The holy grail of any business is the ability to continually increase profits. In the recent past, subscriptions have been the rage to that end.
Most businesses make their profits through one time sales to their customers. With the subscription model, a business charges their customer over and over again on some regular basis. Examples would include gym memberships, streaming services, application fees, etc.
While subscriptions by themselves aren’t necessarily negative, the use of them often takes advantage of people’s habits. For example, someone joins a gym and pays a monthly membership fee (subscription). That person goes to the gym for a couple of months, but later falls out of the habit. They forget about the monthly charge to their charge card. Sometimes this goes on for years. This is great for the business since they end up not having to provide any services while still receiving revenue. In essence, each dollar of subscription revenue is pure profit because there is essentially no cost for the business since the subscriber stopped using the service, but didn’t bother to cancel it.
For those subscriptions that a person regularly uses, the catch is that once the habit to use the service is established, the business can steadily raise the subscription fees over time. A perfect example of this is cable TV. Anyone who has dealt with cable knows the first year’s monthly payment is set at a “teaser” rate. After the first year, the rates rise slowly (or quickly). If the subscriber does not address the issue, the business continues to raise the rate over and over again.
Inflation is now beginning to rage. As consumers are squeezed by higher and higher prices, they begin to search for ways to reduce their expenses. The easiest costs to reduce are those that they are paying that they aren’t using regularly or at all. Their budget has to be evaluated to determine if they really need to have access to a service or just want to have access (need versus want). Both of these cost reduction strategies are subject to the consumers habits.
Once a consumer develops a habit of using some service, many find it difficult to change. But, with inflation rising in a 1970’s style, the pain of meeting their expenses will likely create more pain than the pleasure of having a subscription. The likely result will be paring subscription services.
So, while investors have bought into the subscription model as the holy grail, the consumers’ ability to drop those subscriptions will likely begin to reverse those “cream” revenues and cause businesses to have to reduce their costs commensurate with the drop-offs of rich subscription revenues.
The main driver that will mitigate a reduction in subscriptions is their customers’ habits. At the same time, the pain of inflation will cause many to override their habits to meet their personal budgets. This has been happening in cable TV for some time as the “cable was cut”. For now, those cable TV subscribers moved to streaming services, but the combination of streaming services they subscribe to is eclipsing the old cable TV fees.
So in the current inflationary environment, the subscription model will begin to lose its appeal to investors, as well as, customers.
Be smart, be well-read, be aware and be successful.
