Pricing and proposition testing in

subscription economies
Received (in revised form): 23rd December, 2020

Natasha Fosker
Senior Associate, Decision Technology, UK

Natasha Fosker is a senior associate at Decision Technology, where she conducts research on the
impact of propositions, advertising and branding on consumer behaviour, perceptions and decision-
making. Natasha has an MSc in behavioural and economic science, and her experience also includes the
use of applied behavioural science principles in commercial research and advertising.

Decision Technology, Network Building, 97 Tottenham Court Road, London, W1T 4TP, UK
Tel: +44 (0)20 7193 9812; E-mail: [email protected]

Benny Cheung
Director, Decision Technology, UK

Benny Cheung is a director at Decision Technology. Benny completed a PhD and a two-year research
fellowship in behavioural science at the University of Cambridge. His areas of commercial expertise
include retail, energy, financial services, advertising and telecommunications. He also heads the firm’s
brand practice and personally oversees all related client accounts and internal R&D initiatives.

Decision Technology, Network Building, 97 Tottenham Court Road, London, W1T 4TP, UK
Tel: +44 (0)20 7193 9812; E-mail: [email protected]

Abstract As the subscription model continues to grow in popularity across diverse

markets, this paper addresses three important issues in understanding the so-called
subscription economy: (1) its prevalence; (2) the price sensitivity of different subscription
types; and (3) whether promotional tactics can drive customer acquisition and retention.
In addressing market prevalence, this paper reveals that 83 per cent of UK adults hold
at least one type of subscription, with the most popular categories being service (71 per
cent) and content (62 per cent), and the least popular being product subscriptions (30
per cent). Using the Behaviourlab platform, this paper finds all subscription industries are
heavily price-driven; music and gym subscriptions are most price elastic of those tested,
with price changes having double the impact on customer acquisition compared with other
industries. The results from this study provide clear direction for future proposition design
and the marketing of subscriptions.

KEYWORDS: behavioural science, subscriptions, randomised controlled trials, RCT,

consumer behaviour, acquisition, retention

INTRODUCTION the growth of digital technologies. For

The term ‘subscription economy’ describes the consumers, subscriptions offer the
burgeoning trend among companies across convenience of regular access to items
a diverse range of markets to move towards without leaving the home. For the supplier,
subscription models, and it is currently worth they provide a contract of repeat custom.
£323m in the UK.1 The move toward A well-known example of a company
subscription models is being facilitated by changing its strategy to a subscription model

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Fosker and Cheung

is Microsoft’s shift to Office 365 in 2010. the study presented the propositions at a
After 20 years with its previous business range of price points.
model, this marked a complete change in
direction for Microsoft, and resulted in 27
per cent year-on-year growth for Office PROBLEMS FACED BY
3652 — a sizable enough growth to motivate SUBSCRIPTIONS
retailers who fit the criteria to consider a As a relatively new business model,
similar shift. especially when linked to digital
Beyond Microsoft, the subscription technologies, subscriptions are ripe for
model is now visible across a broad range of studies into why some fail to reach their
companies, and the subscriptions landscape desired user base size (acquisition) or
may be divided into three category types: may further fail to retain their customers
product, content and service. While the (retention). On the one hand, subscription
better-known examples of Netflix and services face acquisition puzzles that are
Spotify are content-based, subscriptions prevalent across other industries. These
are also a growing trend among companies include loyalty, logistics and changing
offering physical products, such as Hello consumer preference. On the other hand,
Fresh and Birchbox. Service subscriptions, holding on to a pre-existing customer is
meanwhile, are those that facilitate an action as important, if not more so, as gaining
for the subscriber, such as Amazon Prime a new customer. Therefore, identifying
and gym subscriptions. In these instances, retention levers also has an important
the customer is not paying for a tangible role in the success of subscription
product, or for passive entertainment; rather, propositions.
they are paying to be able to do other More specifically, product subscriptions
activities. face a further challenge, in that the
The present study seeks to identify the products are likely to suffer from high
most effective acquisition levers for each substitutability; that is, consumers could
of these subscription categories, as well source equivalent products from other
as offering a lens on the price sensitivity purchase destinations either in-store
of each. or online, without the disadvantage of
To achieve this, the researchers started being tied to a set provider. It is therefore
by developing a picture of the current anticipated that product subscriptions
subscriptions market and the problems will experience particularly tough market
facing this relatively new area. Fieldwork conditions.
was then conducted to identify the
prevalence of the different categories, and
thus obtain robust figures regarding their INVESTIGATING THE PROBLEM USING
size. As a growing market, it is crucial to BEHAVIOURAL SCIENCE
identify the levers affecting acquisition for By recognising the impact of various
subscription products. It is also important promotional tactics on subscription uptake,
to understand if some types of subscriptions it is possible to construct a picture of the
are more indispensable than others (and so most effective marketing interventions
less price elastic). To this end, a randomised to drive acquisition. Furthermore, by
controlled trial (RCT) was conducted to comparing across industries, one can
investigate the impact of acquisition levers identify those industries which are most
on subscription uptake across the three price sensitive, and those where benefit-
subscription categories of product, content based features would be most effective.
and services. To uncover the price elasticity, As the RCTs were carried out in an

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 Pricing and proposition testing in subscription economies

online simulation using the Behaviourlab In the implementation of the fieldwork,

platform,3 it was possible to control for each participant responded to one overall
the effects of exogenous factors such as survey. Within the online RCT, each
branding and user experience or journey participant was exposed to three scenarios,
experience. therefore providing three data points in
Pinpointing the impact of the subscription the analysis. The various levers were not
features on acquisition across categories will handcuffed together — any participant
provide tailored strategies for subscription could see between zero and six subscription
categories to maximise acquisition. benefits in each scenario. As a result, it was
However, it is not just about the proposition possible to understand potential interactions
itself — to get customers onboard, the offer between subscription benefits in the
needs to be communicated. Therefore, the investigation.
results will also elucidate on subscription As mentioned, the RCT involved taking
features to highlight in communications participants through a realistic simulation
with customers, ie those that are most likely of the subscription purchase journey. Each
to maximise the benefits to the provider of participant was required to make three
the given offer. purchases for three different subscription
This study will measure the impact of products selected at random from the
price and promotional offers on purchase following six industries explored: food
likelihood (acquisition) and Net Promoter recipe boxes, supermarket delivery, health &
Score (NPS ; retention). To decide which beauty, music, gym membership, TV & film
promotional tactics to test, the authors (see Table 1).
conducted desk research on subscriptions, The propositions were all unbranded
identifying the most popular offers. so that the effectiveness of different
acquisition levers could be measured
cleanly without the influence of branding.
RESEARCH DESIGN The subscription price was randomly
The researchers investigated the research varied from –40 per cent to +40 per cent
questions using our Behaviourlab of the current average market price. Six
platform to conduct a series of online different sign-up benefits were also tested,
randomised control trials (RCTs) with which were randomly selected to be
immersive simulations that mimic real- shown; participants could see no benefits
world consumer decision environments. because of this (see Figure 1 and Table 2).
Behaviourlab circumvents the issues Upon reviewing each randomly generated
traditionally associated with real-life live subscription proposition, participants
trials (eg cost, time, reputational risk, were required to indicate their likelihood
limitations on test variants), while retaining to purchase and intent to advocate
the accuracy of the results. The online (ie NPS).
survey was conducted in November Alongside the RCT part of the survey,
2019 and comprised three sections: (1) a behavioural questionnaire element was
an online RCT; (2) a behavioural survey; also included, as discussed previously.
and (3) a demographic questionnaire. The The behavioural questionnaire asked
latter element was included as the study participants what subscriptions they either
sought to isolate the impact of features, currently had or had previously had; the
independent of the demographics of the benefits offered by those subscriptions;
customer viewing them. In total, 1,384 UK and the date when they first subscribed to
consumers over the age of 18 took part in these subscriptions. This was to provide
this study. information on their subscription usage

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Fosker and Cheung

Table 1: Categorisation of unbranded subscriptions which were tested during the RCT phase
Subscription type Definition Example industry Example providers
Product Provides customers with a physical Food Hello Fresh
product(s), usually delivered to
Mindful Chef
their door at regular intervals
Health & beauty BirchBox
BeautyPie
Service Provides customers with unlimited Delivery Amazon Prime
use of a specific service for the
Tesco Delivery
duration they pay for
Gym membership PureGym
Fitness First
Content Provides customers with unlimited TV & film Netflix
access to premium online content
Amazon Prime Video
for the duration they pay for
Music Spotify
Apple Music

Figure 1: Example of task show to the participant during the RCT phase of the survey

habits, as a potential variable to be explored participants currently signed up to at

in the RCT analysis. least one subscription. Assuming a total
UK adult population of 54 million,4 this
translates to about 45 million UK adults
RESULTS with at least one subscription. Figure 2
Market landscape shows the results of the market landscaping,
The research found high prevalence of and estimated prevalence among UK adult
subscriptions, with 83 per cent of the subscribers. The most popular subscription

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 Pricing and proposition testing in subscription economies

Table 2: Table of elements altered during the RCT trial

Attribute Levels
Free trial for a month On/Off
50 per cent off first two months On/Off
No contract, cancel anytime On/Off
Pause subscription or skip one order On/Off
(You will not be charged when the subscription is paused or skipped)
Referral scheme On/Off
(Giving you one free month for recruiting a friend)
Earn 5 loyalty points for subscribing each month that could be paid for subscription fees On/Off
(50 loyalty points equal one month of subscription fee)
Price –40% to + 40%
(increments of 10%)

Overall Annual
prevalence growth
Industry (%) rate (%)
TV & film 47 2

Music 33 2

Supermarket
32 3
delivery

Gym 19 1

Health & beauty 10 1

Food recipe box 14 1

Figure 2: The market size and UK percentage of adult subscribers by subscription type

type was service, with 36.8m estimated UK In other words, product subscriptions are
adult subscribers (71 per cent). Content most likely to be taken up by those who
subscriptions were the next highest, have already bought into the concept of
with an estimated 32.2 million UK adult subscriptions.
subscribers (62 per cent). Finally, product Of the subscription industries explored,
subscriptions struggle more with popularity, supermarket delivery services were found
with only 15.4 million subscribers (30 per to have the largest net annual acquisition
cent). The largest overlaps of ownership growth rate over the preceding 12 months
were in content and service — 32 per (3 per cent — see Figure 2), while gym
cent of UK adults have a subscription for membership had the slowest growth rate
both. The market landscaping suggests that (1 per cent). Identifying the acquisition
product subscriptions are complementary growth rate is useful in understanding
subscription products rather than the the changing shape of the subscription
gateway, as ownership of the category is landscape. The low acquisition rate of
most often combined with ownership of product subscriptions is striking, with 1 per
either a service or content subscription. cent growth in customers taking health &

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Fosker and Cheung

Figure 3: Price elasticity of demand in different subscription industries

beauty or food recipe box subscriptions, Without a unique product, the value
which is half the growth rate of content and of product subscriptions relies on two
service subscriptions. elements: convenience and curation. The
This is not a case of health & beauty convenience of product subscriptions
being penalised as a new entrant; indeed, will be dampened by the fact that they
younger industries typically grow at a faster are readily available products — the
rate as they have a larger chunk of the convenience is not in the sourcing, but
addressable market to gain, and so grow rather in the passive nature of delivery
their share of the market. Perhaps one to consumers’ homes. If curation is done
of the reasons that product subscriptions correctly, it could counteract the effect of
are flagging in growth is due to the a relatively limited product range, although
lack of intrinsic demand. Many product this depends entirely on the provider’s
subscriptions do not offer a unique product; ability to understand and cater for its
rather, they are a readily available repackaged customers’ preference/needs.
product. This is different from the offer of
other subscription categories, particularly
content subscriptions in which the offering is Price elasticity
often exclusive to a given platform. The results from the experiment show
Beyond this, product subscriptions may that price is a dominant driver of choice,
struggle to offer the range and accessibility significantly affecting purchase likelihood
seen in content or service subscriptions. across all tested industries. The researchers
Once a product subscription has been calculated the price elasticity of demand
delivered to the customer, the goods that (percentage change in demand per 1 per
the customer has are set. This contrasts with cent increase in price) for each industry,
the often unlimited, on-demand nature of finding music and gym to be the most
access to content services. This may well price elastic (–0.25 and –0.23 respectively;
be a barrier to acquisition, with customers Figure 3). Supermarket delivery, and TV
unwilling to be tied to a single provider & film were the least price elastic (both
without the freedom of choice and access. –0.11). While the absolute level of the

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 Pricing and proposition testing in subscription economies

Table 3: Impact of subscription benefits on purchase likelihood (acquisition) across industries

Delivery Gym Food recipe Health & Music TV & film Across industry
(%) (%) box (%) beauty (%) (%) (%) (%)
40% price reduction 4.6 9.4 7.1 6.8 9.9 4.6 7.1
Free trial 7.7 –1.2 1.1 –6.5 –2.3 5.7 0.8
Initial discount –1.9 –4.1 5.6 –6.9 –3.2 4.3 –1.0
Loyalty points –3.2 –4.8 5.7 –0.2 3.1 –1.0 –0.1
No contract –1.3 –3.0 6.5 –3.6 –2.6 12.1 1.3
Pause or skip 2.8 –0.7 6.9 –5.5 –2.5 –2.6 –0.3
Referral scheme 0.7 0.0 3.8 –3.0 –0.2 1.1 0.4

Numbers in italics represent statistical significance (p < 0.1)

elasticity would have obviously been half (47 per cent) of UK adults having a TV
influenced by the artificial context of the & film subscription. To really understand
test environment, the value of these results what this is saying, one must examine the
lies in the relativistic comparison between nature of TV & film subscriptions. Most
the different industries. In general, the more are fixed contract, which in turn results in
a product/service is deemed a necessity, the better reported retention rates. However,
lower the price elasticity; in contrast, luxury the research showed fixed contract is not
items would be more sensitive to price. necessarily required for popularity; disruptor
This may explain why gym memberships brands such as Netflix and Amazon Video
and music subscriptions have higher price actually contribute disproportionately to the
elasticity as they may be deemed as more success of content and service subscriptions,
luxury goods. For example, with free music despite their no-contract format.
readily available, purchasing a subscription It is notable that in the market
in place of a freemium model could be seen landscaping, the greatest acquisition growth
as something of a luxury. was found for delivery service subscriptions
(3 per cent). Amazon Prime (the leading
delivery service subscription) itself also
Acquisition and retention levers offers a rolling contract rather than fixed
The influence of the subscription features contract. Figures reported in October 2018
was analysed using an ordinal logit regression, indicate that an estimated 26 per cent of UK
with the dependant variable being purchase adults are Amazon Prime members.5 When
likelihood. The analysis reveals price to be reported, this represented a ten-percentage
the only lever to have a significant impact point growth in around a year.6
on purchase likelihood across categories NPS is a widely accepted predictive
(Table 3). However, there is variation metric of growth, loyalty and retention.7 The
within categories; in TV & film ‘no contract’ RCT found the same benefits that drove
also has a significant effect on purchase purchase also push NPS, with the only lever
likelihood, while ‘pause or skip’ significantly affecting all industries being price (Table 4).
improves acquisition for food recipe Alongside price changes, ‘no contract’ was a
boxes. This provides support for tailored significant driver of NPS for TV & film and
subscription mechanics across industries. for food recipe boxes. It is possible that one
As seen in the population figures, content advantage of ‘no contract’ is that it removes
and service subscription are more widespread scheduled prompts regarding the contract
than product subscriptions, with around itself, such as renewal notices.

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Fosker and Cheung

Table 4: Impact of subscription benefits on NPS (retention) across industries

Delivery Gym Food recipe Health & Music TV & film Across industry
(%) (%) box (%) beauty (%) (%) (%) (%)
40% price reduction 8.1 13.0 10.8 12.0 19.1 7.2 11.7
Free trial 12.0 –11.1 7.4 –6.8 0.6 7.8 1.6
Initial discount 0.3 –16.3 9.2 –4.6 –6.9 5.2 –2.2
Loyalty points 3.7 –13.0 9.7 3.8 10.6 –8.2 1.1
No contract –0.7 –0.7 9.5 –5.4 0.0 20.7 3.9
Pause or skip 6.0 –8.9 10.5 –9.2 –1.5 –8.3 –1.9
Referral scheme 3.5 –9.6 7.5 –9.2 1.5 3.8 –0.4

Numbers in italics represent statistical significance (p < 0.1)

The research found food recipe boxes result, few other promotional tactics have
to be a challenging category, having lower been shown to drive acquisition. The
uptake and slower growth. Food recipe only additional significant levers were ‘no
boxes offer some of the advantages of contract’ on TV & film subscriptions and
content subscriptions; for example, there ‘pause or skip’ on food recipe boxes. These
are usually a variety of options on offer, levers also drive retention (NPS), alongside
giving the customer greater control over the ‘no contract’, ‘loyalty points’ and ‘initial
products consumed. Not only this, but the discount’ for food recipe boxes. For brands,
consumption of the product is also regular, the study offers a number of implications,
perhaps reducing that visceral impact of as discussed below.
a new delivery serving as a reminder that
a payment will be taken. Food recipe
Acquisition drivers needs to demonstrate value
boxes appear to offer one of the largest
opportunities in terms of viable promotion Given the prominence of price in the
tactics — the NPS of food recipe boxes is subscription market, it is no surprise to
affected by a wider variety of levers than see those promotion features offering
other subscription industries; specifically, tangible monetary value prevail in driving
‘initial discount’, ‘no contract’, ‘loyalty acquisition. While ‘free trial’ is close to
points’ and ‘pause or skip’ all significantly significance in boosting acquisition rate
increase NPS. in supermarket delivery in the RCTs,
Not all levers were positively received; anecdotal evidence from other industries
for example, ‘initial discount’ has a such as content subscription has also
significant negative effect on NPS for gym implicated its impact. Alternatively, brands
memberships. It could be that given the might consider offering an ‘initial discount’,
price range in the industry, such discounts as this showed leverage on retention for
serve to highlight the profit margins during food recipe boxes in the study.
non-discounted membership. This chimes As ever, it is paramount for brands to
with the higher price elasticity of the carry out customer lifetime value (CLV)
industry. calculations,8 robustly evaluating each of
these tactics through the lens of acquisition
costs (eg promotion, discount) and retention
CONCLUSION rate, and to make a decision on which
This study shows that the subscription tactic to adopt based on the expected value.
market is highly price-sensitive. As a Indeed, the approach would also inform any

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 Pricing and proposition testing in subscription economies

decision on the depth of discount to apply lack of intrinsic demand and underlying
within a promotion tactic. that, the redundancy of purchase
destinations and the substitutability of
the product itself. For instance, many of
No contract should be central in any the products offered (eg food, grooming
subscription business model
goods), or their close equivalents, could
In the research, ‘no contract’ has shown also be bought from other retail outlets.
to drive acquisition and retention in TV A unique selling point is as important as
& film and is close to significance in ever. The innovation could either come
acquisition for food delivery boxes. Beyond from the service/product itself or in the
this ‘no contract’ also increases retention for customer journey/experience. With
food delivery boxes. In practice, disrupter the ever-increasing options available
brands such as Netflix and Spotify, which to consumers, the inertia of being in a
offer no-contract subscriptions, continue to subscription alone will not be enough to
perform strongly against incumbents.9 retain their business.
Overall, for marketers, it is obvious
that highlighting the lack of commitment
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