Deep-dive: The rise of micro subscriptions

Why is almost everything getting monetised on the internet?

The internet came with the promise of being free. Read articles for free, connect with your friends for free, watch videos for free, play games for free and so on. But today, it seems we are being charged for everything.

Welcome to the new age of the internet. It is $2.99 per month. Subscriptions are everywhere and the subscription economy is showing no sign of slowing down. 

• Unable to edit tweets on Twitter? Sign up for Twitter Blue at $8/month.

• Bored with the existing features on Snapchat? Sign up for Snapchat+ at $3.99/month. 

• Not getting the attention of the celebrity you love? Sign up for Instagram Subscriptions for as low as $0.99/month. Also available on Twitter and Facebook. 

• Experiencing slow download speed on Telegram? sign up for Telegram Premium at $4.99/month.

• Want to share a Netflix account? Pay an additional $4/month (coming soon).

The list goes on and on. 

We thought social media was free

Yes, but the promise of “free”, came at the expense of users' data.  Users paid with their data. So, it wasn’t a conscious decision. Internet giants such as Facebook leveraged the data to track users' activities across the internet and send them targeted adverts. This led to decade long streak of non-stop revenue growth, until Q2 2022 when it reported its first-ever yearly decline. 

Snap Inc, owners of Snapchat, also had its rollercoaster ride until it experienced year-on-year flattening growth in its revenue. Its revenue in Q4 2022 was $1.3bn, almost the same as that of Q4 2021. The company is also worried that its revenues could drop by 10% in Q1 2023. Aside from the macroeconomic uncertainties and the competition from other social media platforms that have been cited by these tech giants as the reason for the decline, Apple’s iPhone privacy change is also a major contributor. 

Introduced in 2021, Apple’s privacy policy requires apps to get permission from users to track their online activities for advertising purposes. This made it harder for app developers and advertisers to track user behaviour, target users effectively and measure the success of ad campaigns. 

The ability of app developers to follow users around the internet is the backbone of the multi-billion dollars internet advertising infrastructure. It appears as though Apple did to social media, what the internet did to print media. Maybe not. Facebook is still a strong company, with ​​$116.61 billion in revenue for 2022. You’d probably trust Facebook’s brilliant engineers to implement a workaround fix for Apple’s policy. Hopefully, yes. But it is not going to solve all the problems. 

These companies need additional revenue streams to continue to impress their shareholders. So, don't be surprised to see Facebook, Snap and Twitter launching their subscription products to cushion the foreseen decline in ad revenue. When you also consider that Google wants to phase out third-party cookies by 2024 for data privacy reasons, you would expect that advertising inventory will be valued lower, and platforms will need new ways to generate revenue. So next time when you reject cookies or turn down opt-ins on your browsers, know that it will lead to more paywalls on the internet. 

Enter micro subscriptions

Companies are constantly looking for ways to grow their revenue.  The subscription model is such an interesting and difficult-to-resist model. It is the best possible economics for building software - your revenue is stable, recurring and predictable. The compounding revenue that comes from recurring payments is very attractive to venture capital. Since Snapchat launched its subscription service in June 2022, it has acquired over 2 million paid users and generated $28 million in revenue, providing a good buffer for its ad revenue. 

If we go back in history, we have seen tech companies like Microsoft transform into Software-as-a-service (SaaS) to grow their revenue. The subscription model is the go-to pricing model for many software businesses because of its flexibility and affordability to end users. Since 2015, the SaaS industry has grown from $31.4 billion to an estimated $161.7 billion in 2022.

In the early days, when users thought about subscriptions, they would think of streaming platforms, news websites, data providers, and other specific services. But, recently, subscription models are popping up in services you would never think of. Would you ever think of buying a Twitter Gold badge for $1,000/month?

Not just with software, hardware products won’t be left out of the growing subscription economy. Internet-of-things (IoTs), where physical assets are being digitized, are already prevalent. Many features would be locked behind the subscriptions wall. BMW is already selling heated seat subscriptions for $18 per month. This is no joke, as analysts expect that the subscription economy would grow into a $1.5 trillion market by 2025. 

Micro-subscriptions are particularly exciting because small payment prompts us to pay for items, making customer acquisition easier. Some publishers like Winnipeg Free Press have gone further by experimenting with micro-payments, to sell an article for $0.27 for users who don’t want to subscribe to recurring payments. Another interesting thing with micro-subscriptions is that it makes price increments easier, and that can have a tremendous impact on recurring revenue. Low prices typically attract a large number of users. That large volume of users is a gold mine for future cash flow. For instance, let’s say Snapchat has 2 million users paying $3.99/month. That’s $7.98 million in MRR. if Snapchat increases its pricing by just one dollar to $4.99/month, MRR would jump to $9.98 million. A $1 price increase is negligible to most users, but to the business, it’s a massive one.

Nonetheless, it is good to point out that micro subscriptions would only be feasible when the cost of processing transactions and data storage is very low, and the volume of consumption is large enough to justify the prices. Payment is a big thing when it comes to subscriptions. For micro subscriptions to work, payment must be seamless. Google and Apple in-app subscriptions, for instance, take away the cognitive pain of creating accounts and entering payment information online.  Google Pay and Apple Pay have smooth transaction experiences in countries where they have a great presence, and that makes it easy for users to subscribe with one click and difficult for subscribers to churn involuntarily due to failed rebilling. 

Twitter which is on a monetisation drive, is working on Twitter coins to make it very easy for users to make contributions and pay for paywalled content on Twitter. When payment is frictionless, micro-subscriptions become more attractive to companies, as the lifetime value of subscribers would be spread thin over a long period.  However, in emerging markets where payment infrastructure is still fragile and there is higher apprehension towards online transactions, micro subscriptions may be too costly to implement. 

Subscription fatigue

It is not all rosy for the subscription model, as long-term success isn’t guaranteed. Many competitors are entering the market and it could become a zero-sum game or a winner-takes-all market. As you might imagine, when you have to subscribe for everything, it will lead to consumer subscription fatigue. The recurring monthly payment can be a drain for many consumers. In the face of rising inflation and household bills, some consumers might be rethinking the number of media subscriptions they can afford, to save more money. But not just consumers alone. Businesses are also fatigued. Ad budget and overhead costs are being slashed.  Companies using the subscription model may consider any of these to remain resilient: 

• Create hyper-personalization to give free users more reasons to subscribe and existing subscribers more reasons to stay.  Consumers typically expect to get an exceptional experience when they decide to pay for subscriptions.

• Bundle offerings together or forge partnerships with other companies to provide greater value to consumers, and create opportunities for cross-selling. 

• Experiment with more monetization techniques to squeeze out more money, no matter how small, from paid users.  Netflix Basic with Ads  (at $6.99/month) for instance, could be a response to this growing trend of subscription fatigue. 

• Rethink the value delivered to free users and how to make freemium more valuable to the company.  

• Offer users who find your product/services extremely valuable, long-term plans to reduce the psychological pain of monthly bills. 

Keeping subscribers is not an easy game. Subscription businesses need to find new ways to deliver compounding value to users over time. Overall, there is an increasing trend towards micro subscriptions and microtransactions, driven by the need to grow revenue, and capture more value from users amidst inflationary pressure. Interestingly, ad-driven companies are willing to experiment with micro-subscriptions and subscription-driven businesses are experimenting with ads and pricing. Fascinating times are ahead and the only constant thing is change.

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✌️Olumide