In recent years, subscription-based services have surged in popularity, promising consumers lower costs and faster service. However, behind this appealing façade lies a predatory business model that ultimately harms consumers and traditional businesses alike. This article delves into the mechanisms of this model, revealing its temporary benefits and long-term drawbacks.
This business model has only been viable through significant venture capital backing, and basically goes like this:
Identify an existing service in a competitive market (food delivery, taxis, music, movies)
Artificially Cut Costs and Deliver Services Faster (enabled by investor funding)
Reach a Large User Base (low cost, convenience appeal)
Offer Incentives to Vendors (to reach a large vendor base)
Now, Create Tiers and Hike Prices
Finally, Become Profitable and/or IPO
Let's explore.
Cutting Costs and Delivering Faster Services
Many subscription services initially cut costs and accelerate their service delivery, creating an illusion of superior value. Take Uber Eats for instance. When it first launched, it offered significant discounts on food delivery and fast service, heavily subsidized by venture capital funding. This strategy allowed it to grow rapidly, despite incurring substantial losses.
Building a Large User Base
To expand their user base, subscription services often offer deep discounts and promotional deals. For example, Netflix initially offered a free trial period, which attracted millions of subscribers. This aggressive pricing strategy aimed at building a large user base quickly, often at the expense of profitability.
Incentivizing Vendors at a Loss
To ensure a diverse and abundant supply of offerings, companies provide incentives to vendors. For instance, DoorDash has been known to offer restaurants bonuses for joining their platform and for each order they fulfill, even if it means taking on more financial losses. This strategy is designed to build a broad vendor base quickly, enhancing the service's appeal to consumers.
Creating Tiers and Hiking Prices
Once a significant user and vendor base is established, companies introduce service tiers. Spotify, for example, offers a free tier with ads and limited features, a standard premium tier, and a family plan. Over time, the prices of these tiers have increased, while some features previously available in lower tiers have been moved to higher tiers, reducing the quality of the lower-tier service.
Achieving Profitability and IPO
The final stage involves the company becoming profitable or going public through an IPO. Peloton, known for its high-tech exercise equipment and subscription-based fitness classes, went public in 2019. Despite initial financial losses, the company reached a large enough subscriber base to justify its IPO, but it has faced challenges in maintaining profitability.
The True Cost of the Predatory Subscription Model
This business model masks an inherently defective service. The initial benefits are merely temporary, aimed at creating an illusion of superior value. Once the company reaches its desired market position, it reverts to standard practices, often offering worse service at higher prices than traditional businesses.
Impact on Traditional Businesses and Consumers
Traditional businesses, unable to compete with the artificially low prices and rapid service of heavily funded subscription models, often suffer significant losses or are driven out of the market entirely. This creates a monopoly-like situation where consumers have fewer choices and are subjected to higher prices and lower-quality service.
Local bookshops are a prime example, struggling to compete with Amazon's initial low prices and fast delivery times, which were subsidized by heavy investment. Over time, as Amazon raised prices and introduced tiers like Amazon Prime, many local bookshops were already forced to close.
The Endless Cycle
The cycle continues as new services emerge, replicating the same predatory model. Each new entrant temporarily disrupts the market, only to settle into the same patterns of high prices and reduced service quality. Consumers experience brief periods of improved service, followed by inevitable declines as companies focus on profitability over quality.
Conclusion
The predatory subscription model offers a fleeting illusion of better service at a lower cost. In reality, it disrupts traditional businesses, creates monopolies, and ultimately harms consumers.
As the cycle perpetuates, it's crucial for consumers and policymakers to recognize and address the underlying issues in this business model to foster a more sustainable and fair marketplace.
References
"How Uber Makes (and Loses) Money," Investopedia.
"Netflix Business Model," Business Model Navigator.
"The DoorDash Business Model – How DoorDash Makes Money?" FourWeekMBA.
"Spotify Business Model," Business Model Navigator.
"Peloton's IPO: What You Need To Know," Forbes.
"Amazon's Impact on Small Businesses," Small Business Trends.
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