Subscription Economics

It is an old truism of economics that supply drives its own demand. While this is true, it leaves a lot unsaid. For example, a boatload of hula hoops could conceivably inspire a new generation of kids to pick up the toy, and nostalgic adults of a certain age might be compelled to see if they could still “do it,” but it’s just as likely that the supply would not spark much interest.

What’s only implied is that the supply ought to be new and preferably disruptive to have this effect. In the general scenario, less is just less. So the truism is really less about economics than it is about human behavior — but many would quickly counter that economics is precisely about human behavior in relation to trade and possession of rare goods. I am one of them.

A corollary to this is that all markets clear, at a price, which simply means that you can always sell the last hula hoop but probably at a loss and maybe even then the price will be zip.

I was thinking about these ideas recently when contemplating the subscription economy, again. Subscriptions represent one of the key disrupters of our time, and they run across all manner of markets. What’s interesting to me is that adding subscription service to an otherwise boring old business can make it new again by providing a different kind of supply that creates its own demand.

Hidden in Plain Sight

ZipCar has been talked about too much, so pardon me for doing it again, but this is an excellent example. The market for transportation was crowded long before ZipCar came into being, and launching the company must have seemed like lunacy to many people. If you needed a car, there were ways to purchase, lease, rent, and hire taxis and limos, just to name the usual suspects. It looked like the market was sewn up.

Permit me this digression — about 20 years ago, I ran across an interesting sidebar in a Tom Wolfe novel, The Bonfire of the Vanities in which a character mused about how much his luxury car actually cost him. Forget the costs of insurance, maintenance, and garaging in a city. He was just looking at the cost of making the purchase from take home pay in New York, a place where there were federal, state and city income taxes. I forget the actual numbers — and this was a good 20 years ago — but the difference between the net pay and the gross was substantial.

So there it was, in plain sight, in a novel — the seeds of demand for cars as a service. The costs of owning a car in a big city revealed a market opportunity. More interestingly, the demand that would be “created” by the sudden supply of ZipCar, had been there all along waiting to be discovered and converted from the potential to the kinetic.

Learning the Dance

The subscription business model is doing very well these days thanks in part to unforeseen circumstances — most notably, the economic downturn. Subscriptions have enabled all sorts of businesses to stay open long after their core customer bases shriveled. The model created its own demand, and it is doubtful it will go away any time soon, because a new generation of people who well understand the economic demands on their small pay checks has come to depend on it.

The vendor community lags the customer, though. Ironically, many new vendors have an intuitive grasp of subscriptions while many established vendors are still trying to learn the dance. This makes for some interesting mergers, as larger and more established companies perform the difficult calculation about whether to build or buy the expertise.

In many cases, the decision is to buy — as much to get a jump on the market as it is recognition that the larger and older company really needs a culture transplant to pull the entity into the new space. The Avis Group demonstrated this when it bought ZipCar.

CRM Evolution

All this comes back to subscriptions, and the immense power the business model is beginning to exert on business. Subscriptions are not simply for software any more,. Creative vendors have applied the model for both consumables and more durable goods, and there is no let-up. Just as one problem finds a solution, though, another looms.

Subscriptions can be canceled at any time, for the most part, and you have to wonder what will happen in an economy driven by them if or when the next economic calamity happens. Will demand just dry up? Or will companies dependent on many small transactions discover that while they might be hurt by the downturn, they are more resilient than they otherwise would have been before adopting the subscription model?

Finally, and perhaps most interestingly, subscriptions have enabled vendors to concentrate on identifying and pursuing the things that really matter to their customers by analyzing the data breadcrumbs they give off.

It’s mandatory, really, because without clear insight into customer motivations, a subscription vendor can get into a world of hurt. So at the end of the day, and perhaps, ironically, subscriptions are playing a critical role — and maybe a pivotal one — in the evolution of CRM.

Denis Pombriant

Denis Pombriant is the managing principal of the Beagle Research Group, a CRM market research firm and consultancy. Pombriant's research concentrates on evolving product ideas and emerging companies in the sales, marketing and call center disciplines. His research is freely distributed through a blog and Web site. He is the author of Hello, Ladies! Dispatches from the Social CRM Frontier and can be reached at [email protected].

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