The eCommerce market is becoming more vibrant than ever. Brands are experimenting with multiple revenue generation models. For instance, subscription models, to bring in recurring revenue.
But which model is better – one-time purchases vs. subscription? While many merchants debate that one-time purchases are better, subscription models have proven to offer more benefits to businesses.
One of the biggest plus points of subscriptions is the lower cost of customer acquisition. A Shopify report shows that in one-time purchase, the customer acquisition cost per customer may be anywhere between $20 to $400.
That’s a high price to pay for customers if they are only going to make a single purchase from your Shopify store. Isn’t it?
May, a better alternative would be subscription business models.
In this blog, we take a look at one-time purchases vs. subscriptions, the pros and cons of both, and which payment model is better for eCommerce stores.
Let’s get started!
What is a subscription pricing model?
A subscription pricing model is a recurring billing. Once a customer signs up to a subscription, the billing cycle repeats at a predefined interval. For example, Netflix, SaaS and AI products, such as ChatGpt, and grocery subscriptions work on this recurring pricing model.
What is a one-time purchase?
A one-time purchase is when a customer makes a purchase and pays for that product. For instance, say you purchase groceries every other day and make payment for that on the spot.
Both these payment options have benefits and downsides. So, what is better: one-time purchases vs. subscriptions? Let’s find out by learning about the pros and cons of both.
Pros and cons of subscriptions
While many might argue that one-time purchases are better than subscriptions, this model offers many benefits that one cannot be overlooked. Let’s look at the pros and cons of subscriptions.
Let’s begin by learning some statistics around subscription purchases:
- Between 80 and 90% of consumers prefer subscriptions when it comes to purchasing products and services in health & fitness, utility & productivity, photo & video, and education.
- Approximately 75% of all direct-to-consumer businesses offer subscriptions.
Pros
1. Predictable income
Ecommerce brands can have a predictable income stream with subscriptions. As businesses know the number of subscriptions, and the revenue-generation dates. This also makes it easy for businesses to calculate customer lifetime value, plan business finances, and manage the balance sheet and expenses. These are some recurring revenue benefits associated with subscription models.
2. Cross-selling opportunities
As subscribers are associated with brands for a long period, it’s easier for brands to understand them and their preferences better. Over time, brands can recommend products that subscribers would want and appreciate. For example, upsell and cross-sell items based on subscribers’ shopping history.
3. Increase conversion rate
Subscriptions do not involve one-time large payments. Instead, the payments are broken down into small payments at regular intervals. This eases customers’ payment load. And so, it increases conversion rate for subscription businesses. The convenience and ease of small, regular payments makes it easy on subscribers.
For example, imagine if Netflix made it mandatory to pay the annual fee in one go, the platform may see subscriber numbers dwindling. One of the benefits of subscription payments is how it affects and helps with eCommerce profitability analysis.
4. Convenient for subscribers
One of the biggest benefits of subscriptions is the convenience factor. Instead of making repeated purchases multiple times, they can subscribe once, receive their subscription boxes on predefined dates, and their payments can be automated.
Subscribers do not need to get into the hassle of making repeated purchases every time. For brands, too, subscriptions bring convenience in the form of predictability, and better management and planning.
5. Improved customer retention
As customers get into a long term association with brands, brands get more opportunities to engage with customers. It also gives brands the opportunity to improve customer experience and increase loyalty. This leads to improved customer retention.
Moreover, brands can increase retention by various strategies, such as, offer more benefits, incentives, and discounts to retain customers. Subscription apps with churn management features also help retain customers.
6. Minimal manual tasks
Ecommerce subscription businesses automate a lot of their tasks via subscription apps. For instance, a lot of repetitive tasks such as billing, invoicing, payments, and discounts, are automated. Unlike one-time purchases, where every transaction is different, which may require manual intervention, subscriptions involve minimal manual tasks.
7. Reduces customer acquisition cost
Another recurring revenue benefit is the reduction of customer acquisition cost. With subscriptions, businesses do not have to spend on acquiring new customers as frequently. Subscribers engage with brands for a long duration via subscriptions. When subscription businesses acquire customers, they tend to stay for longer periods compared to one-time purchases. Hence, this affects the cost of customer acquisition.
8. Increase customer lifetime value (CLV)
Compared to one-time purchases, subscriptions help increase customer lifetime value (CLV). According to Gartner, it is essential to calculate CLV to drive customer retention. Subscribers associate with brands for a long period, ensuring they give revenue to the business from time to time.
Also, with subscriptions, businesses can increase the average order value with strategies, such as cross-selling and upselling. Some subscription businesses charge annual fees, which means subscribers get locked in for a year, ensuring a certain amount of revenue from subscribers. All these factors increase customer lifetime value.
Here’s an infographic that helps understand eCommerce profitability analysis on the basis of CLV:
Cons
While there are many benefits of subscription models, there are some drawbacks as well. However, the benefits outnumber the drawbacks. Here are some cons of subscriptions.
1. Customer churn
With so many subscription options floating around in the market, it is hard for customers to keep up and use all their subscriptions effectively. Subscription fatigue leads to high churn.
Moreover, if customers do not see value or aren’t kept engaged in the subscription, they may lose interest and eventually leave or simply not renew. This can cause a high churn rate in subscriptions.
2. Need for continuous improvement
It is hard to keep subscribers engaged and loyal for a long time. Once the novelty of your subscription program wears out, subscribers may start dropping out. However, you can avoid this situation by ensuring you continuously improve your subscription offerings and experience. This may require resources, time, and effort.
Pros and cons of one-time purchases
One-time purchase or payment model is not a recurring revenue model. Here, businesses can generate instant revenue, but may incur high customer acquisition costs. In this section, we will look at the benefits and downsides of one-time purchases.
Let’s begin by learning some statistics around one-time purchases:
- Between 30 and 70% of consumers prefer a one-time purchase and payment method when buying entertainment, sports, social media, and books.
- Data from one-time purchases can provide valuable insights with proper analysis. These insights can be utilized for future marketing.
Pros
1. Immediate revenue
When customers make one-time purchases, they pay for it up front. This brings immediate revenue for the business. Unlike subscriptions where businesses generate revenue at intervals, one-time purchases bring instant cash into businesses. This makes it easy for businesses to plan and manage their balance sheet.
2. Reduced churn
Customers can make one-time purchases whenever they like. They are not bound by anything, such as in subscriptions. Moreover, subscription fatigue is common, given the number of subscriptions in the market. This gives customers more flexibility and they tend to return to your store when they want to purchase. However, this could mean they might return after a long duration.
Cons
1. Less predictability
With one-time purchases, there is less predictability because those customers may or may not return to your Shopify store. Thus, you may not have the security of recurring revenue benefits.
2. Low conversion rates
Customers have multiple options to choose any given product. Besides, there are multiple online stores to make purchases from. For instance, a quick search for a black diary will bring up many options. In such a situation, it’s difficult to attract customers to your site. You may require a lot of resources, leading to high customer acquisition costs.
3. Low long-term profitability
With one-time purchases, customers make one purchase. Their return to make more purchases may not be guaranteed. You may not be able to calculate customer lifetime value (CLV).
Let’s understand this with an example. Imagine if a business spent $20 in acquiring this customer. The customer made a single purchase of $22. The actual profit via this sale is just $2. If the customer never comes back to your store, your profits from this spend are quite low.
One-time purchases vs. subscription: what is better for your Shopify store?
With more than 75% of businesses offering subscription models, it is definitely worth a try for your Shopify business to try the benefits of this recurring revenue method.
From long-term profitability, high customer lifetime value to predictability, subscription businesses have many benefits. As the cost of marketing keeps rising, so does the cost of customer acquisition.
To ensure you lower your customer acquisition costs, subscription models are more advisable for businesses. However, to run your subscriptions smoothly, you will require a robust Shopify subscriptions app.
Appstle Subscriptions App is a comprehensive app with intuitive features, helping brands automate repetitive tasks, and ensuring a smooth in-flow of recurring revenue via subscriptions.
Install Appstle Subscriptions App on your Shopify store today!
