The BRB Study - Issue #3: "The Rise of the Subscription Economy"

In the second article of the BRB Study, we looked at the vital position independent hoteliers play in the travel eco-system and the true lack of supplier-centricity.

This week, the BRB Study focuses on the rise of the subscription economy and why we believe bringing this to the travel sector makes complete sense.

But before doing so, let's look at why we have seen such a steep rise in the number of subscription businesses over the last decade.

The end of ownership? The rise of usership.

Back in May 2019, I read an article by Tien Tuozo, CEO of Zuora, entitled:

Ownership is Dead. Long Live Usership

The entire piece really resonated with me as I had spent the previous 18 months talking to millennials to try and understand their consumption and travel habits. From these hundreds of one-to-one conversations, the same two topics kept coming back:

1. A detachment from material possessions with a clear focus on experiences, not things
2. A radical change of POV when it came to ownership

Whilst these two types of behaviours can be seen as completely independent from one another, they're often more interlinked than we think. Let me elaborate.

The dominant economic model of the last 100+ years is slowly being phased out

Millennials are incredibly realistic and given the current economic climate, things that appeared completely normal 30 or 40 years ago - such as getting on the property ladder, owning a car or paying off student debts - have become more and more out of reach for this new generation.

Take home ownership. Given the disparity between wages and property prices, how can a millennials even consider getting on the property ladder? Home ownership, car ownership or the prospect of paying student debts have become pipe dreams for millennials.

By being realistic about the concept of ownership, millennials have focused their attention away from material possessions. This simple shift in mindset has given them a new perspective on life, one that focuses on unique experiences:

"I must enjoy myself and have the most exciting experiences NOW. My future self can worry about house or car ownership".

And with 17 million millennials in the UK, making them the largest generation to date (about 1/4 of the whole population of 65.1 million), it's no wonder that we are seeing a steady decline in ownership and a steady rise in usership.

This shift in purchasing habits is seen by the decline in unit sales across many industries, which does not correlate with a decline in consumption. In other words, unit sales are down but consumption is up.

We have now seen this across many industries - music (music subscriptions now account for 62% of total music sales revenues), automotive industry (millennials are about 29% less likely than those in Gen X to purchase a car, yet Uber, Ola, Bolt are all on the rise) or media (decline of video ownership but the number of subscriptions to online video services like Netflix reached 613 million last year — a 27% annual increase).

Today, most large tech companies have implemented a subscription element to their offering, sometimes multiple ones (e.g. Microsoft has 365 and Xbox Game Pass, Amazon has Prime and Audible, Google has Drive and YouTube Premium). Not all subscription products are disrupting the concept of ownership, but the list of services that do is getting longer by the minute.

So whilst ownership will still play a part in our daily lives, the bigger picture is that the dominant economic model of the last 100+ years is slowly being phased out by new and more relevant models for the younger generations.

Subscription: A fast growing industry

A recent surveys from the Harris Group shows that people across the globe subscribe to more services today than 5 years ago, which should come as no surprise.

The Economic Department of ING estimates that Europeans spend an average of EUR 130 per month on subscription services. Therefore, the European subscription market is estimated to be around EUR 350bn.

Zuora is a software company that provides financial accounting solutions for companies with a business model based upon subscription services. Looking at its customers, the Company estimates that revenue from companies operating with a subscription model have grown at an 18.1% compounded annual growth rate (CAGR) over the last 6 years.

This is 5 times faster than US retail sales (3.1% CAGR over the same period) and not even comparable to revenue generated by MSCI All Country constituent companies (0.5% CAGR over that period). Zuora has assembled these clients into what it calls its Subscription Economy Index.

Is there a false sense of market saturation?

But with subscription being available across most verticals and disrupting incumbent players, a false sense of market saturation seems to have appeared. And it's not hard to see why.

In the US, households have on average 7 digital screen devices — smartphones, tablets, smart TVs, and laptops — and the average US consumer has 12 media and entertainment subscriptions across TV, video, music, news, podcasts, audio books, gaming.

Millennials clearly lead this trend with an average of 17 subscriptions against 8 and 7 for 'Boomers' and 'Matures' respectively. And with 14 subscriptions, Gen Z

Whilst it's fair to say that subscription fatigue is a thing, as there are only so many subscriptions people are willing to have (especially when their disposable income comes under pressure, as has been the case during the Covid-19 pandemic), saying that subscription is on the verge of saturation is laughable.

The picture in the U.S.

Looking a recent article by Nikhil Basu Trivedi (VC in search for the next big thing), according to an analysis earlier this year by Mint.com for the New York Times, the average U.S. citizen spends on average $640 on digital subscriptions in 2019, up from $598 in 2017.

With an average household spend of $63,036 in 2019, and an average of 2.52 people per household, the $640 spend on digital subscriptions represents 2.55% of an individual’s annual expenditures.

What about the UK?

From Netflix to meal kits, Britain is becoming a subscription society: Households now typically spend ￡552 a year on sign-up services, with the average Briton spending ￡46 per month on subscriptions. That's roughly 1.9% of an individual’s annual salary.

In the UK, the subscription economy has grown to be worth ￡323million, according to research from Barclaycard Payments, with an increase in businesses adopting the model. Some 65% of homes are signed up to regular subscription services, with an average of seven contracts per household.

So why this false sense of market saturation? I attribute this to two factors:

1.The saturation of specific verticals

A number of very specific verticals are indeed becoming saturated due to the sheer number of players now offering subscription services.

Take video streaming for example. With players such as Netflix, Amazon Prime, Now TV, Apple TV Plus, BritBox, Disney Plus, HBO Now, YouTube TV, Sling TV or Acorn TV to name just a few, which service am I supposed to choose? This new 'Paradox of Choice' in the video streaming vertical is indeed real, but we can already see that clear winners will emerge globally and across specific geos:

• Netflix and Amazon Prime: Globally (and UK)
• iQiyi and Tencent Video: China
• Viu: South East Asia
• Alt Balaji and Eros Now: India

2. Niche services

This sense of market saturation is also coming from the fact that too many niche services have been launched in the last 5-10 years.

With most consumers still trying to figure out what subscription services they need in their lives, they try niche services only to realise that these make little sense.

For instance, do I really need a 'toothpaste subscription service' or would a shopping subscription service that meets all my personal food and hygiene needs make more sense?

The parallel I would draw being cryptocurrencies. Do we really need DentaCoin to pay for our dental treatments or would a single crypto that allows me to pay for all my personal needs - be it food shopping, clothing, entertainment, holidays and medical expenses - make more sense?

So it wouldn't be surprising if we witnessed a consolidation of this industry over the next 5-10 years!

Ultimately, the general sentiment from customers is that in the future, people will subscribe to even more services, not less, and spend a larger part of their disposable income on subscription services, as highlighted in a recent global study by The Harris Group.

A readjustment towards 'usership'

This concept of 'subscription economy' remains fairly recent and companies are still trying to wrap their head around how to deliver such services. They've also been forced to be laser-focused on core metrics such as sign-up and subscription rates, LTV and churn.

The latter - churn - has been a major issue for most subscription services. In most cases, churn rates have remained high which can be explained by a) the relative newness of the model (consumers want to try new things), b) low barriers to entry and exit (unlike ownership, it's a low entry price point, is easy to cancel and depreciation isn't an issue) and c) the inadequate implementation of such business models.

Let me touch quickly on this last point.

In a world where ownership is decreasing but usership is on the up, does it really make sense to charge people a monthly subscription if they do not use the platform or service? Probably not.

The by-product of a poorly implemented subscription service is churn, and companies facing high churn rates will need to tweak their business models to ensure they provide value to their customers, not charge them for something they are not using.

Subscription services that constantly deliver value to customers, have a low churn rate. Those that don't are forced to pay high CACs to bring new customers to their platform or discount their services to try and keep them, resulting in a lower CAC:LTV ratio. In most cases, this is simply unsustainable.

For instance, I do not spend much time in front of a TV screen, but despite this I have not yet cancelled my Netflix subscription as I get a tremendous amount of value from it. At ￡7.99 a month, I spend ￡96 per year on Netflix compared to a standard TV Licence costing ￡157.50. I've never looked back on my decision to cancel my TV licence 5 years ago and ended up getting access to a better library of on-demand video content, for 60% of the price.

What is needed is a more dynamic pricing infrastructure to give subscription companies the ability to charge their customers only for what they consume. I therefore wouldn't be surprised if we saw specific industries move from fixed monthly subscriptions to usership based subscriptions.

5 reasons why travel subscription just makes sense

The first time I pitched BeRightBack to an audience of investors (late 2018), the feedback I received was very mixed.

Older investors (and I mean this in the most respectful way) were quite cynic about the concept and assumed we were simply trying to ride the wave of the subscription economy. They never scratched the surface to try and understand what my background in the travel space had taught me about both customers and suppliers.

Younger investors on the other hand, completely got the value proposition and the need for such a model to exist in the travel space in order to combat the lack of customer centricity on one side (see "The BRB Study: Customer Centricity in the Travel Industry") and the lack of supplier centricity on the other (see "The BRB Study: Supplier Centricity in the Travel Industry").

So why does it make sense for subscription to become the norm in the travel sector?

In the first article of the BRB study, we touched on the fact that the travel industry lacks customer centricity.

• The convenience economy: The current model is based on customers doing all the heavy lifting and spending a disproportionate amount of time to research and plan their holidays (too many players leading to a paradox of choice). At BRB, we believe that by simplifying the planning and research process of travel, we can give customers their time back. Because it's ultimately about the 'convenience economy'. By leveraging customer data, profiling users and clustering them, we can match you to the best destination and property based on their individual profile and budget.
• Fixed price travel: Whilst customers are researching and planning their holidays, a process which can take 10+ hours over a number of weeks, travel companies use the data collected and their current occupancy to dynamically price travel. This often results in consumers paying more for the same trip (I'm sure it's happened to you). Subscription travel is not based on dynamic pricing, but it offers a fixed price value proposition to customers, making it easier for them to save and budget for their travel. It's a win-win.
• Data driven for more personalisation: OTAs do not have the best interest of customers at heart, but their own bottom line. Their ranking algorithms focus on the properties which deliver higher commissions instead of focusing on those that deliver higher customer satisfaction. Subscription travel focuses on delighting customers, not tricking them. Our main aim is to over-index on the quality of our trips to deliver long-term loyalty.

In our second article we touched on the fact that the travel industry is not supplier centric.

• A more predictable model for suppliers: Most accommodation providers, from small independent hotels to large hotel chains struggle with the OTA model. It's expensive (10%-30% commission), incredibly competitive (with thousands of properties in each city - from large hotel chains to serviced apartments), offers zero guarantee on occupancy, focuses on higher converting properties and penalises hoteliers with flexible cancellation policies. Subscription travel flips the OTA model on its head. We have guaranteed customers travelling with us and we know them well, which allows us to leverage this data 3-12 months ahead of time to guarantee hotels occupancy and cut out the middleman and their commission rate.
• A more efficient model: Whilst most OTAs and travel businesses have focused on two factors - inventory and pricing - to drive their overall conversion rates, this has come to the detriment of a) customers and b) their bottom line. We've already touched on the fact that offering 3,000 hotels on search results is counter-productive for consumers, but it also creates an operational headache. Take the 'flash sale' model which relies on hundreds of people sourcing travel and new packaged deals on a weekly basis. These packages are then put in front of potential customers, in the hope that they will be attractive enough to convert. Subscription travel allows us to bypass this problem. By having complete opacity of travel sourcing, we can build direct relationships with a handful of hotels in each European city. As the business grows, we can guarantee these hotels more occupancy and when we hit full capacity, we simply add more properties in the relevant destinations or direct our customers to less saturated destinations.

Ultimately, we believe that refocusing the travel industry on customers and suppliers is the way forward. The time has come to create a win-win situation for all parties involved and not just focus on the bottom line.

This, is our vision...

Gregory Geny // Founder & CEO @ BeRightBack