Subscriptions | Learning by Proxy

For most of human history, the supply of products was always far lower than the demand for them. It is hard to believe, how radically this changed in the last 30 years. Just as unbelievable as the fact that 15 years ago, if you wanted to find your way around a new town, you had no other choice but to stop your car a dozen times and stop strangers and ask them. There was no Google Maps, no smartphone or 3G.

For most of human history, we have been reproducing faster than we have been producing.

I remember standing in a queue in 1989 outside the Delhi Milk Scheme (DMS) store to get milk which was rationed – half a litre per person in the household. In those days Europe was described in India as a place where ‘doodh ki nadiyan behti hain’ (where rivers of milk flow).

There are still places in the world where getting things is hard; but in most of the developed and developing nations, that is not the case. [*except in America where it seems like getting anything involves a 3-week wait]

The abundance that we experience today – we can get what we want, when we want – is a recent phenomenon.

At a time when demand outstripped supply, growth always seemed infinite. You could bring as much supply to the market as you wished and the market would gobble it up. This ramping up of scale was referred to as growth by most businesses and it has kept shareholders happy for the past 100 years.

That growth is under attack!

Source: Federal Reserve of St Louis

The population growth rate of most G7 countries has been propped up by a single word – Immigration. Many of them are working hard to cull it! Instead of focusing on their systemic flaws and costs (cost of education), they are going after those who actually keep their economies propped up!

Japan is one of the G7 nations that does not receive too many immigrants because of their language, their colonialism was limited to a small part of Asia (mostly China) and also their society is not very accepting of outsiders. The graph above has a story to tell.

The richest nations in the world are dying

These countries do not have a fertility rate to even keep their population constant. Their populations, at least their native populations, are in steady decline. The rise in the standard of living implies it is economically impossible to have more than 1 child.

Benjamin Franklin was considered one of the best that American society had to offer in his times. Even he did not bother with ensuring education to his children, although he had only 2 of them.

By the standards of 18th century Americans, it was very low. Their high birth rate, 5 – 7 children per couple made it possible for the white race to eclipse the indigenous tribes and eventually exterminate them. But that is for another time.

This has undergone a radical change in the last 200 years. Across the US and Europe, a middle-class family is expected to provide quality education to their child. The trouble is that raising a child can cost up to USD 1 Million across 20 years. Many couples are unwilling to absorb this cost.

European countries are trying hard to push their youngsters to have children throwing in all kinds of incentives including “sex breaks“.

The G7 represents close to 50% of the world economy. The slowdown in growth in these countries implies a slowdown for businesses everywhere.

Companies that sell cars or TVs could rely on growth because there were more and more people who did not have those conveniences. As their incomes increased they would eventually step into the market. Today, with more than 90% market penetration and slowing population growth, it does not look like there is a lot of growth to be had.

Enter Subscription

The subscription model was originally conceived by the utility companies that needed to keep providing a service over a prolonged period of time to their customers. The original subscription service was milk which had to be delivered fresh every day. Then came the newspaper. After General Electric figured out how to charge a subscription for electricity, Edison exported the same model to telecom.

The model was adopted by software companies over the last decade since it makes it easier to continuously develop and improve their products rather than having to go through the process of building up hype and selling the software over and over every few years. It is painful to sell software once, it is even more painful to sell it all over again every few years.

The subscription model is a brilliant financial innovation because you keep getting pay-offs from customers you sold to a long time ago.

Revenue Model

As can be seen above, there is an accumulation that takes place which makes the model very powerful. Although new sales remain constant. In the real world, there may be some drop-off – customers who discontinue the subscription, but even so, your revenues continue to rise.

In simple, so long as you are not losing all your past customers, you can rest on past laurels.

Even Swiggy, UrbanClap and Uber who are running transactional platforms which are providing real-world services have launched subscriptions programs that offer users the ability to avail themselves discounts every time they use the app. But more importantly, it allows the companies to have a minimum baseline revenue irrespective of the number of transactions processed.

Almost every device you use today runs on software and therefore, every company seems to think that they can sell you a subscription.

The subscription model is making its way into the unlikeliest of places. The Automobile Industry.

Mercedes could soon offer a monthly subscription service via a Mercedes Me app store that adds extra in-car features. Mercedes software developer Markus Ehmann told the publication that the automaker is “working on a robust platform that allows the user, the drivers, to turn features on and off in their car – possibly an extra feature that costs money or something they know they don’t want.”

Source: CarBuzz

The feature that they want to charge for is a standard feature that has been around in most high-end cars for the last decade.

I am just waiting for all of the other gadgets around the house to start charging a subscription. Imagine when your fridge does not open till you pay up!

Software also means flexibility and Samsung is throwing the Android operating system that is used to power their phones, into the fridge, to create an e-commerce ordering model.

Samsung is really, really eager for you to know about its new smart refrigerator with a ridiculously large touchscreen integrated right into the door. It put up posters early, it posted images early, and finally it even put up some PR early. But now it’s officially official, and despite the fact that it looks nothing so much like a huge Android tablet super-glued onto a fridge, it’s actually one of the best implementations of a smart fridge we’ve seen.

The headline feature is a shopping app that’s been created by MasterCard. It lets you buy groceries right from the door, and the intelligent part is that it can combine carts from multiple stores. At launch, you can order from FreshDirect and ShopRite, and MasterCard says that more stores will be added throughout 2016 (you can use any credit card to pay, of course). MasterCard also tells me that if you have kids, no worries, when they load up the cart with Go-Gurt you will still be able to approve the cart before it goes through.

Source: The Verge

Layering more and more business models on devices that used to be sold for a fixed price is going to become standard as the days go by. These will be necessary to keep their businesses growing. In a business where you sell products that have an average life span of 10 years or more, generating additional income flows from the mere usage of the device is becoming more and more important.

This pretty much explains my last week’s edition on App Store. iPhones used to be changed every 2 years, now we upgrade probably once every 5 years. There is a need to keep revenues growing; selling more services through the device is the only way.






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