New Threats to the Subscription Model

Subscriptions have all the hallmarks of a can’t-miss revenue model. Customers love how they lower their barriers to access, while companies embrace their simplicity and ease of communication. Investors prize them because they generate more predictable long-term revenue flows than conventional one-off transaction models.

Proponents of the so-called subscription economy — a term coined by the CEO of platform provider Zuora — argue that customers are better served by subscription experiences built around services than by static offerings or a single product. Software giant SAP asserts that a subscription model shortens time to market and speeds delivery of services to customers, in addition to accelerating cash collection and enabling businesses to define and modify pricing models.1

Two unanticipated risks, however, currently threaten to undermine these vendor advantages as well as the premise that subscriptions offer a better customer experience. These risks are supply chain disruption and inflation, the two most persistent causes of economic uncertainty over the past two years. Their combined effects are confronting many managers of subscription-based businesses with a challenge that never seriously crossed their minds during the relative stability of the 2010s: Can we still afford to meet the obligations we’ve made to our customers?

Subscription Models at Risk

Supply chain disruptions — such as delayed shipment of inputs and finished goods, as well as ongoing labor shortages — mean that what a company promises its subscribers today might no longer be available at the same level of quality next week or next month. This creates the potential for dissatisfied customers, exacerbating a more fundamental risk in the subscription model: the ease with which customers can cancel. The same low barriers to entry that make subscriptions accessible also make them easily interchangeable.

The threat of inflation, meanwhile, is particularly acute for companies with a large base of long-term subscribers or for companies that deliver physical products under a subscription plan.

Inflation squeezes margins because costs are rising, but the amount of revenue that companies earn from each customer remains constant until customers renew. In some cases, these rising costs expose incompatibility between a company’s cost structure and its subscription model. Managers may be able to disregard this when subscriber growth is robust, but they can no longer ignore it when growth stalls or when it hinders their ability to meet demand.