Amazon, Netflix and subscription payments: 5 key insights

The subscription services industry is a booming market that has drawn-in hundreds of startups, millions of dollars in venture capital and changed many aspects of how people shop. The competition for consumer spending is so fierce it’s even convinced old-line consumer packaged goods companies and retailers to re-invent themselves by shipping their products directly to consumers instead of making them shop in physical stores.

The market for subscriptions covers a wide range of physical goods such as clothes (e.g., Stitch Fix), beauty (Birchbox), meals (Blue Apron) to digital services such as music (Spotify), movies (Netflix) and shopping memberships (Amazon Prime).

Take for example the competitive pressure from subscription services on traditional razor blade and shaving cream brands such as Gillette (owned by P&G), Edge (owned by Energizer Holdings) and Barbasol (owned by Perio Inc.), both of which primarily sell through supermarkets and drugstores. There are now more than half a dozen different subscription services selling blades and shaving cream covering the spectrum from cheap to luxury: Harry’s, Dollar Shave Club, Bevel, Birchbox Man, Billie, Morgan’s, Wet Shave Club and Happy Legs Club. So fierce is the competition that Gillette decided to get in the subscription game and now offers Gillette on Demand (formerly Gillette Shave Club).

Digital services dominate the subscription market with almost half (46 percent) of online shoppers subscribing to at least one streaming service such as Netflix.

Among the online shoppers (4,057) in a McKinsey & Co. survey of 5,093 consumers conducted in November 2017, 46 percent subscribed to a digital service while 11 percent subscribed to both a digital service and physical subscription box (e.g., Dollar Shave Club or Blue Apron), and only 4 percent subscribed to just a subscription box service.

The large number of digital media subscribers is a phenomenon that is not much older than a decade or two, since these services typically require broadband speeds to stream movies and music. The McKinsey study found that the average e-commerce subscriber had an income between $50,000 and $100,000. Cross-referencing this data with broadband adoption by income from the Pew Research Center, consumers with annual incomes between $30,000 and $99,999 had an 80 percent level of broadband adoption. When the income level reaches $100,000 or more, broadband adoption is at 94 percent. In comparison, adults who earn less than $30,000 per year have only a 53 percent home broadband adoption rate.
Once someone becomes a subscriber, it’s more likely that they will have more than one service (digital or physical), especially men.

According to the McKinsey & Co. survey referenced earlier, 60 percent of men and 56 percent of women subscribers opt to have more than one subscription service. Additionally, when men do become subscribers, they are more likely to have three or more services compared to women. Forty-two percent of men have three or more subscription services and 18 percent of men have six or more services. While 28 percent of women have three or more services, only 7 percent subscribe to six or more services.

Discounts and free trials are key marketing tools that many subscription services use to entice new customers to join their ranks. For example, Graze, a snack box subscription service offers its new members a free four-snack sampler box plus $1 shipping for signing up. In the meal kit delivery subscription category, companies such as Blue Apron offer new members a $60 discount by applying a $20 off coupon for the first three meal boxes delivered. Not to be outdone, Plated, a meal kit competitor, is offering an $80 discount by applying a $20 coupon for each of the first four weeks of membership.
A key challenge facing consumers is remembering what they subscribe to each month. A study conducted by the Waterstone Group, which surveyed 2,500 consumers, found that 84 percent of subscribers underestimated what they spend each month. Only 10 percent of subscribers overestimated what they spend each month and just 6 percent knew exactly what they were spending.

To gauge the level of accuracy on monthly spend, the Waterstone study took a three-step survey approach. The company first asked consumers who had one of more subscription services how much they spent on digital services, devices and subscription boxes with the average first guess coming in at $79.74 per month. The question was re-asked with 10 additional seconds given for the response. The average second guess came in at $111.61 per month. Then Waterstone researchers asked survey respondents to take 30 seconds to consider the amount and provided prompts with specific examples of services and service categories such as dating apps, pet subscription boxes, Amazon Prime, Netflix, Spotify, Birchbox, Dollar Shave Club, etc. The answer to the third question was taken as an actual spend and it registered $237.33.
More than half (55 percent) of subscription box consumers stated that the main reason they subscribed to the service was for the curation of each box.

So whether its customized snacks from Graze, personalized styling in clothes from Stitch Fix or tailored pop culture collectibles from LootCrate, having someone else choose the items that go into a subscription box is a major factor driving subscription sales according to the McKinsey & Co. survey referenced earlier.

The second main reason consumers sign up for subscription box services is for programmed replenishment of goods. The third reason is to gain access or premium preference as a customer. Amazon offers a “Subscribe & Save” service for auto replenishment of thousands of everyday items such as dog food and vitamins. Cosmetics are an especially popular segment for auto refill, with many of the manufacturers selling the products directly to consumers including Lancome, Shiseido, MAC, and Bobbi Brown.
No discussion of subscription services would be complete without a mention of Amazon and the growth of its Prime subscription service.

Based on research from the Consumer Intelligence Research Partners (CIRP) and the Census Bureau, almost one in three U.S. adults is an Amazon Prime subscriber, receiving access to Amazon’s movies and gaining two-day shipping on many items. Amazon has used its movie and TV programming to help it drive Prime membership growth. One consumers sign up for Amazon Prime, they are offered a variety of additional subscriptions including its “Subscribe & Save” and grocery delivery services.

The rival media subscription service is Netflix has more than 130 million paid memberships in 190 countries, based on its fourth-quarter 2018 financial press release. According to the Business of Apps, Netflix had 137.1 million subscribers in the third quarter of 2018, of which 57 percent of these users come from outside the U.S. Over half (51 percent) of U.S. streaming subscriptions are to Netflix. The 9.1 million U.K. Netflix subscribers have helped streaming services overtake traditional TV providers as the main media service in that country.