Finding Value in the Subscription Economy as an Entrepreneur

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I remember the days when I could buy a piece of software and be done with it. Whether I used Office 2010 for a month or 5 years, it still cost me the same price. I never had to re-evaluate whether it was worth keeping because it was mine forever. And the same was true for DVDs, phones, and pretty much everything else.

Whether for better or for worse, those days are behind us. A powerful new pricing model has taken over the universe. If you aren’t ready for it, it will take your entire wallet. But play your (credit) cards right, and you can make this new model bow to your will.

Enter Subscriptions

The first one I remember using was Netflix. For the youngest of my readers, this is where the tale becomes strange. You see, Netflix has been a subscription service far longer than they’ve been a streaming service.

Travel back in time with me, if you will, to a darker age. It was before the iPad. Yes, it was before even the iPod. It was a time when something being pronounced fire meant you should get an extinguisher. It was a time when we were all still waiting for JT to bring sexy back.

The year was 1999 and Netflix was just launching their subscription plan.

In the early days, they would send us DVDs in the mail. You would get the latest Die Hard movie, watch it, mail it back, and wait several days to get the next item on your list. There was no binge-watching, but it was still pretty cool.

Oh, and there were no Netflix originals. No Stranger Things. No Orange Is the New Black. No terrible final seasons of Arrested Development. Absolutely nothing that you couldn’t get at a Blockbuster. (Sorry, kids, I’m not giving history lessons here. If you want to know what Blockbuster was either ask your parents or maybe check out Captain Marvel.)

Tangent over for now.

The point is that it was easy to determine the value of the service because there was nothing unique about the product you received.

How much value was I getting from Netflix? I was watching about 4 movies a month. I knew the rental cost of those movies. I knew the amount of time it took to drive to a store to rent them.

There was one complication though. Sure, I was watching 4 movies a month, but that was only because it maximized the value of the service. Without Netflix, I probably wouldn’t have rented more than 1 or 2 movies in that month. This little fact is the first hint that value calculations are not as obvious as they first appear.

Other Signs the Subscription Economy Was Coming

Netflix might have been the most obvious step towards the subscription economy, but it wasn’t the first.

Those new issues of Entertainment Weekly or Midwest Living Magazine you keep getting in the mail? They are a subscription.

Ever leased a car? That’s a subscription.

Do you rent your apartment? You live in a subscription product.

Subscription services have been around for a very long time. My best guess is that the first one involved an early hominid renting out his newly-invented wheel in exchange for a weekly supply of fresh meat from his customers. History wasn’t my best subject though, so I’ll leave it to the real historians to figure out the truth.

If subscriptions have been around for this long, why are we so terrible at factoring them into our budgets?

I’d Gladly Pay You Tomorrow for a Hamburger Today

If I offered you the following 3 options, which would you take?

  1. A brand new couch for $1,000
  2. The same couch for 60 monthly payments of $20
  3. A couch subscription service, offering the same couch for $10/month.

The first option is the cheapest, right? But then again, you’ll be making more money next year and even more the year after, so you should take that into account.

To make matters murkier, let’s toss in a couple more options.

  1. A brand new couch for $1,000
  2. The same couch for 60 monthly payments of $20
  3. bronze couch subscription service, offering the same couch for $10/month.
  4. The silver couch subscription at $20/month, with a complimentary upgrade to a better couch every 3 years
  5. The gold couch subscription at $40/month, with a complimentary upgrade to a better couch every 3 years and a monthly couch cleaning

Head spinning yet? Welcome to the world of subscriptions. Did you want the upgrade of your couch? Do you need a couch cleaning? Even if you don’t, your mind is calculating the extra value you are getting out of them.

The truly crazy part is that by adding that gold plan, they just made the silver one look pretty cheap by comparison. By getting the silver plan, you just saved $20/month off the gold plan. That’s a huge cost reduction!

They won’t stop there, either. There will be an option to pay annually, saving you a couple of dollars a month for each plan. And The rate you get now will likely be sitting beside a larger value that is stuck through. Better act now before they end that discount!

This isn’t intended to be a robust picture of general or even subscription-specific marketing gimmicks. There are whole books written on that topic if you are interested. And you should be interested. You will fall for the gimmicks if you don’t understand them.

I have known more than a few people that say they don’t fall for marketing gimmicks. They are some of the most gullible people I know.

But even understanding the gimmicks isn’t enough. We need to know how to go around the gimmicks. We need to know a better way to determine the value of our subscriptions.

Is This Article About Software Subscriptions or Couches?

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Some of you may have come to this article thinking about software. Others were thinking of subscription boxes. Yet others were thinking about Netflix, Spotify, and Pandora.

If you are wondering which of these I’m going to be discussing in this article, the answer is all of the above.

There are differences between traditional physical products and software subscriptions. Most of those differences matter more for the company than for the consumer, so I won’t go into them here. But there are a couple of differences worth mentioning.

One has to do with value estimation. It would be best to describe this as the difference between a non-unique product on the one hand and a unique product or a service on the other hand.

It’s relatively easy to estimate value when the exact product can be purchased or rented elsewhere, as in the Netflix of 1999 example. However, when the product is unique or when we are talking about a service, you need better tools. We’ll talk about those a bit later.

The other important difference is this: software and media change much more rapidly than razors and couches. And those changes are more than nice-to-haves. I can use a razor from the year 2000 if I need to. I can’t use a social media manager that was last updated before the dawn of Instagram.

This is the primary advantage that I see in subscription services. They incentivize companies to think in terms of frequent updates. Users now expect the latest social media network integration to be included in a matter of months instead of waiting 2 years for it to be included in the next major release.

The same goes for media libraries. I’m paying per month for Netflix, and I expect that they will regularly give me new, quality episodes of Umbrella Academy and Stranger Things.

This distinction was not the primary purpose of my article, but I felt it worth mentioning.

You Haven’t Given Us Any Advice Yet

Oh, thanks for reminding me.

Let me tell you how I handle subscriptions.

There are 4 main reasons people use for switching to subscription services.

  1. Price — Some subscription services are cheaper than their single-purchase alternatives. The Dollar Shave Club is the most obvious example of this.
  2. Convenience — I buy paper towels regularly. Since I walk to the store, their bulkiness is a huge inconvenience. If they were delivered to my door every few weeks, that would make my life easier.
  3. Personalization — Nearly every subscription service offers customization options these days. They want you to feel special. Want a pink razor instead of a green one? That’s personalization.
  4. Curation — I debated lumping this in with personalization, but it is different. Curation is the Trunk Club factor. It’s an algorithm or person who helps you discover and choose the best product for you. Personalization is when you are given three razors to choose between. Curation is when they tell you that your sensitive skin would do best with option 2.

Know these 4 categories. Know which ones are important to you. They make up the value of the subscription. Well, that’s only partially true. More on that shortly. I swear, we are getting to that part.

The relative importance of each of the 4 categories will vary from product to product. I experience no inconvenience when it comes to purchasing coffee beans, so a coffee bean subscription box focused on that factor would never sway me. But, as I mentioned before, for paper towels it just might.

These categories are not independent of one another either. Let’s go back to razors for a second. I signed up for the Dollar Shave Club once because of the price. But, as it turns out, they weren’t the cheapest option.

They were cheaper than what I was buying at the grocery store, but I was able to find the same razors cheaper online. Dollar Shave Club had simply been the most convenient way to save money on those razors. Now that I knew where else to buy them, I canceled my subscription. They were no longer cheaper, and the hours spent to find the cheaper option was a one-time spend. Dollar Shave Club had lost all of its value for me.

What Is the Value You Keep Mentioning?

Okay, I’ve hinted at talking about the real value of a subscription long enough.

I’ll make this one as simple as possible with a concrete example. But it will take a lot of practice to get it right in all cases.

If I offer you a subscription grocery delivery service, what is its value?

You might start with a calculation similar to this:

(Numer of times I get groceries per month) * (amount my grocery store charges per delivery) = value

But wait… do you get your groceries delivered now? If you don’t, that’s not the real value. If you are like most people, you probably drive to the store — or maybe you walk there like I do. Either way, that is not the right calculation.

Instead of thinking about the solution, think about the problem. If you have read any of my entrepreneurship and startup articles, this should sound very familiar.

What led you to consider a grocery delivery service? I’m not talking about the display ad or editorial piece that got you thinking about this. That was the spark. Sparks can only ignite the fuel that is already present. What was the fuel?

Was it “Oh, I would love to not have to carry those bulky groceries home.”?

Or maybe it was “I am so tired of picking out the wrong avocados.”

Try to find that underlying problem. Now ask yourself how you solve the problem now. What goes wrong when you can’t solve the problem?

The value of the subscription is strictly less than the cost of the problem it solves.

Yes, I said less than. This is because it’s not going to be a perfect solution. You might still need to make an emergency grocery run. You might still get a bad avocado or two. Always leave room for error.

If buying the wrong avocados costs you $10/month, any service that is solving that problem must be no more than $9.99/month or it isn’t worth the price.

This exercise does more than help you define the value, it also helps guide you to alternative solutions.

Which brings me to my first major piece of advice.

Write down the problem solved by each subscription service. Ask yourself if the subscription model is really the best way to solve that problem. Then ask your friends and the internet.

If carrying bulky groceries home was your problem, for example, you may be able to solve that by just ordering the bulkiest items online instead. That would make your grocery trips easier without the need for a full grocery delivery service. If picking avocados was the problem, maybe you can ask one of your avocado-aficionado friends to show you the right way to pick them.

Don’t just evaluate solutions once. Re-evaluate frequently. The less reason there was to pick that solution over other options, the more frequently you should re-evaluate.

Can We Interest You in Being Stuck With Us Forever?

Be wary of annual plans. I never sign up for an annual plan when I first join a subscription program. I don’t care how good the plan is. I don’t care how amazing the bonus is for signing up immediately. I don’t care if it is endorsed by every person I know and trust.

I will not sign up for the annual plan for at least one month.

There is a switching cost involved when moving off of a subscription service. The longer you’ve been with that service, the higher that cost. It’s not usually paid in money — although sometimes it can be. More often it is paid in time and frustration. You’ve gotten used to the service. Even if that service is the absolute worst, at least it’s the devil you know.

When you are ready to consider the annual plan, ask yourself how certain you are that this is the best solution to your problem.

At this point, you are balancing 2 factors.

  1. The amount you save with the annual plan over the monthly plan.
  2. How much better this service is compared to the other ways of solving the problem.

Here’s where people usually make their mistakes. That’s not the real second factor. You are locking yourself in for a year. What changes might have happened in those solutions in 6 months? What about in 10 months?

You don’t know the answer to any of these questions, but you can make some educated guesses. How new is this service? Would it have been the best solution 2 years ago? Are there 2 other options you could consider or 20? Don’t forget to include non-subscription solutions.

Lastly, factor in your own changing needs. Even if the company and the market are the same in 6 months, will you be? Or will you suddenly find yourself paying for a product that was right for a version of you that no longer exists?

The longer the company has been dominant, the fewer real alternatives you have, and the more static your needs, the more you should consider an annual subscription.

At least some of you are screaming at the screen by this point. You are telling me that I’m throwing away money by biasing myself away from annual subscriptions. I hear you. I don’t agree with you, but I do hear you.

The Most Important Tip I Can Offer

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I’ve talked so far about how to handle one subscription plan at a time, but that was never the issue. The issue is that I’ve lost track of how many subscription services exist in the world. The number is immense. I have 4 services for movies and TV alone!

Here’s the tip.

Get a subscription management app.

I use Truebill because it does most of the work for me and it’s free. You can use a different app or even an excel spreadsheet. You could even go old-school and write them down on paper or a stone tablet. It doesn’t matter to me since I’m not affiliated with any of these products.

The important takeaway here is awareness.

For each app, make sure you know the following questions answered.

  • How much am I paying?
  • What is the problem I’m solving?
  • What alternative solutions did I consider?
  • Why did I choose this over the alternatives?
  • Am I likely to need to upgrade to a higher tier at some point?
  • How hard would it be to switch to another product?
  • What is this product missing?

If you are familiar with problem interviews, you probably recognize where I got some of these questions from. This is a problem self-interview.

This awareness is the key to the subscription economy. If you know what subscriptions you have and why you have them, you are in far better shape than most consumers.

I’ve gone through 3 phases of subscription use in my life.

In phase 1, I would sometimes forget I even had a particular subscription. Only when I saw my credit card bill would I remember that $15 going to Audible.

In phase 2, I knew what subscriptions I had, but I eventually forgot why I’d chosen them. Why did I have Audible instead of Scribd? Not knowing this answer made it very hard to re-evaluate even if Scribd made a huge improvement to their service. My ignorance was causing lock-in.

In phase 3, I now know what subscriptions I have and why I have them. If Scribd announces a change to their service, the process of re-evaluation is very low effort. There may still be effects locking me in, but my ignorance is not one of them.

Let’s Talk Entrepreneurship

Everything I’ve said thus far is geared toward the average person. Now I want to talk specifically to the entrepreneurs.

100% of what I said previously applies to you, but you have it far harder than everyone else. You should be used to this by now. You didn’t choose the easy path in life. While your corporate buddies were sipping mai tais on a rooftop, you were crunching numbers — trying to figure out whether to pay your gas bill or your AWS bill.

More importantly, though, you are running a business. That business is going to require all sorts of subscriptions in the form of SaaS and maybe PaaS, IaaS DaaS, or whatever other alphabet soup the subscription gods are pouring out today.

Convenience — while important to consumers — becomes synonymous with money for an entrepreneur. If a subscription saves you 10 hours/month of manual work, it is worth as much as the value that you can add to the business by devoting those 10 hours to a different task.

Change also becomes a bigger factor in your decision process. Consumers’ lives are more static than those of entrepreneurs. Businesses change at the speed of innovation.

Corporate employees are shielded from most of this change by the management chain. You are not. Where they have an umbrella to keep the rains of change away, you hold a funnel over your head because soaking in that change is what keeps you alive.

But enough prose. Here’s why that matters. Annual plans are seldom the right choice for entrepreneurs. Your needs will change, and that money you invested in the annual subscription will be a lifeline that you threw away.

There is only one annual purchase that I have ever found worthwhile as an entrepreneur, and that was AWS compute time.

Other lock-in effects are also a bigger deal for you. For any service that is crucial to your company, you need an escape route before you sign up. Know what it would take to move your e-mail campaigns. Know how to switch accounting software.

I’m not talking about having a step-by-step plan for everything. That would be crazy. But before you sign up you should do some googling to determine what it would take to swap from that service to their biggest competitor. Know whether the pathway is simply downloading files or if you need to hire a contractor to build a custom pipe.

Final Thoughts

Subscriptions are here to stay. You and your business will be using them for decades to come. If you are reading this in the year 2080, it’s okay to be amazed by my prescience.

Here’s a quick bullet list of my suggestions.

  • Know what subscriptions you have. Truebill is a lifesaver for this.
  • Identify each subscription with a real problem of yours that it is solving. Always keep in mind that the subscription’s value is pinned to the cost of that problem.
  • Know why you chose the particular subscription over any other solution. This will decrease the effort required in evaluating a switch.
  • Re-evaluate your subscriptions frequently. The less certain you were of the choice, the more frequent this should happen.
  • Annual plans are rarely the right choice. They have their place, but mostly they benefit the service provider more than they benefit you. This is especially true for entrepreneurs.
  • If you are an entrepreneur, your time is valuable. Don’t forget that when it comes to subscriptions. The rest of you can decide how valuable your time is; that’s not for me to say.

I should note that much of this article can be applied to non-subscription purchases as well, particularly the parts about defining value in terms of a problem.

Thanks for taking the time to read my piece.

In case you were wondering, 2 subscription services were used while writing this, and at least 3 more will be used while distributing it. It seems that none of us are immune to the subscription economy.

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