Subscription services dominate people’s lives. Whether it’s using Spotify, which brings together millions of songs from various record labels, to listen to music, or Netflix to watch TV series from different production companies, the platforms are already part of the daily life of each. The most notable platforms generally offer online services, but in some countries subscriptions are emerging for new categories of products and services to be consumed offline. For example, in the United States, ClassPass offers subscribers access to a certain set of fitness facilities, while MealPal offers a membership for lunches at a number of restaurants.
The key to the success of these offline subscription platforms lies in: the presence of customers looking for variety in the targeted local market; recruit salespeople with a differentiated and little overlapping offer; and mitigate price competition between the platform and vendors, according to a recent article by Qiaoni Shiassistant professor at Bocconi University in Milan, and Esther Gal-Or (University of Pittsburgh).
Unlike online subscription platforms, such as Netflix, physical platforms are influenced by location. In fact, the document shows that the first important factor to consider is the local market condition. The market structure differs from city to city. For example, competition between suppliers may vary due to different transportation costs. In one market, consumers may like to visit different stores due to low transportation costs, but in other cities, people may only visit one or two nearby stores when transportation costs are high.
The paper recommends entering markets where sellers are differentiated. In these markets, consumers can benefit from the added variety. In addition, managers must also consider markets where competition between sellers is relatively low because in this case, the subscription contract is likely to attract new customers who are not active in the absence of the platform, allowing both parties to benefit from the surplus drawn from platform customers.
Another important issue is that the platforms do not manufacture products. By charging subscribers a flat fee, platforms provide services from all sorts of different sellers. Therefore, the platform and the sellers are in a dual relationship. On the one hand, they collaborate in the sense that the platform is going to help sellers to attract consumers, but at the same time, they also compete on price because that is how they attract a consumer to join them.
Shi and Gal-Or provide tools for platform managers to mitigate price competition between the platform and sellers. One is to negotiate an appropriate transfer fee per customer to pay the seller, and another limits the number of platform customers the seller serves.
Professor Shi also warns of the decline in the quality of the product offered by sellers. “When a vendor offers lower quality to platform customers compared to the quality they offer to their own direct customers,” she says, “the platform is forced to compete even more ferocious on prices.In the end, neither the platform nor the seller can take advantage of the situation.