they realize that everything is more profitable for the companies if you can transform everything
to some form of subscription service to this Vision we're removing from ownership to access
we're not buying things anymore we're not buying products we're not buying stuff we don't buy DVDs
instead of we subscribe to services like Spotify we don't really buy software and
install it and deal with the servers instead we subscribe to things like Salesforce and Google
how far can this business model go can this really go to the entire economy let me ask you a question
how many subscriptions do you have probably too many to count right don't worry most people do
and there's a very good reason why the amount of subscription service companies has exploded in the
past decade but the question is why it might make sense to have a gym subscription and streaming
movies is much more convenient than buying DVDs individually but now there are companies that will
sell a subscription to basically everything you can buy a subscription to cars shaving equipment
groceries video games plane tickets and even a place to live you can get a subscription for
that literally every product every digital product you could ever want any physical thing you could
ever want there is literally a subscription service for that BMW recently rolled out a
new subscription service that lets you turn on the heated seats in the luxury car you just purchased
from them a startup here in San Francisco is offering 1 600 a month co-living subscription
which gives you walk-in to walk out access to co-living and working spaces around the world a
service that has become a big hit with digital Nomads I don't want to make the argument that
subscriptions are an evil conspiracy designed to make sure you never own anything see The
Triangle Man We Came Here For answers I suppose there's no harm in Walking you through our plan
for world domination those of you who watch my channel regularly will know that I like to take
a more level-headed approach so that you can make up your own mind truthfully most of these
businesses are just following what people want a lot of these Services I use myself and really
enjoy but the average person is now spending 273 dollars a month on subscriptions and at the same
time less than one-third of them could afford a one thousand dollar expense without going into
debt this is a lot of money and this is the new form of getting money from people so it's time to
learn how money Works to find out how everything became a subscription this week's lesson was made
possible by raycon this holiday I was spending a lot of my time in transit and needed to keep
up with my favorite podcaster Patrick Boyle the problem is that when you're in a loud airplane
and surrounded by noisy family trying to stay focused on what you're listening to is hard
fortunately I had my raycons with me with optimized gel tips for the perfect in-ear fit
these earbuds are so comfortable and they will not budge trust me they also offer eight hours
of play time and a 32 hour battery life they are priced just right giving you the quality at half
the price of other premium audio brands raycons also come with noise isolation and awareness
modes noise isolation allows me to block outside noise and noise awareness lets me listen to my
music or podcast while also hearing what's going on around me upgrade your audio game this new year
by purchasing yourself a pair of raycons click on the link in the description box or go to buy
raycon.com hmw to get 15 off your acon purchase the simple reason that everything has suddenly
become a subscription is because investors love companies with a subscription service especially
in the tech space the next question then is why do investors love this business model so
much there are four reasons reason number one is that it makes expensive products easier to sell if
Netflix was to become a one-time purchase product it would cost at least two thousand dollars for
the basic ad-free plan based on discounted cash flows which is fancy investor speak for the
present value of the recurring subscription some other people simply called the time value of money
money now is worth more than money in the future because money now can be reinvested to make more
money and money in the future will also be worth less thanks to inflation by doing some math we can
work out that the value of a monthly subscription that a user keeps paying forever is worth about
two thousand dollars you can roughly verify this because if Netflix got that money up front
and was able to reinvest it in the market they would receive a risk-adjusted return of roughly
one hundred dollars per year which is roughly how much they would make from charging a subscription
an upfront business model also has the benefit of putting the money into Netflix's account upfront
so they wouldn't have to worry about people canceling their subscriptions which their average
user only keeps for around 50 months the problem is that not many people would pay two thousand
dollars up front for Netflix especially back when it was a new company today people would still be
unlikely to buy a one-time Netflix plan at that price because as an investment it would take 20
years to pay off I don't think so it's better for everybody for the investors to take responsibility
for the long-term payoff because well that's the reason that investors invest in the first place
reason number two that investors love subscription businesses is that it makes business easier to
operate and scale a subscription business has consistent Revenue coming in every single month
but a business that makes its money from direct sales is going to have good months and bad months
businesses with the best economics are subscription businesses because there's this low
um you know cost to acquired the user and then you're making money in a recurring Revenue basis
on that existing sunk cost it's very hard to ramp up or ramp down expenses quickly in a company so a
few bad months that a direct sales business didn't see coming can force them to cut the expenses
that they can get rid of quickly by stopping new projects and laying off staff this can hurt morale
and stop the business growth and development that would have come from those projects and workers
single sale businesses can avoid these problems by keeping more cash on hand but that cash is
coming from investors who would prefer to be used to grow the business subscription businesses still
have their ups and downs but their income is much smoother since the bulk of their revenue doesn't
rely on making new sales to new customers every single time predictable Revenue means that the
company can plan their expenses further in advance and they don't need to keep lots of
cash around to protect them from a bad quarter so instead the money could be reinvested into
growing the business but above all reoccurring sales of products or Services breed familiarity
trust and routine people are far more likely to stick with something that they just trust to do
the job even when there's a far better option available the third reason that investors love
subscriptions is because it gives businesses an ongoing relationship with a pool of customers this
one is pretty straightforward if a customer buys something once then a business won't be able to
collect data about how they use their product or services like they would if that customer
had an account that they use to access an ongoing subscription this lets businesses tailor products
based on user data and also lets them sell new services to an ongoing pool of customers if they
develop a new product the final reason that investors love subscriptions is because other
investors love subscriptions Venture Capital firms are responsible for giving us most of
the big subscription platforms that are slowly taking over the world today these investors work
by making early investments into companies so that they can expand their operations and acquire their
first customers a lot of these companies lose money for a very long time to grow as quickly
as possible because they know their business model only works if they grow to enormous sizes this has
become to be known in the Venture Capital space as Blitz scaling Venture Capital firms do not want
to own these companies forever they eventually want to sell them to either private Equity or
retail investors through an IPO so that they can raise money to invest in more new Ventures
to hopefully repeat the process all over again a venture capitals firm's customers are not the
people buying subscriptions to the companies they invest in their customers are the investors that
will buy their companies once they have got them to scale and since their customer wants
subscription businesses that's what they make just because something works for investors doesn't mean
that it's a good thing for everybody and there are reasons that we should be worried about the
subscription occasion of everything but there are also some good things that come from it and in
the interest of having a well-rounded discussion I want to start with those subscriptions are simply
a great way to try a product without committing to a large purchase which could be difficult to
return anywhere from a hundred dollars to a few thousand or more and that doesn't always work
for your audience's budget with a subscription they can spread that cost across multiple months
making it easier to fit into their spending plan if companies rely on subscription Revenue
then they will need to constantly update their product so their subscribers don't just shift
their subscription to a competitor Adobe Photoshop used to be available to buy as a one-time purchase
it came on a CD and you could pick it up at Radio Shack for about 350 dollars which was very
expensive at the time once you had it that was it you never had to pay for it ever again but that
was the version of Photoshop you would use until you went out to buy the updated copy for another
350 dollars today you can't buy Photoshop directly you can only subscribe to it but in return you'll
get constant updates and new features for less than you would end up spending on updating the
software every three years using those old CDs and in return Adobe gets a constant Revenue stream and
the opportunity to try and sell you their complete software bundle for forty dollars a month but now
for the reason we should be worried the the first is simply how much it ends up costing
if a one-time purchase of the most basic Netflix package would cost two thousand dollars then it
might sound downright responsible to break this up into a 10 a month subscription but if the
alternative was purchasing content directly then absolutely nobody would buy the entire Netflix
Library subscription Services package a lot of features that you wouldn't buy out right and they
get away with it because ten dollars a month is a much easier purchase to make than two thousand
dollars once the average person is now spending nearly 300 a month on subscriptions according to
a study by Wes Monroe a technology consulting firm this number only measures technology subscriptions
so old school subscriptions like gym or Club memberships would not be included in this total
at a time when a majority of people cannot afford a thousand dollar expense three hundred dollars is
going to financially hurt a lot of people perhaps without them even knowing about it the same study
found that most people underestimated how much they were spending on subscriptions by 133
dollars a month or around fifteen hundred dollars a year enough to more than double most people save
a lot of subscription Services intentionally take advantage of this by intentionally limiting
contact with customers that they detect are no longer using their services and hope that they
will just forget about their subscription and keep on paying it without ever looking at every
single last expense on their credit card at the end of the month this has the potential to lock
low-income households into a spiral of paying for subscriptions to everything they use because they
never have the cash to purchase things directly now honestly this is an extreme case and most
of these companies are offering a non-essential service so at some point people do need to take
responsibility for their own personal spending where that point is I'll let you decide what
we may not get a choice in though is companies pushing subscriptions into products that really
don't need to be subscriptions by now you may have heard about BMW trying to charge
its customers 18 a month to access the heated seat function in their cars in South Korea
it seems the future of course is some subscription nightmare the reason the company did this was that
luxury car manufacturers make a lot of money from optional extras like heated seats in their cars
for high-end models It's Not Unusual to add 50 or more of the car sale price into optional extras
alone the problem is that differently option cars are very hard to deal with on a mass production
line and it's much cheaper to manufacture cars if they are all the same what manufacturers do to
make this easier and cheaper is build all of the vehicles with heated seats and most other options
installed if the customer did not choose heated seats as an optional extra the dealer will just
deactivate the feature in the car's computer before handing over the keys this effectively
makes a feature like a heated seat a software purchase and software is the best type of product
to turn into a subscription BMW is not alone either lots of other car manufacturers including
Toyota have announced plans to introduce paid subscriptions to unlock features that are already
physically installed on the car that you paid for if car manufacturers are allowed to do this they
will because their investors will demand that they do because of how much money there is to be made
from subscription Services some companies have even spoken about removing their products from
sale and only offering them through a subscription service this might be okay for a non-essential
piece of software with lots of competitive Alternatives but if this continues to gain
popularity in industries that people rely on like cars or housing there are some nasty implications
like could a company ban you from your car or your house if this has all got you a bit worried then
this next part is really important subscription Services have probably reached their Peak earlier
this year Netflix posted its first quarter ever with negative subscriber growth which wiped off
50 of the company's value since the beginning of the year you know with all of the account sharing
which we've always had that's not a new thing but when you add that up together we're getting pretty
high Market penetration and that combined with the competition is really you know what we think
is driving the lower acquisition subscription businesses are going to be much less popular
dealer in a higher interest rate investing environment because when interest payments
are due it becomes more important to have money now than it does to a potential stream
of money in the future customers are also getting smarter about tracking managing and
canceling their subscriptions and the third video streaming service is one of the first
things to get cut when money gets tight these companies are going to be in for a very tough
time and maybe they might start to wish they got their money up front but even if they do
fail it won't be the worst thing because trying to keep a sinking business afloat can cause worse
outcomes for all stakeholders to find out how go and watch my video on why good companies
should not last forever a special thanks again to raycon for making it possible for everybody
to keep on learning how money Works uh well then I'm sorry sir I cannot cancel your subscription
as much as I want to which is unfortunate as I'm noticing now because your annual billing payment
for 349.99 is about to renew tomorrow that's awful news and I don't want that