With the recent explosion of D2C commerce on the digital landscape, one may forget that the concept of a recurring payment by a customer at monthly, yearly or seasonal intervals for access to a product or service goes way back to the 17th century, when it was pioneered by the publishers of books and periodicals.
A one-time sale turns into a recurring sale with very little extra cost outlay, and is cemented by a pre-authorized charge either to a bank account or credit card. The subscription usually gets automatically renewed at the end of the period, so less effort is required on the part of both vendors and customers.
This approach eases budgetary planning for the vendors since they can anticipate revenues. Moreover, subscription models are said to build brand loyalty – once a customer finds a product they like, they tend to stick with it, and thus subscriptions become a natural solution in capturing that phenomena. Value always trumps trends though. If a consumer doesn’t find real value in the subscription, they are going to go back to the marketplace to look for something that does.
The subscription model was traditionally the reserve of newspapers, magazines and journals but was rapidly adopted by membership-based organizations and groups such as mail order books, music sales clubs, and health clubs. Financial (hello insurance!) and business services and solutions providers soon followed suit. The march of telecommunications technology meant that telephone companies started charging their customers for the service, but in the recent past, cable and satellite television providers with pay channels, satellite radio, mobile network operators, and internet providers have all drawn from the same playbook. In healthcare, retainer-based care goes by the name of concierge medicine.
Sometimes, in the case of a performance-arts company such as an orchestra, opera or theatre company, a subscription gives holders tickets to a set number of performances over a season.
The surge in the popularity of the subscription model came in the last couple of decades when software publishers, websites and private webmail providers all moved over to digital subscriptions. Adobe was one of the pioneers in the game when it realized that it had periodical peaks in revenue for its Creative Suite business and in 2013. It converted over from a boxed-licensed software model to a monthly, cloud-based subscription model, in the end launching Adobe Creative Cloud. These days, an eye-watering 84% of all new software is delivered as a service. In the last decade alone, entertainment services such as music and movie rentals morphed and migrated online to become streaming services, sustained through subscription revenue.
The early movers among them such as Spotify and Netflix have since become multi-billion dollar companies and the ubiquity of these brands in our homes has led even pharmaceutical companies to ponder ‘Netflix-style subscriptions’ for medicines. eLearning and fitness websites were some of the first on the bandwagon of on-demand content.
A variation on the theme and a great tool for customer acquisition is called a freemium model, used to great success by Spotify, where the basic or initial service is free but the extras, premiums or following months are chargeable.
Buoyed by the willingness of millenials to sign up for digital subscriptions, there has been a boom in eCommerce subscriptions, where the product might be physical or digital but the transactions themselves are digital. McKinsey estimates the US eCommerce subscription market has grown at over 60% a year since 2014.
Choosing the right subscription model
Within D2C eCommerce, a spectrum of subscription models have found success. Different products demand different approaches to best reach customers. A few can be found below.
The curation model offers a personalized box for customers based on their unique interests. They might include sample-sized versions of products related to a hobby or lifestyle such as cosmetics through Birchbox or recipe cards and ingredients to cook a meal from like with meal kit companies Blue Apron or Hello Fresh.
The access model provides an exclusive service or experience that might not be available to someone without a subscription. Amazon’s Prime program offers prioritized delivery, discounts, and offers not accessible to non-members. Another example, Rent the Runway offers personal stylist services along with their clothes subscription.
The replenishment model offers convenience above all else by regularly restocking products that run out often. Amazon does this under the tagline Subscribe and Save for items such as groceries, cleaning and hygiene supplies, and vitamins. Fast casual dining chain Panera even offers a monthly coffee subscription. This model traditionally sees higher rates of success than the others – 45% of subscribers have remained for at least a year, which is 10% more than the percentage number of subscribers for the box/curation and access services. McKinsey notes that Amazon Subscribe & Save, the Dollar Shave Club, Ipsy, JustFab fashion, and Loot Crate are the top subscription services that have managed to retain a large number of customers for the longest period of time. Dollar Shave Club also additionally taps into the seeming lack of enthusiasm for brands for online shoppers – brand matters to just 22% of them – while offering the convenience of home delivery at a good price point.
Even big-name retailers are leveraging their brands and stores to get into the subscription business. Restoration Hardware uses a subscription model to give customers a discount and access to the services of an interior designer. Lululemon’s offer a free pair of pants or shorts, free shipping, and curated workout classes. Target has come up with a children’s subscription line Cat & Jack. Walmart and Sephora are fighting back with their own beauty boxes.
The factors to consider while adopting the subscription model include:
One of the biggest differentiators in a subscription model stands in that customers feel like the price is lower than a traditional purchase or gets them greater value. Price, however, need not stay static. With all the information one has about the customer, it is easy to test A/B pricing as well as pricing and offers, at different times or seasons.
The customer experience
While a subscription model might result in brand loyalty, the model does come with notable upkeep. Customer service is vital to make sure attrition rates don’t go up. The model works better when the numbers of customers range in the thousands and above. The price also has to be adjusted often to reflect the customer’s interests. Customers want to be able to personalize the experience as much as possible, and they are often looking for the product to improve over time. The Harvard Business Review compared the customer experience and future spending of two similar companies, one of which was traditional and the other subscription-based. Customers who reported the best experiences spent 140% more money than those who had a poor one.
A direct customer relationship also means access to long-term customer behavior. The insights granted from collating customer behaviour behind the membership plans and paywalls helps organizations track more effective engagement metrics beyond page views, and helps not just retain existing customers at a lower cost by listening to them but also to upsell.
Ease of use and scalable infrastructure
The life cycle of a subscription consists of many transactions – sign-ons, cancellations, suspensions, renewals, add-ons and terminations. The systems that handle these need to be designed to be easy to use, seamless, up-to-date, transparent and secure to take the hassle out of that volume of transaction. Packaging can be used for differentiation but organizations should also keep in mind that there are notable movements against excess packaging waste. Accounting procedures and billing systems need to also be streamlined to deal with changing subscription trends.
Not every product could be sold through subscription, though. There has to be a regular incentive to purchase. More than 80% of consumers haven’t yet signed up for physical subscriptions, while music and movie subscriptions are seen as more valuable than those for groceries.
There is also such a thing as ‘subscription fatigue’, as the host of subscriptions that customers signed up for in recent times add up to make a dent in the wallet.
However, as subscription evangelist Tien Tzuo who coined the term ‘subscription economy’ has said, ownership is dead, and access is the new imperative. To put it simply, if you’re not going to offer it, someone else will.