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Hi readers, it’s Nikki here, back at it again with more food for thought!
I was browsing through my Facebook feed when I came across a Wall Street Journal (WSJ) article with the convincingly clickable title “How Exactly Do You Catch Covid-19? There Is A Growing Consensus.” As someone who lives in the country with the highest number of cases in Southeast Asia, this piqued my interest. But after clicking on the link, tragedy struck—it was paywalled!
I had to subscribe to the WSJ to read the full story, else content myself reading the first two sentences over and over again. Shouldn’t this kind of information—particularly health and pandemic-related information—be available to everyone?
This made me consider the rise of the subscription economy and the now-ludicrous idea of having to pay for my information. For the past two decades, I’ve been spoiled with information. It came left and right, sometimes even unsolicited. And a quick Google search could answer all of my questions in 0.00052 seconds.
But then I realized what life was like before Google came into the picture. Wasn’t information scarce and considered a luxury? Didn’t people pay for newspapers and magazines and stack volume upon volume of Reader’s Digest next to their toilets?
Perhaps it’s only right that we go back to paying for information. But will it work? I haven’t subscribed to any news outfit just yet.
As Southeast Asia takes its cues from the success of subscription business models in the West, we explore the future of the region’s subscription economy. Covid-19 may be the ultimate test of business models.
TL;DR:
- The allure of subscription-based business
- Subscriptions for products and consumer content not as sticky in Southeast Asia
- Why do subscription models fail in this region?
- Covid-19 may be giving subscription models yet another chance at Southeast Asia
- What will stay and what will go?
The allure of subscription-based business
Subscription business models are certainly not new but they’ve been all the rage these past few years.
From subscription meal kits to designer clothing rentals, the idea is to shift away from pay-per-product or -service and instead give everyone access to everything as needed—for a recurring monthly fee.
There are a number of perks that come with subscription-based models. For customers, it means they get steady access to a service without having to keep placing orders. And for businesses, they get steady recurring revenue and can more easily predict volume and demand.
Because customers purchase from your business each month, companies also spend less on retention, enjoy faster feedback loops, and capitalize on the compounding value of customer relationships. So even if subscription-based models require a higher initial investment for acquiring customers, the compounding effect throughout the customer’s lifetime value can more than offset these costs.
Of course, it’s not all rainbow and butterflies for subscription-based models. As mentioned earlier, the cost to acquire a customer is much higher for subscription-based models as there is usually a waiting period before customers become profitable. This is true for companies with freemium or free trial models where wooing can take several months.
And even if companies do manage to hook customers in for a few months, there’s always the possibility customers will cancel their subscription.
Whereas transaction sellers can cross-sell, up-sell, and get customers to buy more at certain times (e.g. 9.9, 10.10, 11.11, and 12,12 sales), subscription services need to consistently add value to their service as well as maintain reliability all throughout.
For example, customers of product subscriptions like food or beauty box services seek personalization. They want meals or beauty products that are not just delivered to their doorstep at the same time every month, they also want those products to suit their keto, gluten-free lifestyles. Customers of access subscriptions, like memberships that provide lower prices or exclusive perks such as Zomato Gold, want better deals at their most dined-in restaurants.
A 2018 survey by McKinsey found that 40% of e-commerce subscribers ultimately cancel their subscriptions.
In spite of these challenges, subscription-based models are still hugely popular and offer businesses satisfying returns. The same McKinsey survey found that consumers who have found a product or service they like tend to stick with it for the long-term. Around 45% of those surveyed said they have been subscribed to a service for at least one year.
Some of the top trendsetters for subscription-based services in the West include video streaming platform Netflix, beauty box business BirchBox, and of course, Amazon.
Founded all the way back in 2005, Amazon’s access subscription program Amazon Prime is one of the world’s most successful subscription services with sales from memberships growing to US$5.6 billion as of April 30, 2020.
With over a billion registered players and well-attended, region-specific events (like the one above in Yokosuka, Japan), the wild success of PokThere’s also a good case for companies with pay-per-product or -service business models to make the switch. According to the Subscription Economy Index by Zuora, subscription businesses across the globe increased their revenue rates five times faster than that of S&P 500 companies from 2012 to 2018.
It’s no wonder traditional companies are now entering the subscription space and copycats subscription businesses are popping out left and right. The question is, will they be able to make something out of it?
Subscriptions for products and consumer content not as sticky in Southeast Asia
In Southeast Asia, we learned the hard way that not all subscription-based businesses are made equal.
Following the success of New York-based monthly beauty subscription service, Birchbox, the early 2010s saw a huge number of beauty box businesses pop up across Asia. By 2013, there were around 51 of these startups, including Memebox in South Korea and VanityTrove in Singapore. But at the end of that year, the number of beauty box companies shrunk to less than 20.
The problem with these beauty box subscription businesses was (1) the idea was too easy to replicate, and (2) the limited number of beauty samples in Southeast Asia.
The beauty box business wasn’t the only fail. Singapore-based wine subscription company French Cellar announced last May 2019 that it was ceasing operations due to “difficult business circumstances.” The news came suddenly and none of their customers were informed that their wine subscriptions—some of which amounted to thousands of dollars—were not going to be fulfilled.
In more recent news, Singaporean telecoms company Singtel announced that it had begun a “creditors voluntary liquidation” of media streaming service Hooq.
Hooq blames its demise on market context. The cost of content is high, competition is stiff, and consumer willingness to pay has increased only marginally over the years. Netflix continues to be the top gun for video streaming content in the region, even without a local production strategy.
The problem with Hooq was that it started off with the wrong assumptions. The company believed that it needed to focus on Western-content, and that simply having these shows on their platform was enough to drive customers to purchase.
But piracy is common practice in the region, so simply having their shows legally available on their platform was not enough to justify paying for it. And when it became clear that local content was what appealed to their audience, it was far too late.
This is not to say that all subscription businesses are a bust in Southeast Asia. While box, access, and subscriptions seem to be a bust in the region, software-as-a-service (SaaS) are gaining momentum. Companies like Trax and Deskera are enjoying steady growth, with Deskera even reaching Centaur-levels of company valuation.
Still, subscription business models in the region are neither here nor there.
Why do subscription models fail in this region?
Everyone expected subscription services to take Southeast Asian e-commerce by storm, as it did in the US. But it seems like no one has quite got the subscription model figured out in Southeast Asia just yet.
Some say that subscription models, particularly meal boxes, won’t work in places like Singapore as Singaporeans are “grazers.” In other words, “Singaporeans eat the grass and move on, hardly ever looking back and constantly moving forward to new pastures.” Food trends in the country simply don’t last long.
But to put it simply, digital content revenue models don’t work the same way in Southeast Asia as they do in the Western world, for a few specific reasons.
For one thing, subscription models usually require credit or debit cards for recurring payments. Many businesses offer free trials, but first require you to punch in your credit card details before they let you try their service for free.
In Southeast Asia, credit card penetration rates in many countries still languish in the single-digit range. This means businesses either need to specifically target the banked population, which is a niche population. Or, they need to offer traditional payment methods, including carrier billing.
For another thing, consumer income in the region is much lower compared to its Western counterparts, meaning services need to be priced lower to be attractive to the local audience.
Lastly, businesses need to understand that conversion is expensive. There needs to make significant capital investments in customer acquisition before businesses can begin to see results. The fact that customers can cancel anytime means that subscription businesses need to place more effort and resources into fostering customer relationships as compared to transactional models.
On the flip side, customer retention costs less for subscription models and can significantly improve income compared to acquisition. There lies the value of subscription—once a customer is a paying customer for a month, it costs less to make sure they remain a customer for the next month, and so on.
Hooq, for example, spent too much time pivoting their strategies, which, in over-the-top (OTT) media platforms, is expensive business. By the end of its time, Hooq’s pre-tax losses stood at US$62.5 million, and net liabilities at US$80.8 million.
It is also particularly difficult to succeed in emerging markets like Southeast Asia where users are less ready to pay for content. In countries where customers are willing to pay for subscriptions, like Singapore, they tend to only go for one paid OTT platform, with Netflix being their first choice.
Covid-19 may be giving subscription models yet another chance at Southeast Asia
Meanwhile, Covid-19 is causing major behavioral shifts among consumers in the region. More Asians are staying at home to stay safe. According to a survey by Kantar, 59% of respondents say they have decided to travel less to stay safe. Around 52% say they are less likely to eat out, and another 52% are avoiding socializing outside the house altogether.
As a result, more people are staying in with 42% saying they are streaming more content.
Lockdowns and social distancing measures are also promoting the adoption of digital financial services. In the Philippines, for example, one of the country’s biggest digital currency providers GCash saw a user surge of 150% in just one month. In Indonesia, Bank Rakyat Indonesia experienced an 88% year-over-year growth in online banking during Q1 2020. And in Singapore, the three largest banks reported significantly higher digital transactions conducted by clients.
The adoption of digital payments and electronic money is helping create an ecosystem that will enable subscription business models in emerging markets similar to how credit and debit cards enable it in developed markets. This means that more businesses in emerging markets will welcome new business models, particularly ones that allow them to foster better and more stable customer relationships.
What’s more, Covid-19 has taken a toll on household incomes. This is making customers more likely to commit to an ongoing service at a manageable cost rather than pay a large sum up front for traditional purchases.They are also more likely to opt for bundle services that offer more value for money as opposed to premium services that offer better service.
As Covid-19 continues to impact businesses for the worst, this is also the time when businesses are learning the value of committed customer relationships and recurring revenue. Particularly businesses that started 2020 with committed customer relationships and expected revenue already in place.
In fact, studies have shown the resilience of subscription companies throughout the pandemic. According to Zuora’s Subscription Impact Report, four out of five subscription companies are still growing despite the economic impact of Covid-19. Around 50% of subscription companies are growing just as fast as they were prior to the pandemic, and 18% are seeing subscriber growth rates accelerate.
Among those accelerating in subscriber growth are OTT video streaming, digital news and media, and e-learning.
OTT video streaming saw a 400% increase in subscriber growth thanks to free trials and high demand in the past three months. Meanwhile, digital news and media companies saw 110% subscriber growth.
The New York Times and The Wall Street Journal both saw a bump in subscribers. Meanwhile, Singapore-based Tech in Asia is finally on the path to profitability since switching to its paid subscription model last year. The subscriptions make up 20% of their revenue mix, while events and branded studio content make up the other 80%.
Digital media is one of the industries that would greatly benefit from moving towards subscription-based models. Many of the digital companies that were forced to make huge layoffs due to Covid-19 were those who relied on advertising revenue.
The economic recession of 2008 made media companies realize that they can no longer rely on mostly advertising revenue as companies tend to “go dark” during economic downturns. In 2008, Milward Brown shared evidence that 60% of brands “went dark” during that time, meaning there was no TV ad spend for six whole months.
The same is happening today. As companies continue to make budget cuts to their marketing and advertising spend, the recurring revenue from subscriptions prove to be the better alternative for increased resilience during this time.
What will stay and what will go?
Deloitte said it best when they said that “the Covid-19 story isn’t so much ‘before and after’ as it is ‘before and faster.’”
As Covid-19 continues to accelerate trends, we could be seeing another attempt at the golden era of subscription-based business models here in Southeast Asia. After all, there’s a reason why big players like Netflix and HBO are tapping into the region, and regional powerhouses like GoJek are investing into video streaming with new service GoPlay—Southeast Asia is a high-growth market with plenty of opportunities for subscription-based business.
Subscription businesses are inherently more flexible than their traditional pay-per-purchase counterparts. This flexibility can help create tailored content to different countries in the region. Subscription business models have also proven to provide more stability and resilience in times of crises.
As entertainment consumption and digital payments continue to develop in the region, it may just be a matter of time before the subscription economy becomes the norm.
Now, excuse me while I try to read these paywalled articles.
