The secret sauce for successful subscription business models


Customer acquisition costs are rising. At the same time, consumer brand loyalty is falling. Case in point, according to Statistas 2014 brand loyalty survey, loyalty does not exceed 50% in any major consumer category, ranging from the 47% of men who are loyal to a specific smartphone/tablet manufacturer to the 16% of female apparel shoppers who identify themselves as brand loyal.

This has created a dilemma for manufacturers and retailers. Convincing consumers to make an initial purchase is a difficult proposition. Driving these same fickle customers to make subsequent purchases is no easier. In response, an increasing number of merchants have turned to a long-standing business model, subscriptions, as their prescription for securing repeat orders and maximizing customer lifetime value.

Subscription pure-plays like Birchbox and Dollar Shave Club have clearly disrupted their sectors. This has forced (or encouraged) incumbent competitors like retailer Sephora and brand manufacturer Gillette to counter with their own subscription programs. Even an unlikely entrant such as HP has introduced their Instant Ink subscription program to intercept customers from competing sales channels. And Amazon, as always, is a player in the subscription game. Their Subscribe & Save program offers discounted subscription options on tens of thousands of products.

Subscription models have proven wildly successful for a number of brands, however they are not foolproof and come with their own set of challenges that must be overcome in order to achieve the level of customer engagement necessary to win and retain customers.

Ingredients of Successful Subscription programs

Convenience, Novelty, Value Whether its making customers lives a little bit easier, introducing them to new products, or simply saving them money, all successful subscription programs must nail at least one, if not two, of these attributes. Demonstrating long-term value can be a difficult proposition, but well cover this in the points below.

Free Shipping & Returns Very few subscription programs charge separate shipping and handling fees. This has become the price of doing business, so shipping/return costs need to be factored into the subscription price.

No Long-term Commitments For years, wireless companies have locked customers into binding contracts, in exchange for subsidized hardware, and those companies have some of the lowest customer satisfaction and highest churn rates of any industry. Allowing customers to cancel their subscription at any time opens up a risk for product companies, but the alternative is to create a barrier to enrollment that is difficult to overcome.

Replenishment Options When it comes to ordering consumables, there is a persistent consumer fear of ordering too much or too little. Perishable food and beverage subscriptions add another wrinkle, with the need to carefully time shipments around customer availability. This creates a number of scenarios that can trigger a cancellation, so providing customers with the flexibility to expedite a replacement order, select a specific delivery date, or skip a month (via self-service tools or proactive reminders) is a must. Interestingly, HP has solved this problem by tapping into the Internet of Things. Their internet-connected printers can detect current ink levels, and when linked to an Instant Ink account can either trigger an order or indicate that no monthly shipment is needed.

Incentivizing Subscribers – Theres nothing more frustrating to a loyal customer than an offer thats available to new customers only.” This is a particularly thorny issue for Consumer Packaged Goods (CPG) companies, with direct-to-consumer ambitions. For better or worse, many CPG companies have trained their customers to expect coupons, bonus packaging, or other incentives to drive purchases. These promotional models mostly exclude subscription customers. To combat this, CPG companies in particular need to go beyond the convenience of home delivery.

Providing subscribers the ability to apply offline discounts/coupons to their online accounts is a viable, but flawed solution that places an unnecessary burden on the customer and can erode margins. A more novel approach, and one that is not being widely used currently, is the creation of subscriber-only incentive programs. Running in conjunction with, or parallel to, existing loyalty programs, subscription providers, regardless of vertical, can enable programs, which intermittently reward subscribers for their continued business. This subscriber-centric approach can also combat the subscription fatigue that is a major factor in subscriber churn.

B2B and Subscriptions

The opportunity for B2B companies to introduce subscription programs is enormous and largely untapped outside of the SaaS industry. Many B2B customer relationships already function as pseudo-subscriptions, with customers replenishing stock of a similar product mix on a regular basis. These types of relationships can fairly easily be adapted to subscription models, with accommodations made to account for business-specific processes (e.g. approvals and purchase orders) and customer touch points to keep the salesforce involved. By enabling subscriptions, B2B companies can take another step toward delivering the consumer-like experiences their customers have come to demand.

Randy Kohl
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December 28, 2015
Randy Kohl

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