I originally started to pencil in this post much earlier in the year, but it got left in the drafts folder for quite a while, but I thought it was time to get this one out there with the very recent launch of Disney+ over in the US.
This year alone, here in the UK we have seen the launch of a Sports news subscription service called The Athletic. Whist It focuses on Football for the domestic audience, the service also follows most of the major US sports (including NFL and NBA).
In the past few months we have seen the announcement of even more subscription model based services. Most notably, Disney+ and the UK launch of BritBox.
Now traditionally if we talk about subscriptions you may think of magazines or newspaper subscriptions, beyond that, we didn’t really have many other products.
With a subscription in the physical world, you are guaranteeing the publisher a set monthly/weekly fee for a discount in their product. As they are delivering a physical product, a portion of the subscription goes directly to the printing and delivering.
As we moved into the digital world your typical subscription is no longer physically delivered, you are being provided a digital service.
The cost of providing a service to a customer is not only lower overall, but if the product is not full consumed, it provides ‘free’ income.
Good example of this model and approach can be seen by looking at how mobile phone contracts have evolved over the past 10-15 years.
Originally you had to pay for line rental, then pay a set price per minute or text message. After a short while the providers realised they can start bundling up the product and provide both minutes and texts into the line rental. This was great for the consumer as they had a known monthly price for their typical consumption rather than receiving a different price each month depending on how much the phone was used.
Bundles where selected to meet the customers requirements – where a customer typical uses of 200 mins a month they might select a bundle of 300 mins. The provider now gets a fixed income from the customer, with the knowledge that each minute consumed it paid for, and anything left off is again, ‘free’ income.
As more customers use the same package, and the costs to serve the customer decreases, the provider has a higher profit margin to work with. As a typical customer consumes within their package, the ability for the provider to ‘oversell’ increases.
If 10 customers existed on the 300 minute package, and only consumed 200 on average, total consumption is 2,000 minutes where 3,000 have been paid for and costed.
As we moved through the years up to today, most providers will now give you unlimited minutes. Whilst partly this is due consumers making less calls, the cost to provide the calls has vastly decreased, the provider has the ability to leverage the £20/£30/£40 bundles. The cost to provide the service is low, and the actual costs of the customer usage very low.
Similar model was also seen with mobile data, today GiffGaff can offer 80GB for only £20 a month. Whilst providing 80GB of data absolutely costs more than £20 the economics across the entire customer base means they working on a decent margin through the ‘oversell’.
Moving further into the digital world, the model of overselling can be seen more prominently.
Back when Gmail first launched they provided a whopping 1GB of storage for EACH address. At the time it was noted that each GB would cost Google around $2. The assumption also being that each address would never use anywhere near that amount of data – attachment limits also applied.
Now 15 years later it costs nowhere near as much as $2 per GB, £1.59 a month gets you 100gb of storage across the entire suite of Google products. Again given most customers will never use the full allocation, Google can aggressively price their bundles and quotas to maximise revenue.
Microsoft 365, SaaS
For Microsoft 365 the pricing model and principles outlined above clearly demonstrate the guaranteed income and potential margins for selling added service such as storage. With Microsoft 365, they are also importantly delivering an application, which has fixed development costs.
This was actually an easy decision for Microsoft as they already have the suite of applications, and an active roadmap for both home and business customers. To build out Office into the 365 package. They can not only guarantee a income each month – rather than sporadic retail purchase, they have the ability to up-sell and ‘lock in’ the customer into the future.
SaaS (or Software as a Service) is forever going to grown in the next decade as the small monthly income provides a much more stable income for development whilst also providing continuous product updates at the ultimate cost of lock in. The consumers income is gradually going to get eaten away by services and products that are not actually need, and certainly don’t provide overall value.