It’s a services world: How $1.99 a month can help a company reap millions
With the announcement of Nest’s acquisition by Google for $3.2 billion last week, the entire technology industry was thrown into hypergear deliberating why there was such a high price placed on something that appeared to be so simple.
It's only a thermostat after all, right? Wrong.
Nest helps consumers control the most energy-guzzling aspects of your home – heating and air conditioning – which accounts for 56 percent of the average home’s energy consumption. What made the Nest acquisition so appealing was its ties to this mandatory service. It provides a product that is so closely embedded into the consumer’s life that it was an appealing acquisition for any mega corporation that wants to take advantage of the thing that powers everything – electricity.
Now add $1.99 per month subscription to connect Nest to Google services, and you’ve opened a lot more consumers to replacing their “ugly” thermostat, rather than paying the upfront $249 Nest one-off purchase cost. Which could allow Nest to work its way into millions of homes; this means that 56% of all electricity used, the monthly service that we all are forced to pay, will largely be monitored and controlled by one of the most powerful companies in the world: Google.
Google has done extensively well to take expensive products and turning them into a service, often for free. For example, Google’s acquisition of analytics company Urchin Software Corporation in 2005 turned a very high-dollar offering to a free service for website owners. Google is transforming an industry formerly dominated by Microsoft with the launch of Google Drive, free for most and offered at a low monthly fee for businesses, replaces the need for Word, Excel and the rest of the antiquated one-off software offerings.
This is indicative of a shift from one-off product sales to services that will become essential to our everyday lives, things that we will pay for over and over again. In an age when consumers would balk at being forced to pay $120 for a year’s worth of music streaming, they are happy to have their money taken away dollar-by-dollar at a $10 a month clip. Whether it’s more than $1,200 a year on an iPhone plan or a monthly subscription for home delivered products and services, it’s time for Silicon Valley to realize we have reached the age of leasing, not buying things.
Welcome to the age of services. With every new app and product that debuts, entrepreneurs now more than ever need to take into consideration the value proposition of getting consumers quickly on the “titty” (as a great quote from the TV series "House of Cards" so bluntly put it).
This means instead of selling a one-off item a monthly or yearly subscription model needs to be baked into even the simplest of concepts. Subscription-based services have taken over, letting consumers subscribe to everything from kids’ craft supplies for around $20 a month to licenses for software priograms, which can run around $75 per month. From digital children’s books, to even gadget-driven offerings, the world has shifted to deferred payments for ultimate consumer satisfaction. Big-ticket items are going to the way-side in lieu of purchases.
Much of this shift has to do with up-and-coming generations that have a bent for instant gratification at a bargain price (or even free). They want the $1.99 a month subscription for music, with on-demand video for $9.99. The Internet has made it possible to lease rather than buy, which large companies have done for decades to better balance their books. Depreciation on large equipment (cars, planes, buildings, etc.) is better if you can match it with consumption. Now technology has made it feasible for the average Joe to do the same.
This generation may never really own a thing in their life. Long gone are days of saving up to buy something when you have credit cards and layaway plans await. Instant consumerism is the driving force, and subscription services lead the way.
Many types of startups have embraced and are succeeding with subscription models:
Apps -- they have two basic models: freeium and paid. Paid is usually a one-off, and freeium apps often offer subscriptions with their upsells. Children's books can be rented monthly through apps like Farfaria. Subscriptions providing new recipes every month or week could be built into the latest cookbook app. The list and possibilities are endless.
Hardware -- Phones are leased from AT&T and Verizon, which reduces a user’s upfront cost and allows more consumers to get a device that would otherwise require a large upfront payment. In the near future, instead of selling the Pebble Smart Watch at $199.00, a year contract with the device could cost, say, $59.99 to start with a monthly subscription running $9.99 a month.
Entertainment -- iTunes sales are down as streaming services like Spotify rise up to take its place. According to Nielsen Soundscan, digital track sales dropped 5.7 percent in 2013, the first time digital sales have dropped since the iTunes Store opened.
Games – Who buys boxed games anymore? Games were one of the first to embrace services. World of Warcraft and the like all had their monthly fees in tact before this new wave ever was a even a bubble in the ocean of consumerism.
Food/Home -- Turning a simple task into a service powered by technology is expected to be a major trend in 2014. Take Nature Box for an example. No longer do we need to worry about buying healthy snacks, they can now be delivered to your home monthly for $19.95. Need razors? There are multiple subscription services to deliver them to your door every month on time, like Dollar Shave Club. Doing your laundry a hassle? FlyCleaners will let you schedule pick up and drop off at your leisure. Pressed and folded. Need treats for your dog? Barkbox has you covered. Can't forget about Fido after all. These are just a few examples from the endless world of possibilities.
Health -- Personal trainers are now video pipped to your home for a monthly cost via services like Wello. MyFitnessPal will keep your health in check for $5.99 a month. Who needs a gym? Personal trainers can cost upwards of $500.00 a month and premium gym memberships can run around $70 a month, so why would you want to leave the house when you have fitness options at your fingertips for a lower cost?
Clothing -- Who wants to rent a shoe or a dress? Apparently a lot of people.Thousands have flocked to the latest trend of clothing and accessory rentals. Handbag rental programs like Bag Borrow or Steal let users hold that must-have designer bag for the month. With ShoeDazzle, a monthly $39.95 fee for its VIP Elite Membership gets you credit toward a pair of shoes every month – and you get to keep them when you’re done.
Software -- SaaS (Software as a service) has been a staple, but now everyone is getting in on the game with offerings like Adobe's Creative Cloud for $39.99 a month vs. its $2,000.00-plus Creative Suite of old. These new offerings get SaaS consumers on the monthly subscription merry-go-round.
Every month these services are tapping into the wealth, or at least perceived wealth, of consumers around the world. Where do all these service options leave entrepreneurs? With an opportunity to engage with a consumer base that is primed for the picking. They are now accustomed to paying a small amount monthly for services, which just a few years ago they had no idea they needed. With startups like Lyft, Uber and Zipcar leading the trend of on-demand need fulfillment, the next generation of startups need to strongly take into consideration this trend or be passed up by others who are adopting this lease-instead-of-own business model with open arms.
Welcome to the age of services. How will you serve?
[Image via Thinkstock]