With the rise of the digital economy and a shift in online spending habits, eCommerce companies are finding creative ways to stay in touch with their consumers and retain them longer. With over 2.14 billion global digital buyers in 2021, the rising online consumer trend is an untapped opportunity to grab your first-time customers, and turn them into repeat shoppers.
Ecommerce subscriptions are one of the best models adopted by retailers to ensure their businesses stay visible in front of the consumer, while giving subscribers the flexibility to interact with their products or services. And if done right, it can drive your business’s growth by leaps and bounds.
As per a recent report from McKinsey, for the past five years, eCommerce subscriptions have grown at a rate over 100%. If that’s not impressive, for comparison’s sake, just know that the growth rate was less than 1% just a decade ago.
The stark reality is that consumer behavior is dynamic, and the subscription model offers great retention. About two decades ago, people availed themselves of services by paying a one-time fee. However, the times have changed, and now services are available on a monthly or annual basis.
What does this tell us? There is a shift in consumer buying patterns, and they prefer to automate consumption of services by subscribing to them. For the consumer, a subscription service not only benefits in monetary terms, but also ensures ease of purchasing. As for the merchant, subscription models generate a stable revenue flow. This is why companies need to step up their marketing game, and incorporate a recurring revenue model to grow their business, and pave the way for customer retention and revenue generation.
In this blog, we’ll help you understand how eCommerce subscriptions work, the different kinds of subscription models, and how you can select the best eCommerce subscription model for your brand.
What is a subscription model?
A subscription business model in eCommerce is one where the customers subscribe to products or services they need periodically, in exchange for regular payments. This business model isn’t a new concept, and was in use throughout the 20th century.
A subscription model has the power to increase your customer’s lifetime value tremendously. While in the past, a subscription model was adopted by some particular niches, currently, an increasing number of companies are integrating this strategy into their overall marketing operations.
Why should you experiment with a subscription model?
Today, almost every company offers subscriptions. The steady rise in subscription-based services is because of the several advantages it offers. Some of those are mentioned below:
1. Higher customer retention
With the subscription model, the retention rate of customers increases. When a customer subscribes to your services (either annually or monthly), you automatically hook them up to your services for a long time. Also, using subscriptions to upsell or cross-sell relevant products can lead to a tremendous increase in the business revenue.
The subscription model ends up benefiting the customer as well. Apart from the convenience it offers, subscription also benefits the customers from a price standpoint. To explain, if someone has subscribed to a service or product, they don’t have to buy the product for its full price or pay again for an updated version of the product a few months later. Instead, they need to only pay the additional amount by going for an upgrade, or by moving to a premium plan. A good example for this, is the iphone subscription contract plans. A cultural and behavioral shift towards subscriptions was increasingly observed during the pandemic, where around 18% of companies offering subscription-based services witnessed accelerated growth. A report by Zuora Inc, a leading subscription management platform provider, revealed that OTT subscriptions grew by 7X in 2020 alone.
2. Predictability of revenue
A subscription model brings along with it a sense of predictability. This itself is one of the primary reasons, more companies are adopting this business method. The elimination of uncertainty with the subscription framework helps you have a seamless business operation.
You’ll also become aware of items that need restocking or get an estimate of your total turnover based on the number of subscribers. This will also help you focus your efforts on growing your business, than spending time handling matters of inventory and payments.
3. Better unit economics
Software products that use the subscription model typically host on the cloud. With the use of cloud infrastructure, there come several merits, one of them being ‘no on-site maintenance’. The other is that a cloud-based service provides valuable customer feedback in real-time. With these insights, you create the features the way your customers want. This saves costs and promotes productivity.
4. Effective demand forecasting
Having a subscription-based business helps to sharpen your ability to forecast future sales and revenue numbers. Although not necessary, you’ll also have an idea of how long a subscriber will stay onboard, compared to when one-off products or services were available. Besides, you’ll be able to make inventory-related forecasts since many of your customers have likely subscribed for months in advance. It will give you an understanding of how much stock you need to maintain to prevent scarcity in the future.
5. Increased Customer Loyalty
Subscriptions save time and effort spent on recurring purchases, thus making it easier for customers to interact with your product or services for a longer period of time. This automatically builds customer loyalty as they prefer to stick with the brand for longer.
Moreover, customers experience a sense of growth and flexibility since they only pay for using a product or service for the desired period of time, can discontinue whenever they want to, or pay additional value for a premium plan, if they choose to. This flexibility harbors loyalty and builds lasting relationships between the brand and the customer.
Types of subscription business models
There are many types of subscription business models, and here are a few of the popular categories to help you get started:
1. Replenishment subscription
A convenient and effortless type of subscription model. It’s often referred to as the ‘subscribe and save’ model, something Amazon is famous for. Almost all replenishment plans entice buyers by offering an average 5 to 15% discount on their plans.
- Recurring model: A recurring model falls under the category of replenishment model and is one of the highly preferred types of subscription. Here, the customer chooses convenience over other things. The services hence provided can be done weekly, monthly, or at other intervals the business offers. Usually, food and beverages, personal care items, or beauty products come under this category. It’s a challenge to get people on board for this type of recurring subscription. However, highlighting how much the customer will save on a recurring subscription can work in your favor.
Amazon allows users to subscribe to items they frequently buy and set up auto-delivery so that these items arrive when they’d like..
- Convertible subscriptions: This type of subscription model attracts the customer through an introductory offer. It also allows customers to ‘try before they buy,’ and leave them feeling like they’re getting much more than they bargained. This type of subscription enables a smooth transition from a one-off customer to a subscriber.
The most prevalent example is Netflix. Their introductory offer of a free trial is all the push one needs to become a subscriber. The catch here is the auto-deduction of money once the trial period ends, and the requirement to enter credit card details before you sign up for trial.
- Build-a-box: If you are serving multiple products, then build-a-box is the way to go. This type of subscription model allows customers to curate the collection. Meal kit service providers like Hello Fresh offer customers the option to add certain items to their ‘box’ from a selection of products, which can sometimes go beyond food.
2. Curation subscription service
Curation subscription services provide a collection of products to individual recipients based on their unique tastes.
- Curated boxes: This is a curation of items that are based on the specific preferences or subject, that could be as broad as MoonBox’s wellness boxes to Stitch Fix sending its subscribers a monthly selection of clothing. The mystery factor associated with these boxes coupled with the experience of receiving new products creates an appeal among the subscribers. However, there can be a time when the business finds itself in a rut due to the leftover inventory. Additionally, subscriber count may drop if the business only presents the customer with limited product choice.
- Monthly clubs: Another type of curation subscription service, monthly clubs offer the experience of discovering new products from a single retailer. An example of this form of service is the father-son venture, John’s Crazy Socks. With their ‘Sock of the Month’ club, the customer receives a fresh pair of socks each month personalized with a “Thank You” note, some candy, and discount cards.
The sock of the month club is a hit with the customers
3. Access subscription service
Under this type of subscription service, a customer takes membership, to gain access to other company products. Items offered are sold at a hefty discount, making the membership worth it.
- Exclusive: As the name suggests, the subscribers under this model of subscription, like to feel special. The exclusive model provides the subscriber more than just products, similar to how Amazon Prime provides their subscribers’ services that are more than physical goods. From free shipping to free music on Amazon Prime music, the benefits of Prime membership are quite a lot.
- Brick & Mortar: Major retailers are now embracing subscription or membership strategies to boost the potential value of the offerings. With dynamic market trends, retailers are pulling out all the tricks in their bags to maintain their presence in the industry.
A brick & mortar subscription service offers benefits that subscribers enjoy offline. Beauty brand Birchbox’s partnered with Walgreens to create Birchbox-branded in-store experiences. The shoppers received an option to test out the subscription box with interactive “Build Your Own Birchbox” stations and take five samples home.
Tips to build a winning subscription business model
‘Customer’ is the backbone of the subscription model and if you’re considering adopting it in your business, follow these tips to implement it efficiently.
1. Determine your goals early
Before launching a subscription-based, you must identify, what is it that you want to accomplish through subscription? Revenue or profit or market share growth?
Upon adopting this business model, you will have to define these goals. This helps ensure you’re building the best pricing strategy possible for your specific goals. It might not make sense now, but think about it – recurring revenue in the form of monthly or annual fees, will have an impact on the long-term financials and strategy of your business.
Once businesses define the goals, you will be able to build your buyer personas and create an effective pricing strategy.
2. Increase acquisition with a better experience
More customers bring more revenue, it is as simple as that. This is why the process of signing up for the subscription service needs to be effortless.
A great customer experience will automatically contribute to the increase in subscriber count over time. A satisfied customer will also express a higher willingness to pay. The option to sign up should be available on every channel you use. This will be one of the most convenient ways to drive the growth of your company.
3. Streamline the billing process
If your bill system is not up to the mark, then you will lose out on revenue. Most modern software services have complex processes, and you must master them all. Your customers will gladly sit themselves out, if they have to be part of a complicated billing process.
This circles back to the point that product experience is an equally important factor for a successful subscription. Your customers must experience good value for the product and service, even if it’s for a short amount of time, especially when they’re actively paying for it.
4. Foster customer relationships
The crux of a good subscription business model is the customer-centric approach. The loyalty of your customer is what is vital in this type of business model, as a disappointed customer is just a click away from canceling the subscription. To prevent this from happening, it’s important to remind the customers that they’re valued by offering them quality services.
The focus of a business should be on retaining customers for as long as possible. When you get a sound analysis of what your customer base is like, it will be easier for the company to stay in line with their expectations. The more you know about the customer, the better your pricing strategy will be.
5. Plan for growth well in advance
If you devised a good subscription business model, you will be able to scale it. This steady flow of revenue, evaluated against churn rates and operating costs, signifies a steady growth rate. If you fail to capitalize on this knowledge, your growing subscriber count can prove to be a burden on your infrastructure.
The subscription business model is peaking in 2021 and will continue to do so in upcoming years. It can do wonders for your brand and help you generate steady revenue.
It can be a little daunting at first, but with the right strategies, you will witness your business flourish in no time. From identifying the type of business to curating products and filling inventory, you can prepare a sustainable subscription plan. Even though this business model comes with its set of quirks, the subscription model has grown 5x faster than other businesses, which implies incredible growth potential.
Plus, it won’t hurt businesses to experiment with different types of subscription models to see how your consumers respond. They’re a great way to offer your subscribers more choices, and reasons to stay with the service provider.