so tell them haters cut it out like a coupon

Some businesses sell stuff a la carte; in fact, most do. You offer a number of thingamabobs for sale of varying quality and price, and hopefully enough people buy enough thingamabob that revenues exceed costs. There’s nothing wrong with this model, exactly; but if I were starting a business today, it wouldn’t be what I do.

I would try to turn customers into bonds.

Bonds, from an investor’s perspective, have key desirable properties – they offer regular, predictable, reliable payments. If you own a portfolio of solid bonds, barring a large and sweeping crisis, you can probably plan confidently for a large chunk of future.

For a company, then, if they can turn your unpredictable, lumpy purchases into a steady stream of predictable income, they also gain similarly. Many, if not most, of the businesses that have come to define the modern landscape do exactly this.

The obvious answer is Netflix, but in that realm there is also Hulu and Redbox; in music, Pandora, Spotify, and Grooveshark want you to subscribe. Amazon has Prime, and also individual product subscriptions, and also owns Audible, which wants you to subscribe to audiobooks. Dropbox is a must, and plenty of people subscribe to Evernote Premium as well. Feedly does it, as does Instapaper. LinkedIn does it. Zipcar and Car2Go want you to pay monthly for access. Apple, the king of a la carte selling, has iCloud. Shoot, even my local bikeshare system wants me to subscribe. And this says nothing about your friendly neighborhood broadband and cellular providers.

This isn’t earthshaking, exactly, but it’s worth examining why this model is taking off. It’s not new – it’s how newspapers and magazines, ironically, have stayed afloat for decades and now can’t seem to continue as free content floods the intertubes. But there are key reasons that now is the The Big Moment for subscriptions. Credit and debit cards are a big one – everybody has them, everybody uses them all the time. The internet is another, both from the consumer and producer standpoint. And these combine to produce interesting effects. Essentially, these services can give you the satisfying illusion of freeness – after the first instance, you never have to perform the act of payment again. Even if I only watch 3-4 Netflix movies a month, somehow it feels much more painful to individually rent those movies from Blockbuster, Vudu, iTunes, etc then it does to just watch them on Netflix. There are also concrete upsides, of course, like freeing oneself from the mental grip of the sunk cost fallacy – if you paid $5 to rent a movie that turns out to suck, you’re going to hold out a lot longer then if you just clicked it on Netflix.

The model also makes sense because so many of the firms I listed above have high fixed costs but low marginal costs, meaning that precisely metering access isn’t profit-maximizing. It’s also why many of them can so liberally give away sample service or even permanent not-quite-premium service to so many people.

There is also the bank-shot variation of this model, where you give it all away to  “customers” who then provide you with a steady, reliable stream of eyeballs, and then you sell those eyeballs to advertisers. I will not patronize you by listing the beneficiaries of this model.

These models have the downsides, compared to actual bonds, of being less reliable and predictable relative to actual bonds:

aol-netflix-march2013

Note both the brief stagnation and even decline of Netflix subscribers in the Qwikster-House of Cards interregnum; also note the large, secular decline of people paying monthly for crappy email and browser services.

But if you can make it work as a business, this model offers huge advantages over the boring old-school model of just selling unit-by-unit stuff; for the consumer, it remains to be seen. God knows I am paying a startling share of my income in monthly subscriptions, and certainly it feels more painless then it would to buy a lot of this stuff unit-by-unit; but is it actually saving me money, or just mental anguish? And is saving the latter worth spending the former?

Concluding note: I was surprised to learn yesterday that a business idea I pitched to Mrs. Rooted yesterday turned out to totally already exist and be called Tile; the one difference, of course, is that I pitched it as a subscription service whereas Tile is a la carte. Hmmm…

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