The Rise of Subscription Commerce
Over the last few years, subscription commerce has taken the retail world by storm. From booze, razors, and pills to tea, tampons, and underwear—there’s a monthly box for everything. It’s easy to see why: a subscription service provides busy, on-the-go consumers with convenience and value; this, in turn, generates guaranteed, recurring revenue for retailers. It’s a profitable model for both parties involved, and the numbers show it. In 2011, subscription-based retailers generated $57 million in sales, according to a recent study by McKinsey. In 2019, that number has now ballooned to a whopping $2.6 billion.
Yet why do some enterprise retailers struggle to find success with subscriptions? Recently, both JCPenney and Gap pulled the plug on their menswear and children’s clothing subscription boxes, respectively. And now, even Birchbox, the beauty box that put subscription on the map, is running into growing pains. How can such a winning formula fail? In reality, subscription is more than just a retail trend—it’s a unique sales model, and pulling it off requires a strategic understanding of its distinct value and challenges.
Let’s dig a bit deeper into the subscription retail model—its different use cases, pitfalls to watch out for, and how to make subscriptions work for you.
More than just a box
When we think of subscription, our minds often turn to the colorful, curated boxes that many industries now know and love. In reality, there are many different ways to structure a business model around a recurring, automated billing and delivery cycle. These may include:
- Subscribe and save: Customers sign up to receive a package, which usually consists of the same staple products, for a recurring period of time at a discounted rate. In this scenario, customers are restocking something tried and true. Convenience and value are what incentivize them to sign up. Think Dollar Shave Club.
- Access: Users sign up and pay a monthly or annual fee to a retailer in exchange for access to its marketplace of benefits or physical goods. Rent the Runway is a great example of this type of subscription service.
- Curated boxes: Users sign up to receive a package that recurs for a period of time, only here, the physical goods are selected by the retailer, meaning they vary with each and every shipment. As a result, shoppers discover new brands each time they receive a box, and also get to mix up the types of products they try. Birchbox and Stitchfix are some of the big players here.
- A hybrid mix of all three: Retailers are now incorporating a mix of all three options into their business model. Skincare company Dermstore, for instance, offers a subscribe-and-save option for their skincare products, as well as a subscription physical box.
Why services fail
For businesses, there are many tangible benefits to subscription commerce. A single sign-up equals repeat purchases at a predictable clip. Not only does this guarantee recurring revenue and high lifetime value, it also provides you with more insight into your customers’ purchasing behaviors, tastes, and preferences, which you can then use to inform future subscription products. And since the customer is already onboard with your service—and for an extended period of time—retailers also have more opportunities to delight customers and foster stronger brand loyalty.
Unfortunately, that’s where plenty of companies fall flat. When a retailer fails to foster said loyalty, that’s when their customers start heading for the exits. Churn, hands-down, is subscription commerce’s biggest enemy. The average churn rate for traditional retailers varies per industry, but according to research from Mixpanel, that number should hover around 6-20%. Yet among subscription-based retailers, that average is estimated at a whopping 40%, according to the McKinsey report. With the rising cost of customer acquisition in the digital space—from free trials and discounted starting rates to higher advertising costs—retention isn’t just a source of revenue, it’s crucial for achieving profitability. If customers aren’t retained, the many benefits of the subscription model can’t be reaped. And with the increasing competition across all industries, that’s not something businesses can afford to do.
Beyond setting and forgetting
So how do you retain customers and reduce churn? It’s all about providing your customers with the best end-to-end experience possible. This means having full control of the subscription experience, from cart to billing to delivery, so that your customers have no reason to jump ship. Here are some tips on how to optimize the subscription commerce experience:
- Give options. Subscription services should be as convenient as possible. Anticipate the needs of your customers by giving them as many options as possible, and therefore, more reasons to stay on. Offer your customers a variety of product options at different prices, flexible billing cycles, shipping options, and hold policies. For this, you’ll need the ability to fully customize your product pages and checkout flow, and you’ll also need to be able to manage and modify these orders in the admin.
- Make use of your insights. Curated box customers want something novel and new delivered to their doorsteps, and they want to feel like it was made just for them. To personalize the type of products your customers receive, you’ll need the ability to take customer feedback and respond to market needs at a quick and informed rate. The big players leverage real-time data across channels to better shape their merchandising choices, but even setting up a customer survey during checkout is a quick and easy way to get the ball rolling:
- Scale. As your business grows, you’ll want to make sure your operations grow alongside with it. For instance, due to the complexities involved in integrating disparate systems together—orders, inventory, logistics, billing, etc.—returns management remains one of the biggest challenges of both subscription and general retail alike. As you scale, you’ll want to make sure all your systems are connected to one single source of truth, so that you may better track and manage your business at any volume.
When you break it down, a subscription is just a long-term relationship between customer and retailer. The customer receives an experience that is convenient, reliable, valuable, and delightful, while the retailer receives the customer’s continued brand loyalty. It seems simple, but it’s a relationship that can go south fast. Fortunately, with the right strategies and tools in place, subscription-savvy businesses still have the opportunity to reap the benefits of a trend that’s here to stay.
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