You may have considered offering your products as a subscription. It seems consumers are fine with just having the benefits of a subscription – such as to music – rather than owning goods. You may consider this for two reasons: because you believe it will be an economic success, or because you want to add to a more circular economy.
By Joost van Dun, circular economy lead, ING Sustainable Finance
The first reason is obvious, the second reason is perhaps less obvious. People often relate the circular economy to reducing waste or to recycling of products or components. But this is just one aspect of the circular economy! Another important pillar of the circular economy is optimising the usage of products or devices already produced by making them sharable or offering them as a service. Car sharing is a well-known example of this.
This shift from ‘ownership to access’ (O2A) is growing rapidly, both in the B2B market and the B2C market. We believe the O2A model is a potential important driver for the transition to the circular economy. Ownership of the products will be with the suppliers or producers, who will be pushed towards developing durable products which will last longer, and which will be maintained and serviced in an efficient way. As owner of these products you obviously want to generate as much revenues as possible with these products, at the lowest costs possible.
Can every product be turned into an 'O2A proposition'?
The O2A offerings often come in a subscription. Among consumers the acceptance of subscription models is rising – Netflix and Spotify definitely helped here – leading to a shift from service subscriptions (like newspapers, telephone) to subscriptions to tangible goods. Products like washing machines, clothing or consumer electronics are now also being offered in subscription models! But not every subscription model will be successful or sustainable!
I have selected five attention points which may help when considering a subscription business model:
1. Can I create a competitive offering?
If we take a closer look at the subscriptions for tangible goods, we see that consumers assess the offering of these subscriptions from several perspectives. The most important ones are the price and the added value offered. The price is often compared to a one-off transaction, so the added value offered should be clear to offset this comparison. This might be added value in terms of ‘no worries about maintenance or break down’ in the case of devices but also to other related services included in the subscription.
And when offering a product in a subscription, it should be more than just the purchase price plus related services divided by the number of months the subscription is offered. Otherwise the consumer can ‘create’ this offer themselves. It should solve a problem and there should be clear advantages for the consumer, preferably peppered with something he/she cannot obtain him/herself, for example; lower service costs (economy of scale) or additional (exclusive) services to which the consumer doesn’t have (easy) access.
2. Can I target the right customer and how can I avoid adverse selection?
By offering a product in a subscription model, you make this product more accessible to a broader audience. Consumers who don’t have the budget to buy the product, may now be able to subscribe as the amount to be paid monthly for the subscription is more within reach.
But there are also some risks involved. Consumers might subscribe to various subscriptions resulting in an increase in their monthly spend and unknowingly limit their monthly disposable income. Also, if the subscription comes along with a fixed period for the subscription (private lease of cars for example), consumers may not be aware of the costs involved with early termination of the subscription. So, targeting the right customer is always important, from an adverse selection perspective and to ensure the customer is able to commit to the payment of the subscription. Credit worthiness checks may of course help in lowering the risks of non-payment.
3. Can I mitigate moral hazard?
If the product is offered in a subscription, the ownership of the product is not with the consumer but with another party, mostly the supplier of the product. This may lead to ‘moral hazard’ as consumers are not as cautious with the product as if it was their own. This may lead to higher maintenance or breakdown costs. Therefore, try to keep track of the usage of the product, for example by connecting the product via IoT. As the consumer knows the usage is monitored, moral hazard will possibly go down.
4. How do I finance it?
With traditional one-off selling, 100% revenue is generated when the product is sold. With a subscription, revenue comes in smaller amounts and over a longer period of time, with perhaps a higher uncertainty. This might change the risk profile. Another item to consider, is the ownership. If the supplier is the owner, the product will appear on their balance sheet, leading to balance sheet extension. Not every supplier is suitable for this extension of his balance sheet.
5. Can I extend the lifecycle of the product?
And to end with the ‘Circular’ question: when the product lifecycle can be extended by refurbishing it or by remanufacturing it, the period the product can generate revenues will increase. Of course, the costs of refurbishing should be lower than the expected revenues. The refurbished product may be offered at a lower subscription fee, leading to a more diverse offering of different subscriptions. And the longer we can keep the product in the lifecycle, the less pressure we put on our scarce (natural) resources!
If you can answer all the answers with a yes, it’s worth trying to go from considering a subscription model to implement such a model. Good luck!
For more information about the subscription economy, download our ING Economics Department’s recently published study on this topic.