Pricing Strategies

The value of subscription services

Women's hands holding a credit card and choosing a subscription service on a tablet.

The market for online subscription services accounted for roughly $70 billion in 2021—a figure that could reach $900 billion by 2026. New research co-authored by Prof. J. Miguel Villas-Boas explains the benefits of the model. Subscription services, he finds, often permit companies to reap the most profit from a product or experience.

Consider a luxury handbag company that could either sell or rent its bags. “Renting would be more profitable,” says Villas-Boas. If a customer buys a bag then realizes that she would gladly have paid a higher price for it, then the company has lost money. A subscription or rental program, however, allows for a larger profit over time.

The research, which is rooted in a mathematical model of consumer decision-making, also found that when consumers can learn deeply about a product or service prior to purchase, they’re both slower to buy and more loyal; repeat purchases account for a larger share of their value. When most of the information about a product or service is instead gathered post-purchase, then the opposite is true: Value is generated by the first purchase, which is less likely to be repeated.

Counterintuitively, companies that can’t offer a subscription can use high prices to defer consumer purchases. This forces people to research before buying, which makes it more likely they’ll be satisfied and become repeat customers.