of the cheque sizes. With
no current global source for deep VoD
(video on demand), Netfl ix seems well
positioned to become the place to go for
long tail, niche and archive programmes.

Secrets of Subs-cess

3 Successful subscription business

11

4
The future for
subscriptions

We uncovered a set of challenges

for subscription players that might
make it harder to drive growth
from now on. In particular, from the
point of view of consumer demand,
two challenges stand out:
P
 otential saturation how many
subscriptions can consumers sustain?
R
 ising expectations with value such
a driver, can subscription players make
decent enough margins to thrive?
Would you like another
subscription to go with that?
From the point of view of consumer
demand, a major question is just how
many subscriptions can each individual,
or household, sustain? In TV and film,
content is being carved up among several
subscription providers, something that
has held back subscriptions in online
games. In TV for example, can we really
expect consumers to carry subscriptions
from each of Sky, Netflix, Amazon and
Apple? Are content suppliers potentially
missing out on bigger audiences by not
supplying to just one major aggregator?
Certainly, recent reports about the
volume of illegal downloads for prime
content such as Game of Thrones (season
5) suggest that fans will do whatevers

K AE

Secrets of Subs-cess

necessary to access the content, without

choosing the required subscription.
However, where more universal content
coverage does exist in music for example
this model appears to be coming under
severe commercial strains and stresses.
Indeed, music may begin to look more
like video, if Spotifys rivals like Apple or
Tidal are successful in convincing artists
to put exclusives onto their services
and withhold them from Spotify.
If subscription growth is held in check
through the fragmentation of supply,
perhaps content owners will more actively
pursue windowing strategies, managing
their portfolios from market to market with
a careful strategy of broadcast, pay-perview, pay-to-own and finally, subscription.
Looking more broadly across all sectors,
with subscriptions becoming so prevalent,
just how much will the model keep on
growing before saturation is reached?
Moreover, in times of austerity, we may
look to the big ticket items such as ongoing
subscriptions, in making cutbacks. Add
together a pay TV subscription with
Netflix and Spotify, an average mobile
package, and we are approaching or even
exceeding 100 per month purely on
entertainment and communications.

4 The future for subscriptions

12

Such great value for customers,

can it be good for business?
The second challenge from the point of view
of consumer demand is rising expectations.
Spotify has set the bar high access to
all music on all devices for the price of
an album. Its a great value model and a
miracle for music fans, but does it leave
enough margin for Spotify to breathe? And
is there any scope for increasing prices?
The low margins have forced players
like Spotify and Netflix to go for global
domination strategies and these
businesses have perhaps become too
obsessed by the drive for scale, rather
than focus on a profitable, sustainable
model. Dedicated subscription players
also leave themselves exposed to
competitors that can afford to subsidise
content to sell devices or other services
like Amazon, Apple and Google can.
This makes sustainability even harder for
standalone subscription businesses.
In the end it comes down to value, and the
feeling of attachment to the subscription
felt by the consumer. Is it something
they cant live without? The businesses
that thrive with the subscription model
understand value, and are passionate
about it. However, while the focus on
value is a core driver for subscription
players, have they made a rod for their
own backs by setting the bar too high?
We predict that subscription players will
soon introduce a number of add-on pay
extras, or require consumers to commit
to contract terms like the traditional
subscriber businesses in Pay TV and
mobile. How this will impact customer value
perceptions will be interesting to see.

K AE

Secrets of Subs-cess

Staying the course playing to

strengths and exceeding with
innovation, service and brand
We believe there is a high dependency
between three success factors in
particular: whole-product pricing,
innovation, and being brand-led. More
confident innovators are better at being
brand-led and subsequently have more
capital with customers. This may allow
them to protect premium pricing (or
increase prices) even in the face of heavy
competition from upstarts. We think
its also possible for customer service
to play a similar role to innovation, or
potentially be a substitute for it. Great
service may help preserve brand, and
in turn, sustain premium price.

Price

Innovation
or Customer
Service

Brand

Market leaders must protect price,

requiring a strong brand, underpinned
by innovation, customer service
or other forms of excellence.
e.g. Sky Believe in Better
Subscription is not easy. While it isnt
possible to excel at everything, we found
that successful subscription businesses
mastered at least three of the seven
success factors (sometimes more), and
displayed a high level of competence or
desire, in others. The idea of trading off
success factors however excelling in
some to compensate for failings in others
doesnt cut it. Weakness in just a couple
of areas exposes even the best performers
to the risk of being usurped by competitors
able to exploit the weakest links.

4 The future for subscriptions

13

This white paper was put together by

the KAE Customer Strategy Team. For
further details and a conversation about
subscriptions, acquisition, retention or
loyalty strategies, contact us as follows:
Keith Jopling, SVP

keith.jopling@kae.com
07796 548524
Baber Ahmed, Senior Consultant

baber.ahmed@kae.com
Salman Sharif, Senior Consultant

salman.sharif@kae.com

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