The subscription economy refers to offering a product or service to customers at a regular, recurring (usually monthly or annually) rate, instead of on a per-item-payment. Subscription services are nothing new, but with innovations in technology, companies like Spotify and Netflix are shaking up entire industries with their subscription-based business models.
Generally speaking, subscription-based models means access to more content for users. Instead of buying a DVD, a per-month payment gives you access to stream everything in Netflix’s library; rather than owning a single version of PhotoShop, the Adobe Creative Cloud gives users access to up-to-date versions of the Adobe Creative Suite. The subscription economy has changed the shape of business today – it means getting more, for less. Right?
Well, not exactly. There are two basic models for the these subscription services: Big Pool, and Subscriber Share. Most services use the Big Pool approach – and while it’s simple and straightforward, it also tends to draw a lot of criticism (and even boycotts from pop stars like Taylor Swift).
How the Big Pool Approach Works
The basic equation for most Big Pool Approach to subscriptions is:
- Revenue – platform fee = pool of money
- Pool of money ÷ subscriber usage = contributor earnings
While this might seem fair in theory, it plays out differently in practice, and creators aren’t always fairly compensated for their work. Let’s try an example:
- You pay $20 for a subscription to a digital artwork download site. The site keeps $10 for themselves, leaving $10 for the pool of money. $20 – $10 = $10.
- Imagine the entire site generates $1 million that month to share with creators, and say there are 2 million downloads in total. That would mean $0.50 per download.
- Say you download just one image that month. That download accounts for .00005% of the total downloads on the site that month, but is 100% of your usage.
- With big pool, the creator of that image gets just $0.50 for your download, even though your subscription brought in $10 available to share with creators.
“Imagine if physical records or downloads were sold in this manner: Instead of an artist getting money directly from the sale of their CD or mp3, it went into a giant pool, and the artist only got a percentage of the pool based on how often their music was actually played,” writes Sharky Laguana, in The real reason why the Spotify model is broken. “It’s conceivable an artist could sell thousands of records generating hundreds of thousands of dollars of revenue and still get a check for less than $10, with the majority of the money going to more popular artists.”
The Subscriber Share Model
In contrast, the Subscriber share model is based on the idea that subscription fees are paid out directly to the creators of the items used by each subscriber. Here’s how Envato Strategy and Marketing Manager, Xavier Russo, explains it in a recent Medium post:
“Subscriber share is an alternative way to calculate revenue share. The core idea is that a subscriber’s money should go to the contributors they actually use and value.
[For example], you pay $49/month, 50% going to platform costs and 50% to contributors (i.e. $24.50).
With subscriber share, all of it goes to items you used. And we split it among contributors based on their share of what you used… So if you download 10 items, then each item is 1/10 of your total usage, and the contributor of each gets $2.45. Taken to an extreme, if you only download 1 item, then that contributor gets the full $24.50.
The subscriber share model is more complicated to calculate than the traditional Big Pool Approach, but it leads to a fairer system for creators. Envato is implementing it for a new subscription-based product, Envato Elements, because we want our group of independent designers to be paid fairly for their work. Here’s a video from our team that explains the subscriber share model:
Subscriber share is a relatively new approach, and Envato is one of the first companies to use the subscriber share payout model at scale – Elements has been called ‘Netflix for designers‘. It’s a model we hope to see grow in the future, and expand to different industries and products over time.
Featured image: Catsence_.