Subscription business models: Start small, plan big, reap rewards
70% of organizations are deploying subscription business models to sell directly to consumers – thereby creating recurring revenue and customer loyalty.
After half a decade of more than 17% year over year growth, it’s clear that the direct-to-consumer (DTC) subscription commerce model is here to stay.
In fact, it’s projected that by 2023, up to 75% of DTC brands will offer subscriptions to their customers.
So, merchants who’ve been hesitant to embrace product or service subscriptions may want to give the idea a fresh look.
Rather than being a passing a fad, DTC subscriptions have proven to be a viable strategy for launching a new business or expanding an existing offering.
Hundreds of companies, like Birchbox, BarkBox, and Boxycharm, thrive using a purely subscription-based e-commerce model. And others, like Dollar Shave Club, TrunkClub and Plated, have been acquired by retail giants like Unilever, Nordstrom and Albertsons.
It’s easy to forget that Amazon was struggling against larger online marketplaces like eBay and major retail chains before the 2005 debut of its Prime subscription program, which “permanently raised the bar for convenience in online shopping.” It was Prime that helped propel Amazon to the front of the online retail pack by building customer loyalty, generating more revenue, and creating cross-sell and upsell opportunities.
And as consumers sought household basics and pantry staples at the start of the COVID-19 pandemic, 20% turned to subscription services to deliver the goods. In an economy where many retailers are struggling to maintain revenue, subscriptions can offer a lifeline.
Subscription commerce model: 3 types to drive growth, explained
So, how can your business get in on the subscriptions game? Let’s take a look at three popular subscription commerce models, their potential benefits, and what it takes to succeed.
There are three types of subscription commerce models:- Replenishment model
- Personalized model
- Special access model
The replenishment model
Replenishment subscriptions offer regular deliveries of must-haves like pet food, baby care items and personal grooming supplies—the kinds of things shoppers want to put on autopilot. Billie and Dollar Shave Club are two examples of personal care replenishment subscriptions.
The appeal of these plans is convenience—and the peace of mind that the items won’t get sold out in a run of panic buying.
Even without discount offers, these retailers win customers by focusing on ease of use.
For example, coffee subscription company Grounds & Hounds reported a 35% increase in monthly subscriptions as stay-at-home orders took effect, simply by emphasizing the service’s “savings, convenience and flexibility.”
The replenishment model makes it easy to maintain and grow a revenue stream based on regular repeat orders. And like the other models, it enables retailers to cross-sell or upsell to generate incremental revenue.
The personalized model
We know that personalization is becoming increasingly critical for shoppers (especially Millennials). This model begins by asking the customer about their needs, preferences, and other information to create a tailored, individual offering.
The retailer then offers personalized collections of products, or even custom-made products, on a recurring (monthly, bimonthly, quarterly) or on-demand basis.
Perhaps the best-known example of the personalized subscription commerce model is Stitch Fix, which went public in 2017 and is currently valued at $2.5 billion.
Customers answer questions about their style preferences, and the company curates personalized collections of clothing and accessories based on their answers.
Shipments are sent on a schedule the customer chooses, and customers can offer feedback to refine their collections. This kind of highly customized offering creates a strong connection between the customer and the company.
The special access model
The special access model delivers exclusive benefits to subscribers, like faster shipping and free delivery, special discounts from partners, and access to products that aren’t available elsewhere.
The best-known examples of this model are warehouse club Costco (which requires a membership to shop there and offers deals through a number of partners), and Amazon Prime, which offers free delivery and other perks for subscribers. Amazon Prime is so effective at getting customers to spend more—$1,400 per year by members, versus $600 per year by nonmembers—that Walmart is preparing to launch its own special access subscription service to compete.
5 benefits of a subscription commerce model
Developing a subscription offering does come with some unique challenges (supply chain management, customer experience and retention, managing customer acquisition costs).
But there are also specific benefits that a well-run subscription program can deliver:- Recurring revenue
Recurrent revenue can help a business stay viable during challenging and unpredictable times. A predictable revenue stream from subscriptions allows companies to plan budgets, make projections, and manage costs and expenses more effectively. Automated billing integrated into the checkout process offers convenience to customers and helps companies avoid revenue leakage. This feature can be as simple as a monthly billing tick box, or as varied as Stitch Fix’s billing menu, which includes monthly, seasonal and on-demand choices.To deliver a good customer experience with respect to billing, ensure that the store’s name and the name of the subscription program appear on the customer’s card statement alongside the charge. If customers don’t recognize the source, they may dispute it, leading to costly chargebacks and lost customers. - Higher customer lifetime value
With a subscription commerce model, companies have the opportunity to create a long-lasting relationship with customers based on convenience, reliability, and the ability to meet their unique needs. The impact of convenience on customer lifetime value is clear from the fact that Amazon Prime members spend more than twice as much each year on the site as nonmembers. Convenience alone isn’t enough to build loyalty, though. Retailers must also deliver other components of great customer experience—like reliability and effective personalization—to retain customers for the long term. As the Harvard Business Review notes, subscription models must “move from customer support to customer success, and keep the customer’s long-term well-being in mind.” - Cross-sell and upsell opportunities
Retailers have the opportunity to collect, analyze, and act on data about their subscribers’ preferences, like which products they choose most often and which items prompt additional purchases. With this intelligence, retailers can create personalized cross-sell and upsell campaigns, like product bundles, concierge-level services and related products or services.The key to success here is to tailor offers to the individual subscriber so they have a fully personalized experience. - Reduced capital expenditure and cost of entry
Most companies focus on keeping their first-year costs low, and subscription models support this. Because it’s possible to start a subscription service with a small range of products or services (think of Dollar Shave Club’s initial focus on basic razors), companies that want to test demand can do so without committing to a big investment upfront.Likewise, new customers may hesitate to make a big initial purchase with a new retailer, but a subscription can achieve the same result over time. For example, a clothing subscription customer might balk at the idea of buying an entire work wardrobe at once because of the upfront expense and the commitment involved. Over the course of a year’s subscription, with the retailer sending a few items a month, that same customer might fully replenish their wardrobe. - Increased customer acquisition ROI
With a one-time purchase model, the retailer’s ROI is fixed. A subscription model offers the chance for an exponentially higher ROI. The longer a customer subscribes, the higher the customer’s lifetime value and the better the return on their acquisition cost.These benefits could help many retailers stay afloat during turbulent times and beyond. And as the majority of direct-to-consumer retailers move into the subscription space, merchants who don’t give customers this option may be at a disadvantage. Adopting a subscription model now can also help them stay competitive.
Of course, getting the customer to keep the subscription depends on delivering the kind of experience they expect—one that’s reliable, convenient, and personalized.
