The rise of the subscription economy in Southeast Asia
The subscription economy has seen a boom over the past 5 years, particularly in the United States, where there is an abundance of new offerings targeting the recurring payment space. Now, there is pretty much a subscription for everything from monthly gift boxes for your cats to weekly fresh food delivery.
The attraction of subscription is the mere fact that recurring payments allow the ability to maintain a customer relationship, which also allows cross-selling that could eventually increase your customer lifetime value (CLV). More and more startups coming has inadvertently attracted traditional business giants such as P&G, Adobe and Disney to enter the subscription space.
According to the Subscription Economy Index (SEI) by Zuora, it is mentioned that subscription businesses increased their revenues 5 times faster than the S&P 500 companies' revenues (18.2 per cent versus 3.6 per cent). Besides that, Credit Suisse estimated that the market size of the subscription economy to reach US$530 billion in 2020. Such high growth would only attract the attention of investors, which adds fuel to the already growing industry.
Well, a similar transition of business models in startups would eventually attract traditional businesses to come in as well. Drawing back in time, the subscription model has been around the region for ages. Look at the old TV channel subscription, gym memberships or even your internet connection. These are all one form of subscription either way.
What started the shift in charging methods? Well, initially local startups have attempted to emulate similar models or even businesses in the West and try to replicate it in Southeast Asia. Look at iFlix, a video streaming service similar to Netflix or even media websites taking the paywall subscription approach similar to The Wall Street Journal.
All in all, there was a form of replication either purposely or indirectly due to the increase in Internet penetration growth in the region. Majority of these early subscription models have worked by maintaining an increasing recurring revenue, as long the churn rate is not above the growth rate in users.
Like all money chasers, other businesses have looked at this model and see opportunity in this golden industry. Then, innovation begins, and previously traditional industries attempt a subscription approach. For example, there is the influx of car subscriptions, as seen in GoCar and Flux in Malaysia.
The more fixed commitments that an average individual has, the lower the stickiness he or she has for non-key payments. Thus, an exponential increase in subscription businesses occurs to be able to attract their customer base back. For example, Grab launched a subscription plan for bubble tea in Singapore and a GrabFood-no delivery fees plan as well.
What is the key to this industry?
Data is everything.
As the saying goes: "Data is the oil of the 21st century", we now know that understanding your customer's data is the key to unlocking high growth rate. The constant reevaluation of your customers' preferences would push the business to relook at its pricing strategy, improve product offerings and improve the overall user experience for the product.
At the same time, the same data is instrumental in refining any marketing strategy that the company has. At present, all the social media ads have become so robust that you can drive down to the interest and locations, among others. Through this data, can subscription-based business only measure and improve their metrics.
The key subscription metrics that all businesses have to measure is mainly these four: Monthly recurring revenue (MRR), churn rate, customer acquisition cost (CAC) and customer lifetime value (CLV). Through measuring these numbers effectively, a company can make readjustments and improve its overall operations to grow the company, as customer preferences are constantly shifting.
Challenges facing the industry
Subscription-based business models do not have all just positive attributes. Controlling the churn rate is difficult because more people have increased the number of subscriptions in one's monthly expense, which results in higher demands for user experience and product offerings. Thus, the process of matching the demand of customers is not necessarily a simple solution considering the financial and time constraints.
The increase in churn would lead to a decrease in the customer lifetime value (CLV), which simultaneously increases the acquisition cost. Besides that, there are numerous challenges approaching the industry such as high payment failure rates and financial data protection. Not all subscription-based model would work in the region, as customer preferences are constantly changing, and an increasingly crowded space would lead to a price war if the product offering is not attractive enough.
Opportunities for the future
Overall, the region would continue to see an increase in the subscription economy, as the attractive components still outweigh the possible downsides to it.
However, I believe there would be opportunities that would allow startups to capture a large market in the space that supports this industry.
Your everyday digital marketing company would need to implement data crawling to better understand users and managing the subscription plan would require enhanced user experience in payments and the onboarding process.