Podcast: Two Cents' Worth

Two Cents’ Worth: Beware subscription creep

Subscription creep - it's the money just slipping from your account to an increasing number of businesses running subscription models.

From dental care to groceries, cars and beauty products, more and more companies are offering a subscription service.

Subscribe to Two Cents' Worth for free on Apple PodcastsSpotifyStitcherRadioPublic or wherever you listen to your podcasts

The first subscriptions were offered by European publishing houses back in the 17th century, for newspapers and periodicals. For some years we have had newspaper subscriptions, they never-used gym subscriptions.

But about 15 years ago the e-commerce revolution really started to take off, particularly in the United States. Rather than putting an individual price on a digital product, companies started to introduce a monthly subscription for software, games and streaming content.

That was really the start of the Netflix revolution we are in the midst of today.

“What this rise in subscriptions mean is that people are looking for a fast and accessible option for consumables,” said Brad Olsen, who is an economist at Infometrics.

That is why online subscriptions have become a multi-billion dollar business and why the model that Netflix, Apple and others have turned into global streaming success, is now being applied to a whole host of physical consumer goods, offered for a monthly subscription.

“We’re all a lot busier these days," said Olsen, "We don’t have the same time to go out and do a lot of the things that we might have previously done and you see that in some of the subscriptions models that have become quite popular in New Zealand, quite quickly - like My Food Bag or Hello Fresh around food provision.

"I think there’s also an element of the ‘fun’ of getting something delivered to you and getting it in a personalised manner," he said.

It's younger, affluent urbanites flocking to subscriptions. Olsen said apart from being much more online and able to find the services more easily, young people spend their money differently to older generations.

"They’re very much looking for an experience, whether they’re buying a good or a service, they’re looking for an experience that they enjoy and they’re looking for that tailored, very personal experience."

Economists typically see three areas of growth in the subscription economy. There’s the curation subscriptions, that’s Netflix giving us a range of movies and TV shows to watch

Then there’s the consumables subscriptions. This hasn’t really hit New Zealand yet, but in the US Amazon and Walmart, two of the world’s largest retailers are into it in a big way. Essentially you have a subscription to get stuff delivered to your door.

And stuff truly means anything - dog food, toilet rolls, coffee.

Amazon also offers it's Prime subscription - so if you pay a regular fee you can have an unlimited number of these deliveries.

Prime is an example of the third type of subscription, which is all about access - to exclusive deals or premium products.

The Prime system, which is still off-limits to us Kiwis but is now in Australia, is used by over half of US households. And Prime members spend over twice as much on the Amazon store as casual users who aren’t in the Prime programme.

The obvious criticism of Amazon Prime’s service is that it encourages consumerism and can be bad for the environment. We are also seeing the pointy end of consumerism in the subscription services that are very much at the luxury end of the market, the services that send you a selection of make-up, fancy cheeses or wine every month.

The bottom line for companies, whether they are selling cosmetics boxes or chocolates, is that subscriptions encourage loyalty, an ongoing relationship. In the business world they call the result of that ‘recurring revenue’.

You don’t want a customer making a one-off purchase occasionally, you want them coming back for more all the time and a subscription is the key to that. When it’s a relatively small monthly amount, there’s also a good chance subscribers will let the billing roll over, even if they aren’t quite using it to the degree they could.

"You are seeing increasingly in that consumer space the ability to also leverage that customer base from that subscription model for further purchases," said Olsen.

More and more companies are offering subscription services, like Turners the car sellers.

In March Turners will launch Carly, its car subscription service.

Jeremy Rooke, is the general manager of digital strategy at Turners Automotive Group. He said car subscription is about paying a recurring fee to access a car rather than purchasing it. 

So, there’s no sign-up fee or break fee so it is sort of like that Netflix subscription, you just pay for a month at a time and if you want to cancel after that, they take the car away and you stop paying.

Turners haven’t announced New Zealand pricing yet, but it will be similar to Australia where an entry-level, late model hatchback will typically cost $120 a week as part of the subscription.

Rooke said that includes many of the running costs.

Photo: Dan Slevin/RNZ

"So that includes registration, servicing, maintenance, insurance and roadside [assistance]. Basically you’ve just got to put petrol in it and pay for parking."

"I think the sorts of people that this will appeal to are people anticipating a change in the short to medium term in their lives," said Rooke, "It could also be somebody who has a short term need for a particular type of vehicle, maybe your temporarily working in a location and need a vehicle, or you may just want to try a vehicle without committing to a purchase. So you could just try something for 30 days and then give it back."

Even dentists are getting into subscriptions. Lumino The Dentist, a national dental chain owned by listed company Abano Healthcare, has been offering a subscription plan for nearly three years. It has 17,000 subscribers. They pay around $1 a day for three appointments a year, check-ups, x-rays and a hygiene treatment, the basics designed to keep your teeth healthy.

"From our point of view it’s really trying to get people to come more regularly to the dentist," said Andy Tapper, the chief strategy and business development manager for Abano Healthcare Group.

"If they do then the evidence shows that if you keep on top of your oral healthcare then you will have less chance of major issues arising over time."

And from Lumino’s point of view, it tackles the big problem that a lot of businesses face, so-called “churn”.

That’s where customers simply move to a competitor which offers a better deal.

"As an industry, we’ll typically refer to the fact that it’s about 30 percent of your patients who you will see on a regular basis, 30% of patients will be irregular," said Tapper, "They won’t necessarily have gone to another dentist but they’ll just come infrequently and then 30 percent of the patients that you see, you may never see again."

He said: "There’s no doubt that the vast majority of the population of New Zealand do not visit a dentist regularly so if we can try and encourage that change in behaviour through things like the dental plan, then yeah - certainly from our dentists point of view and as an organisation we would be rapt to see that trend change over time."

Triton, the hearing aid company has also taken the subscription route.

The technology also evolves quickly so you could buy a hearing aid for $5000 and find a few years later that a new model is available that’s going to give you a better quality of life, but you can’t afford to upgrade.

So Pay As You Hear is the answer according to Triton, which has hearing clinics around the country. From five dollars you can get a subscription that will upgrade you to the newest hearing aids every three years, free hearing checks, batteries and no repair costs. It a hearing aid breaks down, they’ll simply replace it.

The key things with all of these subscriptions seems to be carefully considering your personal circumstances to decide if a subscription is going to be worth it. After all, what’s the point of paying a subscription if you aren’t taking full advantage of it?

Getting a handle on that is really important in the subscription economy. The best business model is the gym membership that you never use. The gym doesn’t have to spend any money on you, but takes your money every month.

Scrutinising the numbers is all the more important as the monthly cost of a subscription increases, as it will if you start subscribing to plans for cars, cosmetics, furniture, clothes and alcohol.

We value fearless, independent journalism. We hope you do too.

Newsroom has repeatedly broken big, important national news stories and established a platform for quality journalism on issues ranging from climate change, sexual harassment and bullying through to science, foreign affairs, women’s sports and politics.

But we need your support to continue, whether it is great, small, ongoing or a one-off donation. If you believe in high quality journalism being available for all please click to become a Newsroom supporter.

Become a Supporter

Comments

Newsroom does not allow comments directly on this website. We invite all readers who wish to discuss a story or leave a comment to visit us on Twitter or Facebook. We also welcome your news tips and feedback via email: contact@newsroom.co.nz. Thank you.

With thanks to our partners