Looking at Life as One Big Subscription
EVERYWHERE you look these days, businesses are selling subscriptions. Cable television, Internet and cellphone services are sold that way. So are business software, office printing and car rentals like Zipcars.
For a business model that was used by publishers of periodicals back in the 17th century, subscriptions seem as functional and popular as ever for a variety of goods and services. Periodicals themselves are suffering — Condé Nast announced last week that it was closing Gourmet and three other magazines — but not because there’s anything wrong with the practice of selling subscriptions.
Marketers like them for good reason: Convince someone to take a subscription, and the revenue flows in for months to come. “It is amazing how inertia takes over,” says Peter S. Fader, a marketing professor at the University of Pennsylvania. Anyone who has signed up for a gym membership that is paid for but not used understands the genius behind subscriptions.
There is another reason that marketers use them: When a product has built-in obsolescence, like new versions of software or a magazine with a short newsstand life, subscriptions extend the ownership period. “It removes the impedance to upgrading,” says Erica Mina Okada, an associate professor of marketing at the University of Hawaii.
Most of us mentally account for nearly all the money we spend, whether or not we realize it. We assign a book value to a purchase, Professor Okada says, based on what we pay. Usually we won’t replace that product until we think we’ve gotten our money’s worth. That explains why some people continue to wear ill-fitting shoes rather than chucking them.
The rational way to think about your purchases, says V. Seenu Srinivasan, a Stanford business school professor, is to replace a product when the benefits of a new version outweigh the costs — financial and psychological — of upgrading. (He has developed a mathematical model for forecasting when consumers will upgrade, based on this theory.)
A subscription moves consumers over the hurdle of mentally depreciating an existing asset. When you go on vacation and don’t get any movies from Netflix, it is easier to accept having wasted $30 for your subscription that month than it would be to have bought a $30 DVD and never watched it.
Marketers love the subscription concept, but is it any good for consumers? It sometimes seems as if cellphone deals were designed to alienate customers rather than to lure them into that sweet garden of inertia.
How many times have you heard someone say, “I can’t wait to get out of my cellphone contract”? In many cases, the customers think they are paying too much because they don’t understand that the subscription bundles the price of the phone with the price of the service. (That’s one purpose of early termination fees, to cover the cost of the hardware. Another is to keep you from canceling your subscription.)
Some of the madness of the recent housing bubble can be blamed on an extension of the subscription mentality. What exactly were homeowners doing when they bought a house for little or no money down with the intention of holding it for two or three years before upgrading to a better home? They were treating an investment in real estate as though it were just another consumable product, to be disposed of with the same emotion one shows in recycling a monthly magazine.
People who thought of their home that way got away with it only as long as the home’s value grew enough to let them sell and trade up.
But thinking of other kinds of purchases as subscriptions may actually be useful, especially when they are often-replaced products.
My colleague Saul Hansell has pointed out in the Bits blog of The New York Times that you essentially do that when you buy PCs or digital cameras. Those who love technology might pay $900 every two years to get a new and improved product, and more utilitarian users might spend $300 every four years. Those who see technology as a bother might shell out $150 every eight years to upgrade.
Frugality is a virtue, as we remind ourselves during this recession. But it’s not ridiculous to spend on upgrades. Certainly some people value them more than others, just as some value the premium HBO cable package or unlimited texting on their cellphone plan. But a consumer can become more efficient by upgrading to a more fuel-efficient car or by buying a computer that crashes less often or boots more quickly. A new smartphone gives a person access to information everywhere, a liberating experience for anyone searching for a restaurant or a theater where no computer, bookstore or newsstand is nearby.
PROFESSOR OKADA, who has studied how marketers persuade consumers to replace what they have, says, “People don’t upgrade as frequently as they should if they were acting rationally.”
If more people thought this way, it could fuel consumption. Of course, it would also be likely to expand our disposal society. The two-year-old DVD player from Best Buy or the lightly used Leksvik bookcase from Ikea will be piled out by the curb next to old newspapers and magazines.
The publishers of those magazines and newspapers recognize that the curbside stack is dwindling, and most know that they must offer their products online. Every media company on the Web seems to be trying to figure out how to return to paid subscriptions. It may be a lost cause, but new electronic reading devices like the Kindle or the rumored Apple tablet computer could offer a means to wean readers from the free business model.
“It’s hard to initiate subscriptions,” Professor Fader says. “But once you get them over that hurdle, great things happen.”
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