The Hard Reality Of The Online Subscription Business

Many of the services that consumers can get online are free. The most visited websites such as Google, Facebook or Yahoo are free to use. Companies are often the ones covering those costs.

With the digitalisation of the economy, an increasing number of consumers are buying products online. In reality, this is not a “new industry” but just a way for consumers to take their spending habits on other channels. At the end, they still buy the same products that they were use to when the Internet didn’t exist. Selling products online makes a lot of sense as it is more convenient, simpler and usually cheaper. Amazon is the perfect example of a successful company playing in that field. Still, here we are mostly talking about physical products. Real stuff. So what about immaterial services such as online subscriptions?

The reality in this case is much more complex. Analyzing the current habits, it seems that consumers are mostly willing to pay for the immaterial services that they already used to pay and consume in the past (albeit, in a different form). For example subscribing to Skype to make phone calls is not so different that paying for a traditional landline. Watch streaming content through Netflix is the same consumption habit than going to the video club and rent your.

For items that were not necessarily spending habits in the past, the right offering with consumers is much harder to find. How many successful companies sell subscriptions for technologies / services that people didn’t used to pay for in the past? How many have been successful in creating a new digital need that consumers are willing to pay for? We are not talking here about games or other micro payments which leverage consumer’s impulsivity (e.g. virtual goods). We are talking here about services for which consumers are ready to commit a significant sum every month.

For example, OpenTable which let you book restaurants online could probably never work if it tried to charge directly the consumers for the service. Why? because people have never been used to pay for booking a table over the phone. It wouldn’t hardly make sense. It could be a nice to have but not a must have.

Rare are the example of these companies who manage users to subscribe to new services which technology created. If the technology allowed the improvement of a service that used to exist in a different form (and to be paid for), then the equation is much simpler. If the new service exists only thanks to the available technology, it is much more difficult.

When creating or investing in a company, be mindful of this reality. Digitizing an existing commercial experience is much simpler than trying to create new digital needs worth paying for. This is one of the reasons why many investors are nowadays pouring vast sums of money to startups which offer a service to businesses. The equation in this case is very different. Why? Because businesses are historically used to pay for a wider range of services than consumers do online. And this will be the case for a very long time.