Here’s why inflation and regulatory changes can alter how subscription companies operate.

From the desk of Miles Everson: Hi! Welcome to today’s edition of “Return Driven Strategy (RDS).” I’m excited to share with you another business insight in this article. For those of you who are not yet familiar with this, RDS is a pyramid-shaped framework with 11 tenets and 3 foundations. When applied properly, these principles help businesses achieve high levels of performance. Let’s apply this framework in the context of business activities. Keep reading below to know why demographic shifts and regulatory change can significantly impact a company’s activities.

Here’s why inflation and regulatory changes can alter how subscription companies operate. In recent years, demand for subscription services has seen a massive uptick. In fact, the global subscription industry’s market size is expected to reach USD 1.5 trillion in 2025, up from USD 650 billion in 2020.  According to data gathered in 2021, an average American spent USD 273 monthly on subscription services.  Based on that data, it seems a subscription-based business model is popular among consumers.  … but why? To answer that question, we need to take a deeper look into its history. Convenience and Profitability The concept of a subscription-based service isn’t entirely new as it was first introduced in the 1600s by newspaper and book publishers. Fast forward to today, rapid advancements in technology have led to the development of subscription-based models for a variety of products and services.  Operating based on this model allows businesses to rake in revenue on a recurring basis in return for consistently delivering an offering or service to consumers.  Industries that make use of subscription models include on-demand video and music streaming, gyms, meal delivery, and more. As a result, consumers have consistent access to services they deem necessary in their daily lives and are given the flexibility to end their subscriptions at any time. Shifting Consumer Behavior and Regulatory Change When the COVID-19 pandemic forced everyone to stay at home, subscription services saw a massive uptick in demand, with many consumers opting to subscribe to as many services as possible.  Because of that, subscription demand grew and revenue ballooned to millions, if not billions of dollars. However, this period of high demand and growth wasn’t meant to last for long. Once global lockdowns were lifted, consumers started to realize that they ended up with unwanted subscriptions. Let’s take streaming for example. According to data gathered by Forbes and released in June 2024, a staggering 95% of Americans were paying for more than one streaming service, leading to an average spend of USD 46 per month. Take note: These figures are for streaming alone. Since subscription services come in other forms, it is safe to say that a sizable chunk of a typical American’s monthly spending is tied up to multiple types of subscriptions. According to CNET’s March 2024 Subscription Study, American adults spend an average of USD 91 on subscription services each month, with a bulk of that spend going to streaming services, e-commerce memberships, and big box retailer member programs.  The same study also found out that in recent years, “subscription creep”—the gradual build-up of unused or underutilized subscriptions—has led consumers to dedicate a significant portion of their budgets to paying monthly or annual memberships for services. Since the cost of goods and services have risen due to inflation in the past few years, many consumers have opted to cut down on non-essential spending so they can dedicate more of their monetary resources to necessities such as food, water, medication, clothing, and shelter. Another factor that’s leading subscribers to lessen some of their subscriptions is the fact that companies have continually raised their prices. This is because high interest rates have forced subscription companies to raise their prices to maintain their operations and increase profitability. Unfortunately, shifting consumer behavior, high interest rates, and inflation aren’t the only things that are impacting subscription companies today. On August 12, 2024, President Joe Biden’s administration announced an initiative called “Time is Money,” which aims to crack down on hard-to-cancel subscriptions and poor customer service. According to the Biden administration, it will partner with regulators such as the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau, and the Department of Transportation in proposing regulation that would make business processes such as ending subscriptions easier for consumers to navigate. In other words, the rules the administration wants to propose seek to ensure that people would be able to cancel subscriptions they no longer want in an easy and efficient manner. This initiative comes as many customers have complained about poor customer service and being unable to easily end their subscriptions to services they no longer want or need. Should these proposed regulations come to pass, subscription companies could see a downward trend in their membership count since consumers would be empowered to cancel their subscriptions. The Subscription-based Business Model as Seen through the Lens of RDS Professor Joel Litman and Dr. Mark L. Frigo highlighted the importance of continually reevaluating business activities in the face of constant change. According to them, the areas where changes usually arise include scientific and technological breakthroughs, demographic and cultural shifts, and governmental and regulatory change. These points are elaborated upon Return Driven Strategy’s (RDS) 2nd Foundation: Vigilance to Forces of Change. In the case of subscription companies, they are currently facing regulatory and demographic changes from their target customers. If these firms want to survive, they have to thoroughly reevaluate their business processes in light of these shifts. —  If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo.  Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm. Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. The barriers to entry have never been lower for talented professionals to work independently, and today’s massive external workforce is hardly a pandemic-produced fad. 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