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Do Subscriptions Make Sense?

7/30/2022

by David Hagenbuch - professor of Marketing at Messiah University -
author of Honorable Influence - founder of Mindful Marketing

“That’s the gift that keeps on giving the whole year”—such was Cousin Eddie’s inane attempt in Christmas Vacation to console a devastated Clark Griswold after he found out his firm gave him a Jelly of the Month Club membership instead of a generous cash bonus. Clark had good reason to resent receiving a product subscription, but how should consumers feel about more companies moving to subscription models?

If you’re like most people, you’ve noticed a steady rise in reoccurring payments. Decades ago, monthly bills were restricted to things like rent and utilities, but they’ve since expanded to include regular charges for cellphone plans, movie streaming, and online news. And, the list keeps getting longer, as even more organizations find opportunities to automatically tap their consumers’ wallets for things like clothing (e.g., Stitch Fix), meal kits (e.g., HelloFresh), and shaving tools (e.g., Harry’s).

These examples aren’t particularly surprising—each day people wear clothes, eat food, and shave their bodies, so it makes sense to automate the purchase process and save consumers time shopping for such staples. However, subscription services for some other products should make any of us wonder, ‘Why?’

For example, BMW has begun to offer “heated seat subscriptions” in certain vehicles for $18 a month. According to James Vincent, writing for The Verge, “BMW has slowly been putting features behind subscriptions since 2020.” The automaker’s other reoccurring charges include automatic high beams and adaptive cruise control.

There’s also sneaker maker Cloudneo, which offers a “100% recyclable running shoe that’s only available by subscription.” For $29.99 a month, customers receive “an endless supply of shoes.” When pairs are past their useful lives, customers request new ones while returning their old ones, which the company grinds down and melts into plastic pellets used in its new product manufacturing.

These last two examples and several of those mentioned earlier are innovative approaches that reimagine marketing’s 4 Ps. All share strategic similarities as they fall under the subscription umbrella, but there also are significant and sometimes unsettling differences that make me want to better understand: When is subscription pricing right for both companies and consumers?

To answer this question, I turned to someone who has navigated the challenging process of transitioning his company’s signature product from a one-time purchase to a monthly subscription. Jason Kichline is founder and chief technology officer of OnSong, namesake of one of the world’s most widely used music performance apps. It allows musicians to digitally store, sort, and customize their music, saving them time and enabling them to focus on what they do best.

An annual guest speaker in my capstone marketing course, Kichline has told us of his firm’s deliberations about transitioning the OnSong app from a one-time Apple App Store purchase to a monthly subscription. OnSong started to offer a feature-enhanced, subscription version of its product a couple of years ago. This past June, OnSong finalized the monumental move by eliminating the one-time purchase option.

For many companies, the decision to go to full sail on a subscription model is simply a matter of what nets the most money, i.e., will more revenue from reoccurring payments offset sales not realized from potential customers who want a one-time purchase?

Although OnSong certainly considered income projections, it’s analysis was much more circumspect and other-oriented, which is evident as Kichline explains three main reasons for the move:

1. Relationships: “We’ve always placed a high value on supporting our users. A complex and full-featured app like OnSong demands a level of support that goes beyond that of a one-time purchase. A subscription creates the opportunity for a more formal relationship with users and the need to continually provide them with value. Our goal is to make our customers incredibly happy with the level of service, support, and features we offer.”

2. Continuity: “Although OnSong has been successful for more than 10 years, many software firms don’t last as long—they go out of business, or they’re acquired. A developer can keep an app around for a long time for some side money or an owner’s salary, but a buyer typically wants ROI. For this reason, new owners turn many one-time-purchase apps into subscriptions and try to ‘leverage’ the existing user base.”

“Even though app customers often assume they’ll be forced to upgrade to a subscription, we didn’t feel it was fair, so we grandfathered existing users.” Still, because going out of business also leaves customers stranded, we believe that subscribing to OnSong is the best path forward for all. A subscription to OnSong is an investment in the company and its product’s future.”

3. Value-Added: “The defining measure for most consumers is what they receive compared to what they pay. Although a subscription costs more than a one-time purchase over time, it also provides greater benefits, including important updates and improvements in an ever-changing technological environment. A cancelable subscription also reduces financial risk for consumers by allowing for product trial, which is often not possible with one-time software purchases.”

“Looking to the future, OnSong wants to provide a web-based version of the app that will store music and resources in the cloud, as well as manage bands and teams. A subscription model supports this additional functionality and added value.”

Kichline acknowledges that the transition to a subscription model has not been without challenges, which include effective communication with consumers, who can be swayed by public perceptions in social media.

Still, the change has been a good one for OnSong and its customers. After experiencing one “tight month,” the company’s revenues quickly rebounded to previous levels with continuing growth. That success should also be taken as a sign of the strength of OnSong’s value proposition in the eyes of consumers—the benefits they receive from the app are well-worth its reoccurring cost.

For Kichline, key to the whole process has been “having the mind of the consumer.” His analysis above and this summary statement make me ask: Do the subscriptions for BMW’s heated seats and Coudneo’s recyclable running shoes show an understanding of “the mind of the consumer” and a desire to truly meet customers’ needs?

Cloudneo’s product subscription may represent such a market orientation for certain hardcore runners who cycle through sneakers at a rapid clip. They might wear out a pair of running shoes every few months and could easily spend $360 or more per year on performance footwear.

BMW’s subscription is harder to justify. In his Verge article mentioned above, Vince raises good points that call into question the automaker’s motives:

“BMW owners already have all the necessary components [for the heated seats], but BMW has simply placed a software block on their functionality that buyers then have to pay to remove. For some software features that might lead to ongoing expenses for the carmaker (like automated traffic camera alerts, for example), charging a subscription seems more reasonable. But that’s not an issue for heated seats.”

When BMW manufactures vehicles with heated seats, it likely passes on the added material and labor costs to consumers at the time of purchase. So, the automaker is essentially holding back a feature for which customers have already paid so it can charge twice for what is an increasingly common new car addition. Such a motive certainly wouldn’t represent a customer-centric attitude.

As BMW has shown, there are situations in which paying a reoccurring fee for a product makes little sense for consumers. However, when companies prioritize the three principles that Kichline has identified (relationships, continuity, and value-added), subscription pricing is “Mindful Marketing.”

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Cultures of Corruption

7/16/2022

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by David Hagenbuch - professor of Marketing at Messiah University -
author of Honorable Influence - founder of Mindful Marketing

“Auditors Cheated on Ethics Exams”—a recent New York Times headline revealed. During my 20-plus years teaching college ethics courses, my students and I have sometimes joked about that kind of thing, inferring that of all places, an ethics class is one deserving of absolute integrity. Who would cheat on ethics?— apparently plenty of people in one of the world’s largest accounting firms, but why?

The company that found itself the focus of the humiliating headline was none other than Ernst & Young (EY)—one of the Big Four public accounting firms. The Security and Exchange Commission (S.E.C.) reported that between 2017 and 2021, hundreds of EY employees acted unfairly either by using an ill-gotten answer key for an ethics component of the CPA exam or by cheating on ethics tests required for continuing education.

As punishment for the systematic abuses, the S.E.C. fined EY $100 million, “the largest ever imposed by the Securities and Exchange Commission against a firm in the auditing business” and “twice the sum that KPMG, another big auditing firm, paid in 2019 to resolve an investigation into similar allegations of cheating by auditors on internal training exams.” That’s a significant sum; although, it's almost immaterial for a firm with global revenues of $40 billion in 2021.

What made EY’s, and KPMG’s, infractions all-the-more incredible is that they involved the firms’ auditing personnel—the very people who are supposed to ensure that the financial statements of the organizations they audit are accurate and truthful, i.e., that they aren’t cheating!

What would lead people reputed as among the most moral in one of the most ethical professions to make such a breach of integrity?

As one who hopes to help calibrate the moral compasses of the next generation of business leaders, this question hits close to home. Nearly 90 percent of the students in my undergraduate ethics course are accounting majors, and most look to land jobs in public accounting. In fact, some go on to work for Big Four firms.

Although I couldn’t say that these emerging accounting professionals are any more or less moral than those entering other fields, it’s important to note the common public perception that Gallup polls often capture: Accountants are among the most ethical professionals, having moral standards that are much higher than those in many other fields, including marketing.

All this to say, there are many reasons why I’d really like to understand how a moral breach of the magnitude of EY’s happens. Given that EY personnel likely would not want to comment on the case, I reached out to an expert in the field, who was willing to offer his perspective.

A professor of accounting and public accounting firm partner, Jim Krimmel taught auditing and other advanced accounting courses at Messiah University for more than 30 years, while employing the same best practices with his own firms’ clients. Krimmel is also certified in fraud examination and financial forensics, he’s served as an expert witness in accounting-related court cases, and he has conducted fraud workshops internationally.

As someone well-qualified to assess integrity in the field, Krimmel shared these thoughts about EY’s ethical violations:

“The story amazed me when I read it. If this was not so outrageous, it would almost be funny. The extent of the cheating, those who participated and those who let it continue, demonstrates to me a cultural problem in EY that is bigger than this issue.”

“That kind of culture, as with any firm culture, begins at the top. Somehow, those in authority ‘signaled’ that this behavior was acceptable. My concern now goes beyond this incident and makes me question the greater integrity of the firm. If we now begin to hear rationalization for this behavior, then that only increases my concern.”

“Corporate culture will be developed one way or another. If we don't purposely direct and develop it as leaders, then by default, it will develop poorly. This better be a wake-up-call for EY.”

Krimmel’s assessment was eye-opening for me. When moral infractions occur, we usually focus on the individual and their actions—what specifically did they do and why? Those are very important questions, but they can needlessly narrow the focus of analysis and risk overlooking systemic causes, i.e., broader influences on everyone taking similar actions.

The complexity reminds me of a framework from social psychology I used in my dissertation research: The theory of planned behavior (TPB) suggests that people’s intended actions stem from three factors: 1) their own attitude toward the behavior (their thoughts and feelings about it), 2) their perceived control over the behavior (e.g., abilities and resources to do it), and 3) social influence on them (i.e., others encouraging or discouraging the behavior).

As members of a family, work team, or society, most of us want to be true to our personal beliefs and be accepted by others—Whether it’s the clothing we wear or things we say, we typically don’t want to look or sound so different that we disaffect the people we respect.

The “culture” Krimmel mentions exemplifies that need for acceptance and fits squarely in the third component of the TPB. As he suggests, company leaders bear special responsibility for shaping the cultures of the organizations they guide, for instance, by the policies they set, by the behaviors they celebrate or censure, and by their own actions.

It’s that last way that makes all of us moral leaders, regardless of any formal leadership title. We all ‘lead by example’ and constantly take cues from others for what to do or say in all kinds of social settings—I certainly do.

When I’m going out with my wife, I sometimes look to see what she’s wearing to gauge whether I should dress more formally or more casually. In a work meeting, I may look around the conference room table and decide to close my laptop if I see that others have closed theirs.

Those are easy, nonmoral choices. Ethical decisions are often more difficult and consequential, which likely makes social influence even more significant.

Imagine a newly hired staff accountant at EY who, among other things, is tasked with studying for and passing each part of the CPA exam so they can begin billing more hours. Chances are slim that the young associate would independently decide to risk their reputation and employment by cheating on part of the industry-standard certification, but if they know that others in their organization are taking such liberties and the company's culture endorses such abuse, they’ll be more likely to do the same.

Unfortunately for EY, there’s even more evidence to support that its culture has encouraged crookedness. A recent New York Times article described how consultants from the firm “devised an elaborate arrangement” to enable Perrigo, a leading pharmaceutical company, to dodge federal income taxes of over $100 million. When the original auditors from BDO balked at the setup, Perrigo moved its auditing to EY. The new EY auditors “blessed the transactions, which federal authorities now claim were shams.”

Regrettably over the years, plenty of other toxic company cultures have also precipitated major business scandals, e.g., Enron, Arthur Andersen, Lehman Brothers, Wells Fargo . . . the list goes on. Ousting an embattled CEO might make regulators and others feel better, but as Morgen Witzel maintains in writing for Mint, the bad business behavior usually stems from a much larger issue of rotten corporate culture:

“In many other cases, though, the seeds of failure stem from deep inside the company, its values and its culture. Those seeds sometimes lie dormant for years, even decades.”

Witzel acknowledges that fixing a corrupt corporate culture is a far-from-easy, long-term proposition. However, among several sensible suggestions, he offers organizations two critical challenges:

View customer as “partners in value creation . . .with needs and wants that can be satisfied” and not as “cash cows to be milked in order to boost the earnings figures for the quarterly report”
Have a “higher purpose connected with customer service and societal benefit” and don't exist “merely to make money”

Do people make poor moral decisions in the absence of social influence? Certainly; most of us probably have. However, it’s undoubtedly more likely that an individual will choose a wrong path if others they know encourage them to take it. Moreover, when a person is immersed in a culture that normalizes bad behavior, they might not even realize that what they’re doing is wrong.

To keep itself on the right path, some of the most important marketing any organization can do is internal marketing: ensuring that its own people’s vocational needs are met and with it, promoting a positive corporate culture that encourages ethical actions and condemns immoral ones.

Like many decisions we make, our ethical choices often occur with input from others, whether they realize it or not, which makes it all-the-more important for each of us to model morality everywhere, including in the organizations in which we serve.

Companies should constantly evaluate how strongly their corporate cultures embrace ethical actions. Those whose embrace is weak will be like EY, ultimately hurting themselves and their stakeholders as they chart a path of “Mindless Marketing.”

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Should AI Impersonate People?

7/1/2022

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by David Hagenbuch - professor of Marketing at Messiah University -
author of Honorable Influence - founder of Mindful Marketing

“Imitation is the sincerest form of flattery”—it is a high compliment when people respect someone’s work enough to replicate it. But, when one of the world’s largest companies’ smart speakers start imitating people’s voices, has flattery drifted into deceit?

It’s difficult to keep pace with innovation in artificial intelligence (AI), but one particular advance that's certainly worth attention is the impending ability of Amazon’s Alexa to mimic voices. After hearing no more than a minute of audio, the smart speaker reportedly will be able to deliver a plausible impersonation.

Alexa’s voice is apparently one that appeals to a very large number of consumers: A 2021 Statista study showed that Alexa was the most widely used assistant across four of six age demographics. So, why would Amazon want to mess with the sound that’s helped it sell so many smart speakers?

According to Amazon senior vice president Rohit Prasad, the change “is about making memories last,” particularly remembrances of those who’ve passed.

In many ways that motive makes the voice mimicking technology seem like a great idea. For those who have lost loved ones, one of the greatest blessings would be to hear their dearly departed’s voice again.

Since my father passed away last August, I’ve thought several times how nice it would be to talk with him again—to hear his opinion about the latest news, to ask him questions that only he could answer.

On a lighter side and also related to Alexa’s voice imitation, I’ve always enjoyed good impressionists. It’s fun to hear comedians who can act and sound like famous people. One of my favorites is Frank Caliendo, who is best known for impressions of famous sports figures; his John Madden and Charles Barkley impressions are great!

Frank Caliendo impersonating John Madden on the Late Show with David Letterman

So, I can see why Alexa doing impressions of people we knew and loved could be popular. However, AI impersonations should also give us pause for at least four reasons:

1. More than a voice: Of course, just because someone, or something, sounds like a person we know, doesn’t mean they are that person. Every individual is a unique curation of beliefs, affections, and experiences that influence what they say and even how they say things.

Frank Caliendo may sound like Charles Barkley, but he obviously isn’t the NBA legend and popular sports broadcaster. Consequently, Caliendo can never truly say what Barkley would say and neither can AI. Only a person knows what they themself would say.

2. Respect for the deceased: Per the previous point, if AI speaks for anyone, beyond playing back a recording of them speaking, it’s putting words in that person’s mouth. A living person could conceivably give such permission, but how would a dead person do the same, short of adding some kind of addendum to their last will and testament, allowing AI impersonation?

I’m not sure it would be fair to ask anyone before their passing to give a smart speaker carte blanche use of their voice. As hard as it is to let go of people we loved, it’s something we must do. The longer we’d allow AI to speak for a loved one, the greater the probability that the technology would say things to tarnish their memory.

3. Vulnerable consumers: Given how good machines already are at imitating life, it will likely become increasingly easy for techno fakes to fool us. However, there are certain groups of people who are at much greater risk of being duped than the average individual, namely children and older people.

It’s scary to think how those with heinous motives might use AI voice imitation to make young children believe they’re hearing the words of a trusted parent, grandparent, etc. Similarly, the Mindful Marketing article, “Preying on Older People” described how senior citizens are already frequent targets of phone scammers pretending to be someone they’re not. AI voice imitation could open the flood gates for such abuse.

4. Distorting the truth: Thanks to fake news, native advertising, deepfake video and the like, the line between what’s real and what’s not is becoming more and more difficult to discern. University of Maryland professor of psychology Arie Kruglanski warns that a truthless future is not a sustainable one:

“Voluminous research in psychology, my own field of study, has shown that the idea of truth is key to humans interacting normally with the world and other people in it. Humans need to believe that there is truth in order to maintain relationships, institutions and society.”

“In the extreme, a lost sense of reality is a defining feature of psychosis, a major mental illness. A society that has lost its shared reality is also unwell.”

While examples of the innovation in imitation are fascinating, it’s concerning that in the not-too-distant future, fakes may become undetectable. At that point, it seems like our world will be well on the path to what Kruglanski forewarned: ‘losing its sense of reality’ and becoming ‘unwell.’

In the 1994 movie Speed, Sandra Bullock and Keanu Reeves try to stop a city bus that’s triggered to explode if it drops below 50 mph. AI deception can feel like that runaway bus, barreling forward with no way to stop it or even slow it down.

However, large corporations like Amazon share the driver’s seat and have some control over the AI vehicle. Although having them put the brakes on innovation may be too much to ask, they can at least integrate some forms of notification to clearly indicate when people are seeing/hearing a fake and not the real thing.

Even with such notifications, Alexa’s application of voice impersonation is wrought with potential for abuse. For the four reasons outlined above, Amazon should shutter plans for its smart speaker to imitate people and thereby avoid talk of “Single-Minded Marketing.”

Subscribe to Mindful Matters blog.
Learn more about the Mindful Matrix.
Check out Mindful Marketing Ads and Vote your Mind!

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Do Subscriptions Make Sense?

Cultures of Corruption

Should AI Impersonate People?

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