Are subscriptions the new retail?

games subscriptions retail

Are subscriptions the new retail? We know digital retail is way up, thanks to COVID. But, surprisingly, subscription purchases are way up too.

In fact, new subscriber growth for consumer goods peaked at 145%. Some of the data:

  • Streaming: Growth up to 89.8%
  • Consumer Goods: Growth up to 145%
  • Education: Growth up to 60%
  • SaaS/Cloud: Growth up to 51%

In this edition of TechFirst with John Koetsier, we chat with Dan Burkhart, CEO of Recurly, to see what’s up and why. Recurly helps customers like Twitch and Start and Asana optimize subscription commerce.

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John Koetsier: Are subscriptions the new retail?

Welcome to TechFirst with John Koetsier. We know digital retail is way up thanks to COVID, but perhaps surprisingly, subscription purchases and subscriptions are way up too. To see what’s up and why, we are going to chat with Dan Burkhart, who is the CEO of Recurly.

Dan, welcome! 

Dan Burkhart: Thank you!

John Koetsier: Pleasure to have you with us today. First off, you did a bit of a report on the subscription economy. What’s up? What’s growing? 

Dan Burkhart: Subscriptions are growing far and wide. I think that, you know, this has been something that’s been happening over many years now, but with the advent of COVID, of course, everyone was trying to figure out what is this going to mean for general consumer purchasing behaviors. And there are some surprises in the data, it’s not just media and entertainment that seems to be surging. 

John Koetsier: Interesting, interesting. Give us some specifics. What are the core areas that you looked at? 

Dan Burkhart: So we looked at subscription commerce, so anything that’s in a box or anything that’s moving physical goods we coin as “subscription commerce,” and that includes makeup and sort of food or dog chew toys as consumables. We also looked at education which are, you know, distance learning, it could be professional education, it could be some of the tools and applications that maybe our kids use at home when they’re in the sort of at-home, homeschooling environment. We looked at media and entertainment, OTT media streaming, which is also another common area that you see, and then SaaS, of course, for workplace productivity.

John Koetsier: Yeah, interesting. I mean, I think if I’m not mistaken, there were about 700 subscription or SaaS companies that were included in your report. Where were you seeing the highest growth? 

Curiously, the subscription commerce category really took off.

Dan Burkhart: The highest growth was actually counterintuitive. I thought that highest growth would have come from media and entertainment, sort of OTT media streaming, and OTT being an acronym for over-the-top for the services that we subscribe to via the internet. Curiously, the subscription commerce category really took off. And I would have thought at the advent of COVID, call it in the early-March timeframe, that we would have seen a contraction in discretionary spending and people would have really kind of reigned in their consumption patterns just with uncertainty and not knowing whether they’re going to continue to receive a paycheck, etc.

John Koetsier: Yes.

Dan Burkhart: But really saw a pretty strong surge in that category that outpaced the growth and surge that we saw from some of these other categories that we studied. 

John Koetsier: So I know BarkBox is one of your customers, and honestly, I’ve never been — I have, in terms of the streaming category that you mentioned that was like what would have been the smart money bet maybe on what would be growing the fastest, you know, sure, I’ve got Netflix, Disney+, Amazon Prime, right — but I’ve never done a subscription, like a retail box or something like that.

But that grew super fast as well. I’m interested in that. What do you attribute that to? 

Dan Burkhart: I think there could be a little bit of a guilty pleasure in that it’s a bit of a decadent affordance to have something come to your home that you anticipate, that anticipation that provides a little bit of a self-gifting twang, I think, that perhaps individuals were craving a bit. So that did take me a little bit by surprise, but it’s been an impressive search.

Part of the appeal of subscriptions in general is the convenience factor …

You know, part of the appeal of subscriptions in general is the convenience factor. And I think what has perhaps happened in the way that I think about explaining what the data is telling us, is that the cost and friction of actually going to a store even for simple groceries is something that I know in our family we’re talking about, and we might do a rock paper scissors to see who goes to the grocery store this time. So perhaps the convenience factor of having something delivered to you, to the home, that is something that has that unboxing sort of appeal and it provides that little thrill, has actually been something that has taken root.

And it’s not just a couple of single instances. I think that if there are a few companies that kind of stand out from the rest of the pack, you’d say, okay, they might have cracked the code, or they might have a product offering that is unique, but it really was a pretty broad lift of demand across the category that was counterintuitive.

I always love it when data points out counterintuitive results. 

John Koetsier: Absolutely. I mean, you’re always looking through the data for what’s surprising, what’s different. It’s kind of interesting as well, because during especially the harsher parts of the lockdown, which you know is easing up in some areas, re-clamping down in other areas, you had a lot of people getting crafty as well, right? I mean, a lot of people baking bread, sourdough, had that all on our social feeds and everything like that. So maybe that was going on there.

Talk about the curve. When did you start seeing the growth? When did it peak? What are you seeing right now? 

Dan Burkhart: Yeah, so the curve is distinct actually. So, we started measuring, we did sort of pre and post study, and the pre point of demarcation was March 9th, that’s when we saw the shelter-in-place actually took effect in most States, that’s when most schools started closing in the March timeframe.

So from that, if you called prior to March 9th being pre-COVID, we really did see a distinct surge across all categories of differing levels, but the shape of the curve actually accelerated through the end of April. So March and April showed the period that I would call, the kind of oh my god phase of like, wait a minute, we’re going to have to reconsider our media consumption, our grocery shopping, where are we going to get toiletries, etc.

That period showed the most pronounced growth through April and then we started to see May kind of, it still continued to grow, but just not at such sharp, pronounced, punctuated growth that was orders of magnitude greater than prior periods. 

And I think that so May starts to come into what I’d call the “new normal” phase which is okay, we are now in this post-COVID sort of acceptance, we’re sheltering in place, our consumer patterns in terms of how we’re assembling to consume media and maybe some of the physical goods, consumables being everything from it might be toothpaste and cosmetics to, you know, deodorant and razors are other categories that are quite popular for subscriptions.

Those kinds of categories are, you know, they’re getting into the new normal, but I think what it did is it expanded the market for people that might not have considered purchasing these sorts of items via a subscription and now we’re much more inclined to take advantage of that convenience factor.

John Koetsier: Interesting. And you’re seeing that continue right now in June, July? 

Dan Burkhart: We are, you know, I’m a bit of an internet veteran. I’ve been doing this for 25 years and so having worked for eBay and NBC internet for many, many years, we’ve always seen the slowing effect going into the summer months that I think generally is sort of referred to as the “summer doldrums.”

Even if growth rates are continuing to increase, you know, school’s out, people typically plan vacation. So summer months have often been a slight, a slower growth rate period and that typically starts around June. So we’re starting to see a little bit of that effect, but the growth is still happening. It’s just not happening at the same rates that we saw in April and May.

John Koetsier: Yeah, and those rates are obviously unsustainable, right? I mean, I spoke to Adobe about the growth in e-commerce for instance and they said, ‘basically we had four to six years of growth in about a month or two,’ right?  I mean, and so we had that time of craziness in some sense, and approaching some sort of new normal or quasi-abnormal right now.

Let’s talk a little bit about subscriptions as a model. Obviously there’s no massive upfront cost, right, but there is this ongoing monthly financial suck. I mean, I mentioned off the top that in terms of streaming, we’ve got three services here. What are you seeing from consumers? And let’s talk about consumers first in terms of acceptance of the model and like how many services do people subscribe to? 

Dan Burkhart: So in terms of acceptance of the model, I think there are a number of things that have come into play, sort of the confluence of events that have emerged over the course of several years now, that have led to the appeal and the rising appeal of subscriptions.

And not the least of which is this general notion in academic circles, you hear about value based pricing, and so, you know, aligning these sort of incremental payment or cost of any product, app, service, media — it could be a dating service, insurance, etc. With that incremental component of value is something that I think generally has resonated well.

If you roll back the clock and you might go back in the memory banks and think about the feeling you had when you might’ve purchased an album as a kid, and you walk into a store, you buy your albums with your hard earned cash and you go home and you listen to the music and you realize, gosh, I might like one out of the five albums I brought home.

And that sort of buyer’s remorse is something that is a difficult feeling to get over.

And that sort of buyer’s remorse is something that is a difficult feeling to get over. So there is some, you know, I think there’s a better alignment between this notion of you pay [for what you get], and you also know that you can vote with your feet. If the service provider in any category is not living up to the promise of their brand and the product and the way they pitched and positioned it, you can vote with your feet and you don’t feel like you’ve been duped.

You don’t feel like you’ve been ripped off, which I think in general is something that feels more like a balanced relationship. Which you can sort of chalk it up to subscriptions being interesting for businesses because recurring revenue streams have always been rewarded by the markets, whether it’s insurance companies or any form of annuity has always been financially appealing.

But now you have this alignment where consumers feel that they can trial often these services and figure out whether they want to actually commit with a credit card. And then for the remaining period of time, the onus is really on the provider to win over the hearts and minds and loyalty of these subscribers over time. So that balancing act in tandem with social media and the fact that people can communicate broadly about services that they love and that they feel are delivering or exceeding the promise of the marketing positioning, is something that I think has really locked in and resonated well with consumers across all of these categories.

John Koetsier: That makes a ton of sense and yet it’s still interesting. Last night I was watching a Blu-ray movie — I know it’s so old school. I took a piece of plastic out of another piece of plastic. I inserted it into something and it played, and the quality was amazing compared to the streaming stuff.

But yeah, I get where we’re going, obviously have the services as well. Let’s talk about businesses and B2B markets.

I was chatting with Clearbanc president Michele Romanow last week, or a couple of weeks ago, and kind of every period, every couple of weeks or so, they reconsider everything that they’re spending money on, every subscription that they’ve got, for instance. What do you see for businesses in terms of SaaS software and how they’re considering those purchases? Is it the same? Is it different compared to how consumers deal with it? 

Dan Burkhart: Yeah, I think, speaking from the first person as someone who runs a company, it’s really easy for departments to buy tools and to adopt tools. And it’s actually a little bit more difficult as a company to identify tools that are no longer being used, because the roster of tools that companies pay for get some sprawl there.

And I think that’s not terribly dissimilar from the household or personal decisions where, you know, yes, there are a series of sort of logical services that we all must have that are part of — you know, your internet service, for example, is something that is in the must-have category. And then of course, all of the affordances on top of that are sort of incremental purchases that you might have to reevaluate periodically. And I actually think this is a healthy part of the consumption side of the equation, which is not to say that subscriptions are amazing everywhere, that the sky is blue and continuing.

You know, as a homeowner sort of family member, I always encourage us — I ask my wife all the time, ‘you purchased that subscription, are you guys still using it?’ And I think that that’s something that is probably a more common question in households today and it’s healthy. And it goes back to the notion that companies really need to shoulder the burden of making sure that they are continuing to deliver value in whatever it is they’re selling by way of a subscription model, in order to achieve that long term benefit.

And I actually felt that it was pretty interesting when Netflix announced a month or so ago that they were going to go through and look at all of the subscriptions that were not being, they were dormant. These were dead accounts that were just trickling in revenue for them, but they actually took the honorable approach and went and said, ‘Look, we’re going to pause your subscription and if you really want it, and you log back in and you want to consume the service, we’re there for you.’ And that was a little bit counter to what you would typically see a publicly traded company do. 

John Koetsier: You would never see a company do that in the past, and it was kind of almost a flex because it was like, you know, everybody’s such a tight knit …

Dan Burkhart: For sure.

John Koetsier:  You know, it’s such a small percentage of people who don’t really use a service that well or that often. I mean, the other thing that’s funny as well, I mean, if you look at like a Disney+ it’s six, seven, eight bucks a month, or something like that, you watch one movie a month with a family, like more than one person, and you’ve gotten sort of positive ROI as a consumer on that, right? It’s not too hard to justify that.

Dan Burkhart: Mm-hmm.

John Koetsier: Talk a little bit about Recurly, what you do, what your business model is, and a little bit more about your customers. 

Dan Burkhart: Sure. We’re a 10-year-old company and we’re in the business of providing subscription billing management and revenue optimization for subscription-based businesses. So it’s sort of the back office, if you will, of all the functionality that companies need to run a successful subscription business but also the affordances of not just payment processing and managing the “clockwork” as we call it of all the various plans and pricing models.

But coupling that with data and insights, so that companies actually have the ability to understand what’s going on in the underlying layers of various subscriber cohorts, and different price points, and different plans out there, so that they can make more informed decisions and hopefully decisions at a quicker pace to respond to the needs of optimizing their business. 

John Koetsier: Very, very interesting. Excellent. Well, thank you so much for being with us on TechFirst. 

Dan Burkhart: My pleasure. Thank you, John. 

John Koetsier: Excellent. And everybody else, thank you for joining us as well. My name is  John Koetsier. I appreciate you being along for the show. Whatever platform you’re on, hey, like, subscribe, share, comment, or all the above. If you’re on the podcast later on and you like it, please rate it, review it. Thank you so much! Until next time, this is John Koetsier with TechFirst.

 


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