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Overview

Subscription services like Netflix and Spotify have grown from small-scale offerings to a major part of the global economy.

These platforms have altered consumer behavior by shifting the focus from one-time purchases to ongoing, personalized experiences.

Source

Forbes article, “Subscription Service Model: How to Build a Profitable Business” by Cheryl Robinson.

Key Focus

Examines how subscription platforms use tiered pricing and exclusive content to influence market dynamics, boost retention, and drive long-term growth.

It also explores the economic principles behind their strategies, including price discrimination, market segmentation, and the use of data analytics to adapt to changing consumer demands.

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Comparative Analysis of Subscription Service Models

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Comparative Analysis of Subscription Service Models

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Current Situation:

Market Dynamics: Subscription services like Netflix and Spotify dominate the entertainment and music industries, leveraging tiered pricing and exclusive content to retain users.

Consumer Behavior: Today's consumers seek experiences and community, leading to lower churn rates and higher brand loyalty through subscription models.

Past Scenario:

Traditional Sales Model: Prior to the rise of subscription services, consumers purchased products outright (e.g., DVDs, CDs), leading to one-time transactions with no ongoing relationship.

Impact on Retention: The traditional model resulted in higher churn rates as customers had no incentive to return after purchase, contrasting with the continuous engagement seen in subscription models today.

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Real-World Examples and Expert Viewpoints

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Real-World Examples and Expert Viewpoints

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Expert Viewpoint:

Dr. Cheryl Robinson emphasizes that the key to a thriving subscription business is its ability to adapt and create continuous value, fostering a strong sense of community among subscribers .

Real-World Examples:

Netflix: Implemented tiered pricing strategies to cater to different consumer segments, offering ad-supported plans for cost-sensitive users while maintaining premium ad-free experiences for loyal customers .

Spotify: Utilizes marketing techniques like free trials and student discounts to attract younger audiences, showcasing premium features to convert trial users into long-term subscribers .

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Market Failures and Unintended Consequences

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Market Failures and Unintended Consequences

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1. Inequality and inequity of consumers: Platforms like Netflix and Spotify use tiered pricing, as described in the article, to attract different customer segments. Some customers are forced to use ad-subscriptions, or can't afford subscriptions which used to be free for the public (radio, tv, free spotify version)

2. Unequal access: There is unequal access to media in this new era of streaming, with customers having to pay a subscription to watch their favorite sports team, or signing up for a free subscription that can auto-renew as a paid subscription

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Externalities:

Negative societal costs, such as increased screen addiction and reduced productivity, result in welfare loss not reflected in equilibrium models.

These externalities shift social welfare curves but are invisible in basic supply-demand graphs. Positive externalities are also not represented in standard equilibrium models.

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The Positive Externality of Subscription Sharing:

Subscription sharing is when multiple users are able to access and pay under one subscription account.

There is more marginal social benefit while users have to pay less money per person. As mentioned in the article, subscription services are cracking down on this method due to loss of profits and margins.

Subscription sharing increases overall utility without additional cost to the individuals involved.

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Negative externality:

One of the largest consequences of subscriptions and media consumption is the over-usage of screen time in young adults.

Screen time is increasing, as mentioned in the article, and subscriptions such as Netflix, Spotify, and Youtube TV contribute to this.

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Consumers: Benefit from access to content but may face financial barriers due to tiered pricing.

Streaming Platforms: Gain predictable revenue, but must balance pricing models to avoid alienating consumers.

Content Creators: Rely on streaming platforms for exposure but may sacrifice creative freedom for marketability.

Advertisers: Benefit from ad-supported models but face challenges targeting specific users.

Regulators: Oversee market fairness, consumer protection, and competition.

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Positive: To optimize revenue, subscription services like Netflix and Spotify employ tiered pricing and targeted marketing. Price sensitivity and content preferences are used to segment the consumer base.

Normative: Should all income levels have equal access to material through subscription models? Is it possible for platforms to maintain profitability while addressing externalities like screen addiction?

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Efficiency: While over-segmentation may result in inefficiencies, tiered pricing effectively maximizes revenue.
Equity: Because premium material is mostly available to higher-income individuals, wealth inequities continue to exist.
Impacts on Distribution: While lower-income groups could only have access to basic services, wealthier consumers enjoy access to premium material, which exacerbates inequality.

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Control Pricing Models: offering discounts or subsidies to lower-income customers to guarantee affordable access.
Address Externalities: Encourage people to log their screen time and to consume media in a responsible manner.
Promote Competition: Uphold antitrust rules to promote equitable pricing and a variety of content.

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1. Adverse Selection

Tiered models mitigate issues like account sharing by aligning costs with user behavior.

2. Market Segmentation

Platforms expand reach through differentiated pricing for ad-supported and premium users.

3. Pricing Strategies

Elasticity-driven pricing optimizes revenue and broadens market appeal.

4. Competition & Elasticity

Substitutes like rival platforms influence consumer behavior and demand curves.

5. Gains from Trade

Niche content specialization maximizes consumer satisfaction and retention.

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Market Segmentation, Price Discrimination, and Demand Elasticity

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Market Segmentation, Price Discrimination, and Demand Elasticity

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Custom Plans: Platforms like Netflix and Spotify customize plans for different consumer groups.

Examples:

Netflix: Premium ad-free tiers vs. ad-supported affordable plans.

Spotify: Student discounts for younger, price-sensitive users to build loyalty.

Economic Benefits:

These strategies maximize consumer surplus by delivering value tailored to each segment’s willingness to pay.

Platforms also increase producer revenue by effectively pricing plans for both high-value and cost-sensitive customers.

Demand Elasticity:

Platforms adjust pricing based on how responsive consumers are to price changes:

Elastic Demand: Lower-priced tiers attract cost-sensitive consumers who are more likely to cancel if prices increase.

Inelastic Demand: Premium tiers appeal to customers less sensitive to price changes, offering exclusive content and convenience.