Subscription services boomed during the pandemic. With many stores and restaurants closed for a time and people wary of contact after they opened, subscription services offered a convenient way to keep needed products on hand or in the case of meal kit subscription services, a way to recreate restaurant-quality meals at home.
Curiosity was a factor too, as consumers had more time on their hands to browse the internet and learn about offerings. And they were drawn to sign up to gain access to higher-quality products not easily available elsewhere. Plus, they had more money to spend with government stimulus checks burning a hole in their pockets.
Right before the pandemic hit in early 2020, Pymnts.com found the average U.S. consumer subscribed to fewer than 1.5 retail subscriptions.
At the end of 2021, the number increased to five retail subscriptions, with consumers spending on average $38 per subscription. That added up to just under $200 per month to keep their subscriptions coming. Overall nearly one-third of consumers maintained at least one retail subscription last year.
Pymnts.com estimated the retail subscription market reached some $15 billion per month by the end of last year. But now the tide is turning.
Pyments.com survey found that 14% of consumers were seriously intent on reducing retail subscriptions, which would result in a $2.2 billion loss per month collectively in the subscription market.
Cancelation pace to quicken
Kearney Consumer Institute predicts the pace of cancelations will rapidly accelerate. The Kearney survey found more than half of subscribers wanted to reduce their subscription exposure to about $50 per month.
Kearney foresees a subscription apocalypse on the horizon with its survey finding 40% of consumers think they have too many subscriptions.
With inflation skyrocketing to levels not seen since the 1980s, consumers are going to be looking closely to find places to cut, putting subscriptions in the hot seat.
If consumers do as they say, that would effectively put the retail subscription business back to where it was before the pandemic.
Subscription services have long struggled with keeping consumers in the program. A 2018 study by McKinsey found that one-third of consumers who signed up for a subscription service canceled in less than three months, and over half canceled within six.
Maybe over the last two years, subscribers hung around longer, but consumers are going to apply a new calculus when it comes to subscriptions.
“Subscriptions are built on the premise that consumers will always need fresh food or clothing or whatever,” explains Greg Portell, lead partner at Kearney, the global consumer practice of strategy and management consulting firm.
“In a highly inflationary world, they are going to have to cut their budgets somewhere so those automatic purchases are not so automatic anymore and become much more discretionary,” he continues.
Tightening the belt on subscriptions
There are three basic types of subscription business models: replenishment, curation and access. Each of them has inherent weaknesses as money grows tight. And with consumers returning to work and able to get out of the house and do more things do, the convenience embedded in some of the subscription models is not so compelling.
Replenishing some not all needs
Keeping subscribers into the program all comes down to delivering a meaningful benefit. Replenishment models in certain categories may have an edge.
“Take dog food. It’s a usable product that needs replenishing. Lugging 20-pound bags home from the grocery store is inconvenient so the consumer benefit can be monetized,” he says. “But, under budget constraints, consumers may trade down from premium dog-food brands to more affordable options, canceling their premium subscriptions in the process.”
He also sees greater cancelation potential for other replenishment services, like toilet paper, paper towels or shampoo, that can be bought as needed, rather than on the models’ artificially-imposed timeline.
“Besides the budget constraint, there’s the element of time. People want to control what they buy and when they buy it and don’t want it forced on them,” he continues.
Curation subscriptions under more pressure
Curation models are even more complicated since they tend to be highly discretionary and so under greater pressure when budgets are tight.
“Getting the curation right – to provide a happy surprise in every box – is harder. The curation model of a Stitch Fix (clothing), Blue Apron (meal kits), Birchbox (beauty) and others require services deliver on that sense of exploration and discovery. You can’t just send the latest flavor or style of the month. It’s got to be special,” Portell says.
And curation models face even greater headwinds from the scheduled timing of delivery. For example, when restaurants were closed, meal kits provided a meaningful alternative. Now with restaurants open, consumers’ weekend ritual is returning to a night-out, rather than a night-in.
A similar timing issue applies to clothing and cosmetics offerings. “The subscription consumption pattern is fixed, but consumers don’t necessarily want to be dictated to about when they need a new dress or tube of lipstick. The cultural and social element of these types of purchases is missing and it’s hard for a subscription retailer to establish that,” he continues.
Measuring what access is worth
The access model applies both to some subscriptions and membership models like Costco, BJs and Amazon
And because the Costco business model is based upon its 75/25 “triggers and treasures” formula, where 75% of purchases are for consumer needs and 25% for discretionary purchases, consumers can avoid the temptation to spend more on extras simply by staying out of the warehouse.
“When it comes to access subscriptions and membership renewals, consumers will evaluate closely whether the upfront fees really are worth gaining access to the offerings. Some will win and others will lose,” Portell says.
Subscription headwinds turn to tailwinds
In the current environment, subscription retailers are more vulnerable than other retailers that have the flexibility to change their product mix and offer lower-priced selections. Subscription businesses are stuck.
“Other retailers have room to maneuver in response to income pressures, but the last thing a subscription business wants is to lower its revenue per subscriber,” Portell says. “But you won’t see consumers trading down from one subscription service to another. You’ll see them eliminating subscriptions altogether.”
One hope for subscription businesses is to leverage their in-depth consumer data to either sell it, merge with other companies or cross into related categories, from food to health and wellness, for example.
Subscription businesses, which grew so rapidly over the last two years, are now facing a market turned upside down.
“In the pandemic and the immediate aftermath, people had more disposable income, more free time and they couldn’t go to the store. Now the three things that made subscriptions explode are going in the opposite direction. How quickly subscription businesses adapt will determine their survival,” Portell concludes.