As the CEO of subscription management platform Zuora, Tzuo has been at the forefront of this economic shift for nearly two decades. Today, as the subscription model reaches maturity, companies are grappling with evolving consumer expectations, the specter of subscription fatigue, and the need for more sophisticated monetization strategies.

The key to success in the subscription economy, according to Tzuo, is creating an “essential” relationship with the customer. “Don’t focus on the sale, focus on the ongoing relationship,” he told PYMNTS CEO Karen Webster. “Earn the right to establish an ongoing relationship slowly over time.”

This shift in mindset requires companies to think beyond traditional transactional models. Tzuo pointed to the example of a coffee subscription service that’s exploring ways to better understand customer habits.

“They’re asking questions like, ‘Do we sell you a coffee maker? Do we sell you a grinder?’” he said. “Are there other things that we can do to help understand what your coffee habits are and deliver you actually what you need where you don’t have to think about it anymore?”

By focusing on the broader need — in this case, fresh ground coffee every morning — companies can create a more valuable and sticky relationship with their customers. This approach also opens up opportunities for expanded services and revenue streams.

Limits of ‘Everything as a Service’

While Tzuo believes that “anything could be a service,” he acknowledged that there are challenges in making certain products and industries subscription-friendly. The key is understanding the underlying need that the product or service fulfills.

Tzuo cited examples of heavy equipment manufacturers like Caterpillar and John Deere embracing subscription models. “Are you really interested in the excavator? Or are you just trying to move some dirt?” he asked. By reframing the value proposition, these companies can offer more flexible, service-oriented solutions.

Even seemingly unlikely candidates for subscription, like flooring, are being reimagined. Tzuo mentioned a company developing a “smart floor” that could measure foot traffic for retail or public spaces. “These are companies that are really saying, ‘Look, just pay us a subscription fee and we’ll make sure that the carpets are always clean and good,’” he said.

However, the challenge lies in finding a large enough market to make these niche services sustainable. As Tzuo noted, “There’s a riddle of there being a big enough market to make a service sustainable.”

Regulation and Industry Standards

As the subscription economy matures, calls for increased regulation have grown louder. The Federal Trade Commission (FTC) has expressed interest in further regulating the space, particularly around issues of transparency and ease of cancellation.

Tzuo sees potential benefits in some regulation, particularly in establishing trust and reducing friction for consumers. “Anything that helps take friction out of the system or prevents a few bad apples from ruining everybody’s experiences … the more trust, the less friction, the better off we are,” he said.

However, Tzuo believes the industry could potentially self-regulate, pointing to examples like the PCI standards in the credit card industry. “If the industry does not want the government to do it, the industry should absolutely regulate it,” he said. “The more standards bodies, the more people come together and seal of approvals, those are always good.”

The lack of industrywide standards may be partly due to the relative newness of the subscription economy. “When we started, Spotify didn’t exist. Uber didn’t exist. Netflix was not a streaming service,” Tzuo said. “A lot of these things are relatively new. Peloton is relatively new as well. So I think the time has come.”

Looking Ahead: Future of Subscriptions

As the subscription economy approaches its third decade, Tzuo remains bullish on its prospects. He dismisses concerns about “subscription fatigue,” instead seeing a market that’s becoming more sophisticated and competitive.

“What we’re seeing certainly is there’s been a wave of companies that were able to take advantage of this business model, but now competition is higher,” Tzuo said. “Consumer expectations are greater. And so I think you’re gonna see the sophistication level go much higher.”

Tzuo predicted that successful companies will focus on giving customers more choice and flexibility. “This is about letting them manage their own lives and manage their own needs and manage their own subscriptions,” he said. This may lead to a pendulum swing between bundled and unbundled offerings, as companies strive to meet diverse customer preferences.

The integration of artificial intelligence (AI) is also poised to play a big role in the evolution of subscription services. Tzuo sees AI driving more sophisticated pricing and engagement strategies, particularly in areas like metered usage and consumption-based models.

As the subscription economy continues to mature, the companies that can strike the right balance between choice and simplicity are likely to come out on top. “If I’m a consumer and I have a choice, do I want to buy and spend a lot of money on a physical product and deal with obsolescence, deal with ownership, or would I rather simply pay a fee that I can dial up when I need, dial down when I need, and give myself more flexibility?” Tzuo asked. “Of course, I’m going to opt for the latter.”

For Tzuo and the subscription economy he helped define, the journey from disruptive idea to economic mainstay is nearly complete. The next challenge will be navigating the complex landscape of consumer expectations, regulatory scrutiny, and technological innovation. As the subscription model enters its next phase, the companies that can deliver both value and flexibility are poised to thrive in this new economic paradigm.

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The opportunity is a sizable one, as 20% of the U.S. population is between the ages of 12 and 27. Gen Z is the cohort that everyone from retailers to real estate brokers wants as a customer. They’re digitally native — 26% more of the consumers in this cohort use apps to make retail purchases, PYMNTS Intelligence data shows.

Stuart knows whereof he speaks — he’s the father of 22-year-old triplets, newly out of college and just starting their professional careers. There’s no cookie-cutter approach to capturing their attention and carving out share of wallet, he cautioned. And from his vantage point, “In many ways, this generation is extremely different — certainly from my generation, but they are also very different than millennials.”

For starters, they are the only generation that grew up with digital-first technology basically from birth, where social media (found by PYMNTS Intelligence to be highly important to two-thirds of Gen Z individuals) and other online channels help inform their worldview — and how and where they shop. Stuart noted that in one recent transaction, his daughter chose a back massager through TikTok and is also looking for social media recommendations to help furnish her new apartment.

There’s a flexibility, too, in how merchants must approach Gen Z consumers, said Stuart, who noted that, according to “Visa Insights Engine: 2024 Predictions,” 83% of shoppers still go to in-store settings during their commerce journeys. Research commissioned from Visa Acceptance Solutions and conducted through PYMNTS Intelligence has found that the “Click and Mortar” shopper has come back to malls and merchants, even if the actual transaction might happen on the device. Merchants must be agnostic as to where the sale happens, with a seamless continuum between the store and the website.

As to the seamless experience, he said, “there are lots of ways in which payments play into that.” He noted that with transactions made through Visa, the payment network’s Authorize.net service, or through digital wallets or buy now, pay later (BNPL) options, the goal is to meet these younger consumers where they are. With tap to pay, in addition, he said, “we’ve been able to take everybody’s mobile device and turn it into a payments terminal,” with 6.7 million active terminals, as of Visa March 2024 data. 

DoggieLawn: When They’ve Got to Go, They’ve Got to Go

Those young consumers’ tendencies to go online to shop, to get recommendations and, especially, to set up subscriptions, have proven to be a boon for DoggieLawn, a firm catering to pet owners through a strategy that incorporates all of those elements. The company sells indoor grass pads it calls an “environmentally friendly way” for dogs to do their business, without the odors or chemicals of artificial turf. 

Youn launched the company as a way to quit the corporate workaday. She said the principle behind the organic natural pee pad is simple.

“We ship out grass all over the nation to people who have dogs and who don’t have access to a backyard — and they need a solution,” she said. Having the DoggieLawn on a balcony or even indoors, she said, also is a natural extension of the daily walk, where our canine pals are already used to “going” outside on the grass.

The model is subscription-based, complete with free shipping and loyalty points.

Younger consumers, particularly Gen Z and millennials combined, represent a significant portion of DoggieLawn’s clientele — and its targeted audience.

Think, then, of the young adults who have flown the proverbial nest and now are starting off on their own, living in apartments in or out of school.

“You’ll have a lot of college students who are still Gen Z, but we expect that as they start to become professionals, they will have more discretionary income,” Youn said, “and they will become a larger segment of our customer base.”

Though DoggieLawn’s “primary channel” is its own site, the company also looks at where millennials and Gen Z consumers are shopping and where they are spending their time — not surprisingly, that’s Amazon, TikTok and Chewy.

“We try to be in different places where we know that there’s going to be clusters of people looking to purchase pet products,” Youn said. With that data on hand, the company can tailor its approach to the consumer. The main site promotes subscriptions; on the eCommerce sites, she said, the move is to try to introduce DoggieLawn and incentivize an initial purchase. The company also has videos and testimonials on social media channels embedded into its email communications with prospective customers, illustrating the cross-pollination of these points of engagement.

Appeal of Subscriptions

Nearly 40% of Gen Z consumers have subscriptions, which Youn said makes them a natural fit for DoggieLawn, as the pads eventually become “essential” to everyday pet ownership, and to setting a routine for the dog.  

With a nod to the final piece of the puzzle, the transactions, Stuart noted, “When it comes to the payment side of working with these Gen Z consumers, there is a lot of work that has to be done in terms of marketing to these folks, retaining them and growing your business.”

Stuart said the subscription model sports the least friction-filled option in commerce, due to recurring billing, and the ability to keep cards on file — while tokenizing those credentials, too, making those transactions safer and preventing failures when credentials or addresses have changed. Reordering is made easy, while firms control their costs through direct sales and streamlining returns.

For Visa, “We don’t make companies like Natalie’s have to hold on to that consumer information, and have challenges with data security.”

As Stuart said, “Payments, in many ways, should be the very last thing you should have to think about.”

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By the Numbers

“Walmart+ Week 2024,” a new PYMNTS Intelligence report, digs into consumer trends regarding subscriptions and purchases during Walmart+ Week, drawing on a survey of more that 7,700 respondents in late June.

The study revealed that, overall, roughly 30% of consumers subscribe to or have access to a Walmart+ account, and among those subscribers, the vast majority — 87% — also have an Amazon Prime account.

That share rises by more than 50% when looking specifically at millennials, of whom 47% hold or have access to a Walmart+ account, and 90% of those also have access to a Prime Membership.

In contrast, baby boomers and seniors are the least likely to hold paid Walmart+ subscriptions, with only 15% of those in this age bracket doing so. Yet that is not to say that these older consumers are strangers to retail subscriptions. The majority — six in 10 — of them hold at least one Amazon Prime or Walmart+ subscription.

The Data in Context

“Walmart+ continued to grow double digits as members engage with us more frequently and spend more than other customers,” Walmart CFO John David Rainey told analysts on the retail giant’s most recent earnings call in May.

CEO of Walmart U.S. John Furner added that the program “is an important part of what we do,” and improving fulfillment has been key to growing the program.

Amazon, meanwhile, is seeing its Prime membership prove a key priority internationally, a make-or-break factor for success as it continues its global expansion.

“We’ve launched 10 new countries in the last seven years. Each of those has its own particular trajectory on profitability. The first thing we see there is having a good customer experience, having people sign up for Prime,” CFO Brian Olsavsky told analysts in April. “ … Then work on our cost structure as we get scale, ad advertising and other things. And eventually, what we see is a break-even countries breakeven, and then they make … [a] positive contribution to the international segment.”

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The new collaboration, announced Wednesday (June 26), is designed to recover failed transactions and eliminate involuntary churn for subscription customers.

With this expansion, FlexPay will offer Spreedly customers its Advanced Vault, a solution designed to increase transaction success rates, reduce the overall cost of managing payment vaults, and improve the end customers’ experience.

“We work closely with our subscription customers to employ new financial metrics better to connect the results of retention initiatives to profitability,” said Charles Weiss, vice president of engineering at FlexPay. “Part of that story is the long-standing relationship with Spreedly that drives more value for our customers by taking away much of the integration complexity found in most payment stacks.”

Daniel Scagnelli, Spreedly’s senior vice president of client services, added: “Partnering with other innovative payments technology providers like FlexPay further increases the value we can bring to merchants globally. There is powerful alignment in our vision to unlock choice among PSPs, fraud tools, and other innovative payment services to improve customer experience, lower churn, and improve lifetime value.”

As PYMNTS reporting and research has shown, failed payments are a continual challenge for merchants. For example, “Fraud Management, False Declines and Improved Profitability,” a PYMNTS Intelligence and Nuvei collaboration, found that 11% of transactions processed by the average eCommerce firm failed in the past year.

However, “few merchants have a clear understanding of the underlying causes,” PYMNTS wrote earlier this year. “In fact, over 80% cite difficulty in pinpointing the causes of failed payments as a major challenge, with nearly 64% ranking it as their top challenge.”

Meanwhile, PYMNTS spoke late last month with Peter Doughterty, Spreedly’s president, who said a steady diet of data and a willingness to shift when necessary will be the keys to success amid a shift in consumer spending patterns.

“As a savvy business operator, flexibility to make pivots is super important to run a great business,” Dougherty said. “Having access to data to make those decisions, but also having the flexibility to pivot and bring new products to market is key.”

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The new plan, set to be unveiled later this year, will charge users at least $5 per month more, Bloomberg News reported Tuesday (June 11), citing a source familiar with the matter.

That source said this updated plan would offer access to better audio, as well as new tools for managing song libraries and building playlists.

According to the report, Spotify is set to position the new offering as an add-on for existing customers. It lets most users remain on their current Spotify plans, but customers who opt to upgrade will generate additional revenue for the company and its partners.

Bloomberg’s source said the new offering’s pricing will depend on each user’s base plan but will average out to about a 40% increase.

PYMNTS has contacted Spotify for comment but has not yet gotten a reply.

The news comes a little more than a week after Spotify said it was increasing prices for its premium plans in the U.S. to let it invest in product features.

Starting immediately for new subscribers and next month for existing subscribers, the new prices for the plans are $11.99 for Individual (up from $10.99), $16.99 for Duo (up from $14.99), $19.99 for Family (up from $16.99).

“So that we can continue to invest in and innovate on our product features and bring users the best experience, we occasionally update our prices,” Spotify said on its blog.

This announcement came about six weeks after Spotify said on an earnings call that this will be a “year of monetization” after seeing gains in revenue growth, margin expansion and efficiency.

Also on the call, Spotify CEO Daniel Ek stressed the platform’s value enhancements and consumer satisfaction as rationale for the — then still rumored — price increases.

“[…] We think consumers like what they’re seeing from Spotify,” Ek said on the call. “They love the offering, and they feel that the value that they’re getting is more than fair.”

But in spite of consumers’ embrace of streaming, “the competitive pricing approach is not without risks,” PYMNTS wrote last month.

Data from PYMNTS Intelligence’s report, “The One-Stop Bill Pay Playbook: Drivers of Consumers’ Bill Payment Priorities” shows that streaming subscriptions are often the first things to go when consumers face financial constraints.

“Specifically, more than half of respondents indicated they would cancel streaming subscriptions to reduce monthly bills, surpassing any other service,” PYMNTS wrote. “Only 17% expressed a preference for paying streaming bills over other expenses.”

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With the addition of PayLink Manage, financial institutions can enable their account holders to view and make real-time changes to all their recurring payments — all within their banking app, the company said in a Tuesday (May 21) press release.

“We’re confident that within a few years subscription management will become a must-have feature in any leading consumer banking application,” Jordan Wright, co-founder and CEO of Atomic, said in the release.

Atomic’s technology provides a unified experience where users can view all their recurring payments, including subscriptions and bills for things like streaming services, phone and internet plans, auto insurance, rent and mortgage payments, according to the release.

Its direct connectivity provides users with access to insights into usage data, plan details, itemized receipts and other subscription information, the release said.

In addition to viewing their recurring payments, users can take real-time actions on them, helping them find ways to save money, per the release.

The new PayLink Manage leverages Atomic’s technology used in other solutions that connect consumer data to financial solutions by allowing access to payroll, human resources information systems (HRIS) and merchant systems, according to the release.

“With this launch, we are extending our trusted, robust connectivity framework to subscription management, providing financial institutions with a tool to enhance customer engagement and improve retention by helping people take action to improve their financial outcomes,” Andrea Martone, chief product officer at Atomic, said in the release.

In another recent entry into this space, Visa said in April that it launched a subscription manager service that financial institutions can provide to Visa cardholders.

Visa’s service provides a single place where consumers can see where their card details are stored, view recurring payments attributed to their card and stop recurring payments.

In March, Mastercard said that it is piloting a subscription management solution that financial institutions can add to their consumer banking offerings.

Mastercard’s Smart Subscriptions solution enables consumers to cancel, pause and resume their subscriptions; analyze and categorize their spending; see upcoming bills; and receive personalized offers from merchants.

Smart Subscriptions is being piloted in the United States and is expected to be launched in other markets later this year.

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“What we’re seeing is that people are willing to pay even more to learn a language through generative AI,” Matt Skaruppa, chief financial officer at Duolingo, told the Wall Street Journal (WSJ) in an interview posted Friday (May 10).

Duolingo, which offers a language-learning app, also reported a 45% increase in revenue during a quarter in which other online learning companies reported declines in sales, according to the report.

The company’s Duolingo Max is a premium subscription tier that offers AI-generated feedback and conversations in various languages.

Duolingo aims to use generative AI to create a “human-like tutor experience,” the WSJ report said. It currently offers Duolingo Max, which is powered by OpenAI GPT-4 technology, in six countries for those learning Spanish and French, but it plans to add more languages.

Skaruppa told the WSJ that GenAI helps keep users engaged and helps build word of mouth, which is how Duolingo gets most of its new customers, per the report.

Duolingo has also found that GenAI has enabled it to accelerate its production of content. On some projects, the technology has reduced development time from five years to three months, the report said.

It was reported in January that Duolingo cut about 10% of its contractors due to its use of generative AI to create content, as it was shifting tasks from staff to AI tools. 

At the same time, no full-time Duolingo employees were affected by the move, and many now use AI tools in their work.

The company now uses AI to generate scripts for language-teaching shows, making use of the technology’s ability to create text, speech and images quickly.

“We just no longer need as many people to do the type of work some of these contractors were doing,” a Duolingo spokesperson told Bloomberg in January.

Duolingo has also used AI, together with data gleaned from marketing campaigns, to learn more about its audiences and increase the utility of its platform for those audiences.

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The free tier for the company’s app was added in May 2023 to attract new customers but was dropped within the last few weeks after failing to convert these new users into paid subscribers, CNBC reported Monday (April 15).

People who already signed up for the tier will continue to have access to it, but new users will be able to choose from only two paid options — at $12.99 per month and $24 a month — after a seven-day free trial, according to the report.

The app was designed to provide an option for potential customers who were interested in the brand but balked at the cost of its fitness equipment, the report said. The free tier for the app was meant to encourage customers to sign up for the app, enjoy the content and then move up to a paid tier that offers additional content.

However, by last November, Peloton found that this option was engaging and retaining fewer subscribers than the company had expected, per the report. Executives determined that the offer of limited free trial would be more likely to accomplish those goals.

When announcing the company’s earnings in November, Peloton CEO Barry McCarthy said the free version of the app had been downloaded more than 1 million times, with limited marketing support.

“The bad news is we were less successful at engaging and retaining free users and converting them to paying memberships than we expected,” McCarthy said at the time.

By the time of its February earnings call, Peloton was rolling out new solutions to drive subscription growth.

These include a business-to-business (B2B) program designed to capture businesses’ corporate wellness spending, and a partnership with social media platform TikTok that aims to grow engagement with younger consumers.

“Corporate wellness … is having a moment in corporate America for sure, where companies are investing at the margin increasingly in fitness, nutrition, mental wellness, and I think we’re well positioned to participate in that,” McCarthy said at the time.

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A new service by subscription dog treat company BarkBox aims to end that situation for pet lovers who can afford it.

As Bloomberg News reported Friday (April 12), Bark Air lets dog owners reserve flights on Gulfstream 550 private jets, with all members of the family traveling in the main cabin. 

According to the report, the airline will offer weekly flights from New York to Los Angeles — and LA to NY — as well as twice monthly flights from New York to London, with fares starting at $6,000 one-way on the transcontinental U.S. flights—a ticket includes a seat for one person plus one dog—plus $8,000 one-way on the New York to London route.

The first flights — on jets owned and operated by charter company Talon Air — will take off May 23, with dogs allowed to sit anywhere in the cabin. Flights offer a dog-specific menu with delicacies such as “dog Champagne” (chicken broth), and someday include an onboard play area resembling a dog park.

“We’ll find out if this is a service that the world wants and values,” Matt Meeker, Bark’s co-founder and CEO, told Bloomberg. “If not, we’re going to have a heck of a time finding out.”

Regardless of whether dog owners want Bark’s specific offering, recent reporting by PYMNTS shows that pet parents value services that treat their four-legged friends like part of the family.

These feelings are being harnessed by companies like Synchrony, whose CareCredit earlier this year launched a collaboration with Destination Pet, a provider of veterinary care and pet services. It involves offering CareCredit’s financing solution at Destination Pet locations across the country, for things like boarding, daycare, grooming, veterinary care and pet resorts.  

“In our conversations with the executive team at Destination Pet — their customers are asking for it,” Jonathan Wainberg, GM of Synchrony’s pet business, told PYMNTS in January. 

“People are still bringing pets into their family and at increased rates. And they are spending more,” Wainberg said.  

Backing up this assertion is data showing that in 2022, the global pet care market reached $235.32 billion and is expected to reach $368.88 billion by 2030. 

“These figures clearly indicate why Synchrony is seeking to expand its market share in the industry,” PYMNTS wrote.

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According to The IFPI Global Music Report, revenues from recorded music worldwide were up 10.2% last year to $28.6 billion, surpassing 2022’s 9% increase and marking the ninth consecutive year of growth.

The main driver behind the revenue spike was paid music streaming subscriptions, which were up 11.2% last year. The number of paid subscribers exceeded 500 million for the first time, reaching 667 million accounts worldwide.

This news comes as music to the ears of record company executives, artists and others in the industry. But it also suggests digital music providers such as Spotify can be thankful they don’t have to deal with the many challenges other retailers must juggle when working to meet the needs of their subscriber base.

Make no mistake, retail subscriptions can be profitable. A PYMNTS Intelligence study revealed that 30% of retail subscribers generate 79% of total revenue across the retail subscription space. One retailer alone, Chewy, recently reported that its autoship subscription program was responsible for generating about $8.5 billion in customer sales throughout 2023.

Not only can retail subscription plans prove profitable, they are also an effective way to keep customers happy. PYMNTS Intelligence’s “The Replenish Economy: A Household Supply Deep Dive” report found about 42% of retail subscribers were able to minimize trips to their preferred stores because those retailers offered online subscriptions that met customer needs.

But keeping those customers happy can be challenging.

As PYMNTS Intelligence found in compiling “The Retail Subscription Features That Make Top-Performing Merchants,” “[retail] subscribers who complete most or all their shopping via scheduled delivery and/or automatic refills are a lucrative but demanding group of customers.”

The report is based on surveys of 2,011 consumers and nearly 200 merchants and provides a comprehensive overview of what today’s subscribers look for in subscription services.

For starters, consumers who are scheduled subscription shoppers (those who mostly shop via pre-scheduled and automatic refill subscriptions; roughly 26% of respondents) expect a smooth payment experience. In fact, they are much more likely than other consumer segments to cancel subscriptions should any payment-related problems arise.

For instance, if a merchant doesn’t offer a buy now, pay later (BNPL) option, these subscribers are around 3 percentage points more likely to cancel. They are also more likely to walk away if a merchant fails to notify them that a failed payment will result in a missed delivery, or if they encounter any friction when updating their accounts.

This segment also expects hassle-free refunds. After all, the reason most sign up for pre-scheduled deliveries is because they anticipate effortless shipments, and they believe frictionless returns are part of that package.

Another type of subscription shoppers are online at-will shoppers. They make up 43% of the retail subscriber community and typically complete their at-will shopping online. For this segment, timing is crucial. Most will wait to purchase items when needed. And one-quarter of them will cancel a subscription if it fails to offer pause or skip options, which enable consumers to temporarily pause a subscription for any reason or skip an order before its delivered.

The third segment, accounting for 31% of subscription shoppers, are in-store shoppers. They mainly shop in brick-and-mortar locations despite having online retail subscriptions. The reason? Respondents said they enjoy the thrill of the hunt. They want to explore potential purchases in person and control product selection whenever possible.

As the image above shows, product selection is especially important to in-store retail subscribers. They are six times more likely to cite it, and easier browsing, as key components to their shopping experience.

Not all merchants offer the features subscribers want, but PYMNTS Intelligence identifies the features the highest-rated retailers offer.

For instance, 100% of top performers give subscribers the option to pause or skip (only 20% of the lowest-ranked merchants do the same). Ninety-seven percent of top performers provide product details and the ability to alter the frequency of deliveries (60% and 10% of bottom performers, respectively, do the same). Guarantees and refunds are also offered by 97% of top performers (while 17% of bottom performers do).

One thing these findings make clear is that subscription providers — whether they operate in the retail space, the entertainment industry, or another market entirely — can’t take their subscribers for granted.

As PYMNTS Intelligence data found, subscribers are keenly aware that today’s subscription landscape is highly competitive and full of entrepreneurs looking to earn their business. If providers want to keep sustaining growth, they will need to clear the bar that subscribers set.

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