Rory Sutherland writes in his book Alchemy about what he calls the two different approaches to business.
There is the ‘tourist restaurant’ approach, where you try to make as much money from people on a single visit; and the ‘local pub’ approach, where you may make less money per visit, but more over the long term by encouraging people to come back. Sutherland believes the local pub approach is more likely to generate trust and yield positive outcomes.
I would like to propose a third approach. Its real name is the subscription model but I like to call it the ‘Hotel California’ approach because, as in the song, you can never leave. And it is booming.
Welcome to the Hotel California
Previously dominated by the likes of newspapers, magazines, gyms, utilities, and telcos, more products and services are being offered to more people through subscriptions.
In the B2B world, the likes of Adobe now have a monthly subscription model for Photoshop and Amazon Web Services for its cloud model. You cannot buy a perpetual licence or boxed copy. You could argue that WeWork is a subscription model (and I am sure it did!).
Even the world of sex toys has got in on the (ahem) act. For example, Teaser Box offers a variety of options based on gender and sexual orientation with the contents remaining a mystery until you unbox them. Not that I knew this myself of course – a friend told me!
Royal Mail forecasts that the value of the subscription box market in 2022 will be up 72% versus 2017. Some 27.4% of shoppers are apparently currently signed up to a subscription service – skewed heavily towards 25- to 34-year-olds.
The biggest news in the subscription services game is that Disney is now taking on Netflix and Apple TV with Disney+. The launch was a success by one metric: signups. In little more than a day, Disney Plus registered more than 10 million people.
Why I love and hate subscription-based businesses
As a marketer, I would argue that subscription-based businesses are a tad easier than, say, most retail or FMCG businesses, where each day is a new one. Not for these folks the Monday morning meeting with all eyes staring at you wondering what you are going to do about sales that week.
Sadly for me, I have only worked for businesses where every day is a new day, without a guarantee of revenue from subscriptions. So, yes, I am jealous!
Subscription business are attractive to investors for one reason: predictable revenue. Here is the proof: Disney shares are at an all-time high since Disney+ launched.
Why do investors love them? Three letters – ‘CLV’ or customer lifetime value. This is when you know the revenue of a customer and margin, and the number of people who stay, you can calculate their full value.
CLV is also more technically known as the net present value of the future cash flows attributed to the customer during their relationship with a brand. Conveniently, this also happens to be very close to the description of one of the ways that investors work out the value of a company: operating free cash flows.
I appreciate that for many people they’re convenient. You don’t have to worry about your service or membership lapsing. That’s not a bad thing.
But let’s look at this another way; here’s a list of brands. Think about how you feel about them:
Netflix. Spotify. Amazon Prime. Audible. Your gym.
Here’s another list of companies. Think about how you feel about them:
Your water utility. Your mobile operator. Your mortgage bank.
My guess is you love the first set of companies; you might not hate the second, but they are something you would discard if you could.
‘You can check out any time you like, but you can never leave!’
My point is that my subscription list just keeps growing; but while it’s a great model for a business it is not always thr greatest model for a consumer. The most egregious aspect is the auto-renewal after an initial trial.
We’ve all been there. That free trial for a service that looked so tempting when you signed up through the app on your smartphone. But then it turned out to be either not what you wanted or not worth the money to keep going. The subscription renews automatically after the trial is up, and you have no idea when it finishes, or how to cancel it. Silence is taken as permission to charge your card.
Even for Disney+, it is not that seamless: it depends on how you signed up. If you subscribed via the web, there are four steps before you get to the page with the option to cancel. If you signed up via an app, you’ll need to cancel through the same platform.
If you are seeking to build a brand based on trust, respect, and reputation, make sure it is built on immense value creation – and not value extraction. Otherwise you might end up on a dark desert highway!
Of course, subscription brands say they are creating the best product or range to keep customers subscribed, hence why Netflix is spending so much on content and mobile operators offer add-ons.
However, another way to reduce churn is to not increase the value of the product or offer customers but simply to increase barriers to cancel. This is why you can subscribe to a broadband operator without waiting but, as has happened to us all, spend hours on the phone trying to cancel. It is truly impressive how many brands work hard to obscure how to cancel a service, but have none of those barriers to sign up.
And, it’s not just me moaning: the subscription model does not sit comfortably with all shoppers. Some 58.1% of those who are not currently signed up do not like the idea of being locked into recurring deliveries, according to the Royal Mail report. And, surprise surprise, the flexibility and ease of cancelling are the top reasons that persuade shoppers to sign up.
‘We are all just prisoners here – of our own device’
The argument for subscriptions seems to fall under the idea of ‘caveat emptor’ that buyers are responsible for checking the quality and suitability of a service before they purchase. Or I am a ‘prisoner of my own device’, as The Eagles sing.
If I commit to a regular payment, then I have to make the leap of faith that it will be easy to leave any time I want. But this is not always the case.
Let me explain: brands can create value for customers and / or create value for investors: ideally the two are linked. But in the world of Hotel California marketing, there is a distinction to when they are linked.
Netflix set the perception that hours of content should be available for nearly nothing. But Netflix – and many other subscription services – are making eye-popping losses despite being brands that consumers really like.
In this case, investors are funding these losses to enable subscriptions that customers want. And the ‘all-you-can-eat’ model makes any decision to cancel a lot harder.
As Sutherland writes: “Solving a problem at your own expense is a good way of signalling your commitment to a future relationship.” That is an intrinsic part of why Netflix and Spotify are so well liked.
The other type of Hotel California brands are really monopolies in action. They are not really about value creation but value extraction.
Sutherland refers to the theory of ‘continuation probability’, which predicts that when a business focuses more narrowly on short-term profit maximisation, it will appear less and less trustworthy to its customers.
This is why the water companies and mortgage suppliers are not liked by consumers but loved by investors. They appear to be analysing, estimating and calculating value to the minimum amount they can deliver. They don’t really solve a problem for consumers at their expense.
An economist might call them ‘rent-seekers’. The Eagles called the model “living it up at the Hotel California”!
Where is Hotel California marketing going?
Love it or hate it, Hotel California marketing isn’t going anywhere. So, if you are seeking to build a brand based on trust, respect, and reputation, make sure it is built on immense value creation – and not value extraction. Otherwise you might end up on a dark desert highway!