‘Subscription economy’ enters mainstream
People use to buy and own products of their need. But this way of consumption has been challenged in recent years as more people choose to “subscribe” rather than purchase.
Subscription services were normally used to get regular delivery of goods such as milk or newspapers, but consumer tastes have evolved to where customers subscribe to almost anything, which has led the creation of a so-called “subscription economy.”
The subscription economy has been emerging as a potentially lucrative business model because it enables consumers to save on the initial purchase cost, according to company officials and industry analysts, who said an increasing number of millennials, those born roughly between 1980 and 2000, are paving the way for it to become the mainstream because they prefer subscription services rather than owning products, they added.
The subscription economy has something in common with the sharing economy, another emerging term that has been talked about for years, because users of the two business models rent products or services from providers.
But they are slightly different. In the sharing economy, users pay for their use of car-sharing service, office-sharing or home sharing like Airbnb.
The subscription economy is closer to the software as a service (SaaS) model as the subscription-based model puts its focus on delivering services to customers, who subscribe to them on a monthly basis, rather than individual transactions.
For example, Netflix, Spotify and other streaming service providers are kind of on-demand subscription as the bill will be the same whether users use the services 24/7 or not. Also, car subscription service provided by Hyundai Motor or other carmakers is not categorized into the sharing economy as users rent or lease their cars for a certain period of time.
Data showed that the subscription economy will quickly become a major trend. According to industry researcher Gartner, 75 percent of companies selling direct to consumers will offer subscription services in 2023. Financial institution Credit
Suisse presumed the market size of the subscription economy in 2020 will be at $530 billion, more than double compared to 2000 when it was $215 billion.
The strong growth of the subscription economy has been changing the business landscape, forcing companies in many sectors such as daily necessities, music, videos, games, automobile and even private yachts to introduce the subscription services.
While the subscription-based business model has been led by companies based in the U.S., Korean companies are also accelerating to launch their services to catch up with the trend. They said the subscription services have become an essential factor for them creating a positive distinction.
Hyundai Motor Group has been test-operating three car subscription programs since January.
Hyundai Motor enables subscribers to its Hyundai Selection program to drive three Hyundai vehicles with a monthly fee of 720,000 won ($615).
Its sister company Kia Motors and luxury brand Genesis are also test-operating their subscription programs Kia Flex and Genesis Spectrum, respectively.
While the automaker is testing the subscription service for a limited time, a Hyundai official said it will extend the pilot programs thanks to their popularity.
“Hyundai, Kia and Genesis are test-operating their subscription programs. Though the number of subscribers is limited to around 100 in respective programs, we have seen the users are highly satisfied. Based on the popularity, we recently decided to extend the service period of the Genesis Spectrum program,” the official said.
The automaker said launching the subscription programs was right decision as it could verify that younger consumers prefer to subscribe rather than to purchase vehicles.
“When compared with middle-aged or older consumers, we could find that younger drivers prefer to rent vehicles because many of them are interested in car subscribing or ride-sharing services rather than owning cars. Launching the subscription programs was the right decision because we could meet the changing consumer trends,” the official said.
E-commerce firm Coupang said the number of people who subscribe to its daily necessity delivery service are more than 400,000. Ranging from baby items such as diapers and powdered milk to rice and processed foods, consumers can get delivery of over 8,000 items.
Dongwon F&B is operating a meal subscription service, enabling consumers to choose what they want to eat everyday. Another food company Korea Yakult, known for “Yakult ladies,” who sell and deliver the foods and beverages of the company, is also running food subscription service EatsOn.
The beauty industry here is also embracing subscription services. Startup company Wisely delivers razors produced in Germany on a regular basis and cosmetics companies AmorePacific and Aekyung Industry have offered their cosmetics subscription services of Steady:D and Fflow, respectively.
Korea lags behind advanced countries
While Korean companies are dipping their feet in the emerging business model, an expert said the country is lagging behind other advanced countries in making a shift to the subscription economy.
“Korea is behind other advanced countries in the subscription-based business market because they entered the sector rather late. But the country has been placed in a leading position among Asian countries,” James Kang, an analyst at Euromonitor International Korea, said.
The analyst said there needs to be more improvements in the home furnishing and consumer electronics sectors. For instance, the country’s mattress rental business is expected to see a growth after some products of local manufacturers were found to contain the radioactive element radon in 2018.
“In overseas countries, the Swedish home furnishing giant IKEA already kicked off its furniture rental business. While the country’s mattress market is estimated at 1.2 trillion won, the portion of mattress rental business is presumed to account for about 300 billion won. Since the 2018 radon mattress scandal, the rental business in the sector is expected to see a huge growth,” he said.
The rental business for home appliances, especially air purifiers due to the growing concern for air pollution, has been enjoying a soaring popularity but there’s still much room for development in home appliance sector as smart home technologies are getting mature.
“Using Amazon’s Dash Replenishment Service (DRS), which enables connected appliances to order physical goods from Amazon, consumers can automatically order new detergent for their washing machine in overseas countries. Both washers of Samsung Electronics and LG Electronics are also capable of that but the function is not available for domestic consumers because there’s no such market here,” the analyst said.
Lee Suk-geun, a business professor at Sogang University, said the subscription economy will disrupt the entire business model due to a growing “end of ownership” trend, in which people are not as interested in owning goods any more.
“Due to the growing end of the ‘ownership trend’, the subscription economy is expected to soar to meet changing consumer needs. Disruptions are inevitable as more and more companies will transform their business model to the subscription one,” Lee said.
To take the lead in the subscription-based business, understanding the fast-changing consumer needs and improving management capability of supply chain are getting more important because they need to make agile decisions to offer well-curated and more personalized services, the professor added.
“In the subscription economy era, companies are urged to make agile decisions to be more competitive than anyone else. It is essential for companies to better understand the rapidly-changing consumer needs and effectively manage their product supply chain to satisfy the needs. Also, improving efficiency of their after-sales service operation will be very important,” Lee said.