The fight over default consumer behaviors

Subscriptions are powerful because they create a default buying behavior for consumers. They are rare because the amount of value you need to deliver to keep a consumer from exploring her alternatives is high. Very few platforms deliver enough value to maintain subscription status indefinitely, which is why churn for consumer services can be brutally high, especially early on in the customer lifecycle.

Nevertheless, I believe sensible defaults make consumers’ lives significantly easier. I see the world moving in this direction. As the largest platforms in the world aggregate both supply and demand in their respective categories, their subscription offerings will only become more compelling to consumers.

Across the board, category leaders in digital media services are consolidating the market, growing 30%+ annually:

• Video: Netflix subscribers grew from 36 million (Q1–2013) to 125 million (Q1–2018), or 28% CAGR.
• Music: Spotify subscribers grew from 18 million (Q1–2015) to 75 million (Q1–2018), or 33% CAGR.
• Gaming: Sony’s Playstation Plus subscribers grew from 7.9 million (Q3–2014) to 31.5 million (Q4–2017), or 53% CAGR.
• News: While no single aggregator is dominant today, Deloitte estimates 20 million digital only subscriptions worldwide in 2018. One of the top digital-only U.S. news services is NYT, with 2.8 million subscribers, growing 26%/yr. With Apple’s recent purchase of Texture and success of its native News app, we are likely to see a standalone subscription from Apple that rolls up the news market.

Because media drives a huge portion of consumer engagement, every individual consumer tech company must have a media subscription service of some kind. The big holdout today seems to be Facebook. Whether it enters via news, video, or gaming is still to-be-determined, but it will certainly need to do something to compete with Netflix, Spotify, Amazon Video, Microsoft XBox Game Pass / Sony PS Plus, Apple’s soon-to-be released News subscription, and Google’s YouTube TV and Red. Deloitte predicts that, by the end of 2018, 50% of adults in developed countries will have two online-only media subscriptions, and by the end of 2020, the average will have doubled to four. I wouldn’t be surprised if those four corresponded roughly to the above categories.

By extension, I wonder how long it will take for major categories of commerce default to subscription behavior. With 100 million households subscribing to Prime, Amazon is the 800 lb gorilla. The default behavior behind Prime is driven by free, 2-day delivery. In verticals where fast delivery is essential, bundling with Prime is a competitive weapon. That said, not all commerce use cases benefit equally from fast delivery.

For example, the primary driver of purchase for a Stitch Fix* customer is not speed, but curation and discovery. Amazon is great at getting the thing you’re looking for to your door faster than anyone, but Stitch Fix customers are willing to wait to have their problem solved. Its auto-ship subscribers no doubt have bought into the default behavior of finding new apparel through the company’s algorithms. FabFitFun has a similar value proposition in the lifestyle category and has similarly engaged subscribers.

Another strong use case for commerce subscription is replenishment. For instance, Daily Harvest* offers dozens of frozen SKUs that vary seasonally to fit a variety of taste profiles and nutritional needs. Unlike a meal kit company, for which consumer interests wax and wane, Daily Harvest is focused on meal staples that require only minutes to prepare and can be stored for months in the freezer. Because customers typically hold some inventory at home, the company drives a replenishment default behavior, so customers become used to delivery on a certain date with a week’s notice. 2-day shipping is therefore irrelevant. The same replenishment default behavior drove both Pillpack (prescription pills) and Dollar Shave Club (razors) to billion dollar outcomes.

I fully expect commerce subscriptions that cultivate a differentiated default behavior, like discovery or replenishment, to thrive in today’s consumer landscape. Amazon will attempt to acquire more of these businesses to leverage the customer acquisition benefits of its Prime bundle. I also expect more traditional retailers and CPG companies to plant flags in the ground in subscription by acquiring leading startups in this space.

* Indicates a Lightspeed portfolio company or other company in which I have an economic interest.