The Dollar Shave Club sells razor blades the same way as magazines—every month you get a new issue. It’s done so well that it’s forced industry leader Gillette Razor to respond with the same type of subscription program.
E-commerce subscription services are smoking hot, for streaming music, software as a service (SaS) and personal care products. Honest Co, an eco-friendly subscription service company, was recently valued at $7 billion, according to TechCrunch. Interestingly, the model came into widespread practice at about the same time as flash sales sites such as Groupon and Living Social.
According to a study by Retention Science, flash site deals have cooled considerably in comparison to subscription services, which also outperform traditional e-commerce ordering. The study surveyed more than 10 million orders by more than 2.5 million unique customers over a 12 month period.
The average number of orders per customer for subscription was 7.68, far outpacing retail’s 2.36 per customer, and crushing flash sale’s 1.41. That said, subscription services did have a high rate of churn (customers who didn’t make a repeat purchase in the six months following their first order), though still lower (72 percent) than both retail (91.5 percent) and flash (93.8 percent) models.
Related Article: Lessons in Entrepreneurship from The Honest Company
The Advantages of the Subscription Model
Develop brand loyalty. Customers used to buying a particular product from you are more likely to try others, if only because they’ve grown accustomed to the ease of use in ordering and invoicing that happens without them having to think about it.
Annual subscription fees. Brick and mortar stores have been doing this for a while. A Sam’s Club membership costs anywhere between $45 and $100, and allows you to shop in their discount stores. Similarly, Amazon charges $99 for free and expedited shipping, among other benefits, for its Prime membership.
Cross-sell potential. A subscription locks customers in to your other services. Why should Amazon Prime customers shop somewhere else online only to incur shipping fees and wait longer to get their product? While not all subscription services charge annual fees, they all strive to provide the convenience of one-stop shopping that makes it inconvenient for customers to go elsewhere.
Lower retention cost. Customers are buying from you every month (or whatever the defined purchase interval is). You don’t need to spend money on retargeting advertising, promotions and social media to get repeat sales.
- More accurate forecasting. Your monthly revenue projections are based more on committed paying customers as opposed to educated guesses. Consequently, your fulfillment process is less subject to extreme demand fluctuations.
Related Article: 9 Benefits of Subscription Selling
The Downsides of the Subscription Model
As Econsultancy points out, subscription services are not without potential pitfalls. These include:
Your supply chain must be almost perfect. When a traditional retailer has a supply problem, it’s not necessarily a huge problem. The business can hold off taking orders or just inform customers there are going to be fulfillment delays. While not the best thing for customer service, it’s not an outright disaster. The problem with subscription customers is they’re expecting orders to arrive according to the terms of their agreement. If you fail to satisfy your end of that agreement, you risk losing customers.
Subscription fatigue. While there are always customers who love being subscribers and people who just hate the whole idea, most are in the middle. They’re willing to try it, but might not be willing to keep going with it after an initial trial. Once customers start wondering whether they can justify the cost of a subscription, the chances increase they’ll eventually cancel.
- It gets boring. If subscription products aren’t really well curated, customers can start to feel like it’s the same old thing every month. The excitement of having something new in your mailbox every month begins to fade. (This isn’t necessarily a problem for commodity products such as razor blades, which customers aren’t looking to get excited about, just get a product they need, when they need it).
Related Article: Supply and Demand: Building Links In Your Supply Chain
Starting Your Subscription Store
As Fortune points out, all sorts of companies are now experimenting with subscription-based business models. There are several companies that offer services to design, build and manage a subscription store. These include Zuora, Subbly and Cratejoy.
As Jesse Richardson of Cratejoy notes, “The subscription commerce industry for subscription boxes is exploding. Hundreds of new subscriptions have been started in the last few years, and even with the industry’s impressive growth, these new startups still have just begun to scratch the surface on the numerous niches and interests these types of business can service.”