Subscriptions

Subscription Commerce Is Expanding Beyond Retail

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News came last week that Facebook is trying to get into the video streaming subscription business and attempt to steal market share from YouTube and Amazon. This is the first time Facebook is trying to sell subscriptions directly to users without an intermediary, indicating eagerness to enter the video streaming business.

Subscription commerce is attractive to entertainment platforms as well as retail businesses because it locks in revenue streams, and customer data can help with planning and forecasting. The downsides are that the subscription model is subject to customer churn and high acquisition costs.

The latest Subscription Commerce Tracker explores how subscription-based businesses are adapting to an ever-changing market, and how they keep their payments experience secure and how new models are emerging to stay competitive.

What Security Means For Subscriptions

Subscription commerce isn’t immune to the retail data breaches that have become widespread, though it does have different payment issues.

Traditionally, online retailers receive and process credit card information upon each transaction. With subscriptions, credit card data is often stored for convenience and ease of payment. Considering a company could have thousands — or even millions — of subscribers, this volume of credit cards could become a target for fraud.

PYMNTS recently spoke about security with Bill Onderdonk, chief operations officer at KiwiCo, a monthly science, technology, engineering, art and math (STEAM) subscription box for children.

The company has partnered with multiple third parties to protect against cybercrime, including Netherlands-based global payments platform Adyen. They allowed KiwiCo to develop tools that flag and analyze transactions, including a risk assessment profile that assigns scores to orders based on how likely they are to be fraudulent. Transactions that are deemed too risky are either automatically denied or passed to human associates for further inspection. The subscription box company also has velocity checks in place that prevent scenarios in which one person is running tens or hundreds of transactions.

This raises the issue many online retailers face, the difficult balance between security and customer experience.  “The two lenses for us are managing your payment risk and your approval rates,” Onderdonk said. “You can have zero risk and low approval rates or you can have high risk and 100 percent approval rates, but the business judgment call is also really just where to dial that in.”

New Models: Ride-Sharing Hybrids, Autos, Software and More

Subscription commerce keeps growing. American consumers are subscribed to an average of three different subscription services, up from 2.4 services five years ago, and 34 percent say they will sign up for more services within the next two years.

But not all subscribers stay subscribed. According to PYMNTS’ Subscription Commerce Conversion Index, 70.7 percentof digital media consumers who plan to cancel their subscriptions within one year after just one month of service.

This isn’t surprising considering that subscription businesses have an overall churn rate of 5.6 percent. This is mostly due to voluntary churn — that is, cancellations — with a rate of 4.2 percent compared to involuntary churn (1.4 percent) which is usually the result of payment issues.

Even the most popular types of subscription commerce like streaming services aren’t guaranteed a steady user base. Netflix reported earlier this month that last quarter it lost 126,000 subscribers in the U.S., resulting in 60 million total domestic subscribers. This is the first time since 2011 that it lost more American customers than it gained.

That’s why many companies are trying new models. Uber recently started testing a monthly subscription pass that offers a discount on rides, free rides on JUMP bikes and scooters and free Uber Eats delivery. This is an extension of the Ride Pass that was introduced last year to compete with Lyft’s All-Access product. And as mentioned above, Facebook is now trying to get into the video streaming subscription business.

Vehicle subscription hasn’t exactly proven itself yet. Cadillac ditched its service after the first year. But that hasn’t deterred Mercedes-Benz and Porsche from getting into the monthly fee for car access game.

Hewlett-Packard has taken a cue from Microsoft and will start offering computer services, network equipment, storage hardware and software on a subscription basis next year.

The video game subscription market is getting increasing crowded. Ubisoft recently announced a gaming subscription service, Uplay+ that is set to launch next month. Electronic Arts (EA) first introduced a subscription program for PCs and Xbox One in 2014, which first launched its subscription program, EA Access, on PC and Xbox One in 2014 and will soon be expanding it to PlayStation 4.

Companies flexing their innovation muscles and expanding definitions of subscription commerce are taking lessons learned from retail and applying them to new industries. It will likely take this and more in order to remain competitive in this market.

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Latest Insights:

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The PYMNTS Next-Gen AP Automation Tracker, is a monthly report that highlights the most recent accounts payable developments and automated solutions that are disrupting how businesses process invoices, track spending and earn rebates on transactions.

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