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Feature

Thinking Inside the Box

Of the approximately one thousand cars, trucks, and SUVs on display at last year’s Los Angeles Auto Show, not one car featured the distinctive blue and silver logo of the Swedish automaker Volvo. Instead, visitors to the Volvo booth found a curiously empty stage, a banner that read, “Don’t buy our cars,” and a warm invitation to explore the company’s new subscription service, Care by Volvo.


How does Care by Volvo work? For a monthly payment that covers insurance, repairs, and other costs, subscribers can drive farther and change models more frequently than they can with a lease. Another important difference: instead of a big down payment, customers pay only a few hundred dollars to join.

Designed for customers who prefer their goods and services on-demand, Volvo’s “subscribe, don’t buy” philosophy is a big shift for the automotive industry. To date, rivals from Mercedes-Benz and Porsche to BMW and Jaguar Land Rover have unveiled their own subscription plans, giving pay-as-you-go drivers an ever-widening range of hood ornaments to choose from.

Life in the fast lane, it seems, is now less about ownership and more about access and choice.

Is the post-ownership era here to stay? If the latest developments in the luxury car market are any indication, it might be. From streaming services to subscription boxes, disruptive business models entice us daily with bespoke offerings, each one personalized and immediately available, all for a low monthly fee. But what strategies should companies consider when launching or growing a subscription service? And how can innovative companies launch or grow a subscription service of their own?

A Nation of Subscribers

When it comes to subscribing, Netflix truly sets the gold standard, having warmed consumers to the subscription model that is revolutionizing paid-for-product markets. Calling itself “the world’s leading internet entertainment service,” the California-based company boasts more than 151 million paid memberships in over 190 countries. “Members can watch as much as they want, anytime, anywhere, on any internet-connected screen,” the website explains, “all without commercials or commitments.”

Over the last two decades, Netflix has helped change the way consumers spend their time and money, aided of course by shifting mind-sets in the everyday American experience.

“The US is becoming a nation of renters, leasers, and subscribers,” one critic recently observed1 as Apple announced the end of its iTunes software. In its race to compete with Netflix and Spotify, Apple introduced an audio-streaming service in 2015 called Apple Music. The service lets subscribers access a library of 50 million songs, including curated music videos, all for $10 a month. This fall, the tech giant will roll out its video streaming service called Apple TV+ to more than 100 countries, though it hasn’t announced its pricing strategy yet. Together with Apple Podcasts, the trio of apps will replace iTunes by the end of this year.

Given Netflix’s massive head start in the streaming arena, can Apple hope to compete? In a star-studded press event in March 2019, Apple called Apple TV+ “the new home for the world’s most creative storytellers featuring exclusive original shows, movies, and documentaries.” Big stars such as Reese Witherspoon, Steve Carell, Alfre Woodard, J.J. Abrams, and even Big Bird took to the stage to help CEO Tim Cook drum up publicity in classic Steve Jobs style. But what might actually make the difference, experts say, is Apple’s multibillion-dollar investment in new content, its digital integration with Hulu and Amazon, and its all-in-one pricing.

Strategically, Apple won’t require its customers to have Amazon Prime or Hulu before they can buy subscriptions, and that lowers the barrier of entry. Content will be ad free and available online or offline, Apple says. The company will profit from each subscription it sells, helping to boost revenue as iPhone sales taper off.

Of course, the market for streaming services is already crowded, led by Netflix, Hulu, and Amazon Prime. Each company is an ocean of original and licensed content. In the coming months, new streaming services from Disney, AT&T’s WarnerMedia, and Comcast’s NBCUniversal will also become available, priced at $7 to $17 per month. Currently, Dish Network’s Sling TV and Google’s YouTube TV also provide online programming for just a few dollars per month.

Greener Pastures

Jared Peterson, a BYU Marriott alum who graduated in 2001 with an MISM degree, was working on the Apple Watch—his dream job, he says—when he and a friend launched a startup to revolutionize the traditionally low-tech outdoor retail industry. Even after cofounder Rob Little quit his job at Lockheed Martin and moved to Bend, Oregon, to dedicate his full time to the project, Peterson was hesitant to uproot his family. “It took me a year and a half to fully commit and jump ship from Apple,” he says. Eventually Peterson left Silicon Valley for greener pastures and joined Little as co-CEO of Cairn Inc.

Taking its name from the stacks of rocks that often guide hikers, Cairn’s goal is to help outdoor enthusiasts discover best-in-class outdoor products and remember that what feeds your soul is just outside. The company uses two subscription models to ship curated products—including apparel, gear, emergency supplies, skin-care items, and edibles—to outdoor enthusiasts once a month or once a quarter, for $30 or $250 respectively.

While the quarterly packages include premium contents that cost more, such as down jackets and electronics, both packages deliver contents worth much more than the price of the subscription. The company also offers a personalized try-before-you-buy retail program called Kitted. “Think Stitch Fix for the outdoors,” Peterson says. “It’s early, but the program has been well received, and we’re optimistic about its future.”

Looking back to 2014 when Cairn began, Peterson and Little knew consumer behaviors were changing. “We saw younger generations taking over market share,” Peterson says, “and a lot of innovative companies—Birchbox, Stitch Fix, Casper, Warby Parker—were starting to bring customization, convenience, and personalization to traditional markets. The subscription box was one of the ways we saw to bring these things to the outdoor retail market.”

Just one look at Cairn’s Instagram account reveals the passion and energy of its customers, who camp, hike, ski, and paddle in breathtaking locales. Cairn consumers are also highly loyal to their favorite brands, Peterson says. By employing a subscription model, the company is able to collect and integrate customer data such as income, marital status, hobbies, and even food preferences into its product curation. For example, if five hundred customers enjoy rock climbing, Cairn’s product experts will ship three to six cutting-edge items (never sample sizes or closeouts, Peterson says) just for that batch of customers.

Once the box lands, the company checks back with customers to ask what they thought of the products, measuring brand and product awareness, product performance, and even product packaging, Peterson explains. Cairn’s data analysts then marry this feedback with customer profiles to produce valuable consumer insights that brands crave. “Because it’s a passion industry, we see high response,” Peterson explains. While only about 5 percent of purchases at REI, a leading outdoor retailer, lead to online product reviews, Cairn sees up to 50 percent, says Peterson.

Savvy retailers such as REI, Cabela’s, and Walmart use product reviews to help customers make more-informed purchasing decisions, which boosts sales. Cairn does the same. As Cairn gains greater access to outstanding products, often well before the public and at lower prices, its subscribers receive these discounted products and then provide more and more reviews, allowing Cairn to position itself as an indispensable marketing partner. To date, Cairn has shipped more than two million products and generated hundreds of thousands of reviews.

“We’ve learned a lot in the last five years,” Peterson says. “We didn’t set out to be a subscription-box company; we set out to be an innovative commerce company in the outdoor industry. Subscription boxes just happens to be where we started.”

The Sweet Spot

By seeking to understand the consumer behaviors that drive subscription services, companies can better attract and engage customers, whatever their passions may be. Jeff Larson is an associate professor of marketing at BYU Marriott who studies budgeting and other shopper decisions (see “When Budgeting Backfires,” Summer 2013 issue). He says monthly pricing, common among subscription plans, offers perceived lower costs. “We’re all dealing with budget constraints,” he says. “A purchase divided into smaller payments feels more affordable.”

Larson cites a study published in the Journal of Consumer Research that found the so-called pennies-a-day strategy effective among charitable organizations in the 1990s, when donors were invited to help feed a hungry child for pennies a day.2 Today the sales tactic is growing as consumers embrace subscription boxes and other services with smaller, monthly price tags.

So what are some of the biggest hurdles in a subscription model? First, companies must be able to analyze their data, Larson says. A star performer in this arena is Amazon, whose Prime membership offers not just video streaming but also personalized shopping recommendations for each of its members. Nicknamed “the everything store,” the e-commerce giant can analyze data to enhance sales across its platform better than anyone else. “Amazon is very information based,” Larson explains. “That’s where its value lies, in being able to analyze its data to make better decisions.”

A second challenge is keeping customers when they can cancel anytime. Using Amazon as another example, Larson points out that its audiobook service Audible keeps subscribers interested with free audiobooks every month. “With the best services, no one’s evaluating their bill each month to see if they’re going to keep it,” he says. “But with some of the new ones, each month is a reminder to ask yourself, is it worth keeping?”

Some subscription companies were overvalued when they went public because their company valuation didn’t factor in high customer-attrition rates, Larson notes. “Revenue growth comes from trials. But if you look at the length of time, people don’t stay long enough to sustain growth,” he says.

The sweet spot is not in having a service that people are willing to try but in having one that, month after month, people are willing to pay for because they see the value in it.

While marketing can help with customer acquisition, it can’t guarantee retention. “The big barrier is, do you have enough content to make it worthwhile for someone to actually pay a monthly fee?” Larson asks.

A Perfect Box

With subscription services catching on, more and more companies are thinking inside the box. Low-cost shipping across the contiguous United States as well as improvements in last-mile delivery and returns processing have made subscription-delivery boxes a popular, feasible option for many businesses. Along the way, startups such as Warby Parker, which disrupted the eyewear industry by offering designer glasses by mail, are also cutting out brick-and-mortar retailers and passing savings on to customers. Casper does it with mattresses. Away does it with luggage. The list goes on.

Beyond convenience, today’s delivery boxes give consumers access to an unprecedented range of products. While the contents of some boxes have universal appeal, others are aimed at highly niche markets. While some are selected by subscribers, others are designed to surprise and delight the recipients as they open their boxes to discover new products or brands.

Liz Cadman helps subscribers do all of the above through her website and forum, My Subscription Addiction. Obsessed with Birchbox, a skin-care subscription box, the Pittsburgh-based product manager launched a platform in 2012 to help other subscribers track subscription-box trends, post reviews, and swap unneeded or unwanted items.

Today with her software-engineer husband, Cadman leads dozens of employees and contractors who review about twenty subscription boxes per day. Cadman and the My Subscription Addiction team are able to use their research to answer questions from companies about pricing, frequency, and other factors—all designed to help companies come up with the perfect box.

And pursuing the perfect box appears to be well worth the effort. Thousands of subscription boxes are available, with more likely to come as the business model gains momentum.

“Subscribe, don’t buy” is not just a mantra for luxury carmakers. From a sustainability perspective, subscription services could also help today’s consumers use resources more efficiently as they sample, swap, or share goods and services across diverse stakeholders.

A few shining examples: Mighty Nest, which offers eco-friendly household goods, helps subscribers replace a disposable item with a reusable one every month, while By Humankind works to help consumers eliminate five pounds of plastic waste per year by selling refillable deodorant and other hygiene products.

And what about Cairn, the subscription box for outdoor recreationists? The company’s Gear Up, Give Back program keeps retired gear out of landfills and raises funds for the Conservation Alliance by letting subscribers and nonsubscribers alike donate used gear to a repair-and-reuse shop called the Gear Fix.

As companies and consumers in more industries embrace subscription services, business as we know it is changing. Who knows what the delivery man will bring tomorrow.

_

Article written by Bremen Leak
Illustrations by Martin Wickstrom

About the Author
Bremen Leak, a 2005 BYU grad, has written for the Marriott Alumni Magazine since 2006.


Notes

  1. “What Members Are Talking About,” Wall Street Journal Weekly What’s News Newsletter, 5 June 2019.
  2. John T. Gourville, “Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation,” Journal of Consumer Research, vol. 24, no. 4, 395–408, 1 March 1998.

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