Small subscriptions: Business saviour or profit killer?

Coffee
Andrea Murad By Andrea Murad

11 July 2019

With more businesses turning to small subscriptions to increase customer loyalty and drive demand, Andrea Murad examines if these models deliver long term value – and the factors that make them successful.

Winning customers can be a fierce fight for companies looking to grow market share, and subscription services are regaining popularity among brands. Whether it’s Burger King’s BK® Café Subscription Program that offers people one cup of coffee a day for $5 a month or MoviePass’s $19.95 monthly membership to view three movies a month, these subscriptions can increase customer loyalty – provided the business can support it.

“The key driver is that you want to be able to lock in your most loyal customers and to get them to use you as often as possible and to get them out of the market,” said Allen Adamson, Adjunct Associate Professor at New York University’s Stern School of Business. “Even if you’re losing money – it’s a loss leader. They will buy something else once in a while, but they won’t change their habits.”

While these subscriptions can be an expense to a company’s bottom line, there’s long-term value in removing these customers from the marketplace and creating loyalty with your brand.

Mentally locking a customer into a brand is essential, especially in a cluttered marketplace where winning a customer back or replacing that them with someone new is expensive.

“Loyalty is an age-old marketing attempt to drive your best customers out of the market, whether it’s buy one, get one free; free coffee; or free movies,” said Allen.

Changing consumer behaviour

The idea of receiving products or services for a small fee has been around for decades –but how businesses use this model has evolved. Successful subscription models change consumer behaviour.

MoviePass isn’t really changing anyone’s behaviour because there’s not enough incentive for people to start frequenting movies more. Conversely, Burger King though is looking to capture more of the morning coffee market, and those customers also have the opportunity to purchase another item while getting their subscription latte.

“Burger King is going to gain customers – people who are light users will be going more,” said Michael Stone, Chairman and Co-Founder of Beanstalk. “All Burger King needs to do is to get those occasional consumers to go to Burger King more often.”

Businesses best suited for small subscriptions

MoviePass’s initial service allowed for unlimited screenings in the U.S. for $9.95 a month. To provide this service, the company would buy tickets for about $12 a movie – with customers seeing about three movies a month, that equated to a loss of about $20 per customer each month. Faced with these losses, the business redesigned its subscription plan to limit the number of movies a customer could watch each month.

“The problem is it’s expensive because true heavy moviegoers see a lot of movies and they don’t attract the next level,” said Allen. “The movie business has proved to not be effective because the people who sign up are fanatic moviegoers and you don’t want the people to go less frequent – they want the light user to become a heavy user and it didn’t work.”

MoviePass doesn’t own the theatres so they can’t generate revenue from concession sales – AMC’s annual food and beverage revenue has exceeded $1B, and theatres are starting to move into alcohol and specialized food sales to grow revenue.

Companies want to reward their best customers, said Allen, “but giving someone more access to movies, they were rewarding their most loyal users and not the most important customers – the most important customers are a family of four that buys snacks and not the person who goes to the movies four times a month.”

Product consistency is important

Coffee is a consistent product while movies have extreme variability. Customers who frequent Burger King for their coffee will know exactly what they’re getting, while people don’t like to purchase movies in bulk because they may have no interest in the films that were recently released.

“The problem with buying lots of movies is movie decisions are made a la carte, and how often you go is based on how many great movies there are,” said Allen. “There’s consistency in coffee, but if you go to the movies 30 times, you won’t see 30 great films.”

When there’s so much variability in a product, predicting what customers will buy becomes more of a challenge.

Personalisation

Depending on the product category, these subscriptions do target the younger demographics that want a relationship with a brand. Generation Z is are starting to become consumers, but they have certain needs and desires.

“They’re digital natives,” said Michael. “They didn’t know a time without the internet, and they want brands to be personalised. They want them to be authentic, to be curated.”

Brands need to create loyalty and a personalised experience with curated products for these younger consumers that make the consumers feel as if the brand knows their preferences. While ecommerce has made shopping convenient, because there’s so much choice, consumers suffer from information overload and prefer easier buying decisions.

“People are looking for ways to make their purchasing easier and quicker and authentic and curated – all of those elements fit the subscription model,” said Michael. “If you think about coffee at Burger King, it makes the consumer feel they have a special attachment to Burger King.”

People frequent the same places for their morning coffee, and Burger King is looking to capture some of that and to personalise the experience. They’re not looking to generate profits from coffee sales, but instead, are trying to sell breakfast sandwiches.

“[Burger King is] giving their coffee away for free,” said Michael. “They’re not looking to make money on it – they’re looking to drive people to burger king for other purchases.”


About the author

Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.comFOXBusiness.com, Global Finance and InstitutionalInvestor.com.

Topics

  • CA life
  • North America

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