Nikki Lambert, Spotify’s marketing director, Europe admits that even five years ago subscription-based businesses had a reputation for being a “stitch up” thanks to mobile phone providers and gyms “locking people in and holding them to ransom”. But a lot has changed in that time thanks primarily to the growth of digital, which has brought with it far greater transparency meaning brands have got to put consumers first or they simply won’t engage.
In her new book The Membership Economy, consultant Robbie Kellman Baxter outlines this shift in consumer expectations and explores how businesses can benefit from moving to a subscription-based pricing structure.
“Once you start thinking about how the principles of membership can be incorporated into existing business models, you start to see opportunities everywhere,” she tells readers – particularly as consumers are growing increasingly frustrated with the burdens of owning, caring for and storing “too much stuff” and are looking for ways to minimise that stress.
“Any CEO that is not thinking about membership is missing a huge opportunity to point his or her organisation to long-term, sustainable profitability,” she insists.
Hasan Mustafa, founder and CEO of start-up menswear business Collar Club, a service which combines bespoke shirts with an upmarket laundering service, says he took inspiration from the Netflix subscription model and made-to-order furniture brand Made when launching the company, which he believes will “disrupt and revolutionise” the retail sector.
For a monthly fee of £95 members receive 11 made-to-order shirts, five of which are collected, laundered and returned each week.
“From a business perspective we have two really powerful things working for us,” he says. “Firstly we can predict demand so we can efficiently manage our warehousing, stock and inventory, which means we can keep costs low. Secondly we can forecast our revenue trajectory for the next 12 months. There is no seasonal fluctuation; once members sign up it’s set.”
Just as a mobile phone operator requires customers to sign up for a set period of time in order to recover the cost of the ‘free’ handset, Collar Club customers must commit to a 12 month contract. At the end of the year customers can pay to keep the shirts or they will be donated to charity.
Five years ago, subscribing to a supermarket would have seemed an even more unlikely prospect than subscribing to have your shirts ironed, but following the lead of online-only Ocado, grocery brands now look to sign customers up for longer periods of time by offering them the chance to pay monthly for free delivery and savings on particular products.
Ocado claims its Smart Pass membership scheme is responsible for “further driving customer loyalty, shipping frequency and total spend per customer” according to its latest annual report.
And just as the movie rentals market has changed to a subscription-based model, cinema chain Cineworld is looking to increase footfall by getting customers to sign up for its Unlimited card for a monthly fee, which grants users access to an indefinite number of screenings.
Considering that the average person now visits the cinema just 2.8 times a year, with the main deterrent for 52 per cent of non-cinemagoers being the price of a ticket according to research by Yahoo, it is certainly an industry that could benefit from lowering the barrier to entry and getting customers through the door more often. Gemma Shepherdson, head of marketing at Cineworld says the initiative underpins the brand’s strategy of growing other revenues and admissions and generates some of its most “loyal and dedicated” customers.
“The Unlimited programme brings the group the financial benefit of regular subscription income thereby reducing the level of fluctuation in our revenues,” she says. “It also brings operational benefits by encouraging repeat visits, often at off-peak times, which in turn enables us to improve capacity utilisation at our cinemas and provide more retail opportunities.”
In addition to unlimited access to movies, members also receive a 10% discount on in-cinema food and drink which increases to 25% after a year when users are automatically upgraded to a Premium Unlimited card at no extra cost.
“The added benefits prove as a great incentive for customers to continue with their membership,” adds Shepherdson.
Yet brands will also need to avoid their subscription models being seen merely as a way of “locking people in”, as Spotify’s Lambert warns. To see the value of the service, customers need to feel that they will be getting more back than they would have paid for without a contract, meaning the competitive edge for brands shifts towards providing a consistently rewarding service.
Q How do you look to convert free users into paying subscribers?
One of the biggest things that continues to dominate the music world is piracy and people wanting content of every kind for free. So the whole premise around Spotify was to come up with a way for consumers to pay for something that was increasingly being pirated. We believe the route to get people on board is to let them try it in full first [via the free ad-funded model].
Essentially, rather than spending £7 to download one album on iTunes they could spend slightly more and have access on demand to as much music content as they could ever want.
Q How do you keep users engaged once they upgrade to a premium account?
At the end of last year we created a profile for every Spotify user based on their listening habits as part of our ‘Year in Music’ initiative. There was a certain amount of information available for all users but we took premium users a level deeper by telling them what time of day and day of the week they listen most and creating curated play lists of tracks we think they would like.
Q How successful was the initiative?
It was by far and away the most impactful thing we have ever done and also the smartest in terms of using people’s data and helping them learn more about their music listening habits. Although I can’t share exact numbers, we were really surprised at how many people we re-engaged. We also had an up-sell offer for free users to upgrade to the premium service with a three-month free trial and expressed that we could have shared much richer data [on their listening habits] with them had they been a premium user.