The concept of subscriptions is definitely not a new one. In fact, historians are able to trace it from the early 1800s. From fresh milk bottles to newspaper deliveries, our ancestors subscribed for all kinds of basic necessities. The modern world has not left subscriptions behind. In fact, e-commerce organizations are retaining customers by offering them the subscription service. SaaS giants such as Netflix and Spotify have reaped off the benefits of this model for years now. Organizations that employ this model in a correct manner can grow and enhance their businesses in no time. Here is a detailed guide about subscriptions model and why your organization needs to offer it to the customers at the earliest.
What is a Subscription Model in E-Commerce?
An e-commerce organization following the subscription model offers customers services or products on a regular basis for a specific time frame and in return receives an amount of payment from the customers. The time frame in which the customers have to receive services and make payments is set and mutually agreed by both parties. Once the agreement/time span ends, the customer has the option to either end the subscription or subscribe to it again.
A representation of the subscription model.
The main goal is to retain customers by developing a friendly relationship with them while at the same time providing them with the commodities in a routine. Bendle, Pfeifer, and Farris mention in their book, Marketing Metrics, that the probability of acquiring a new customer is only 5-20%. On the other hand, according to their research, the chance of retaining an old customer is around 60-70%.
Unique Aspects of Subscription Based Commerce Models
- Customer Experience: Perhaps the most important part of the subscription model in an e-commerce setting is how a customer experiences the product or service.. Services or items that do not generate an exquisite and smooth purchasing experience hold little value for customers. This is why it is essential for subscription based e-commerce organizations to provide their customers with a smooth experience without any hiccups to retain them.
- Selling: Whatever the commerce organization decides to sell (services or products) via the subscription based model must have a value attached to it. Without the existence of proper values, organizations will lose retention of customers in the future or any referrals that the retained customers would have generated.
- Buying: The whole concept of traditional buying i.e. give some amount and receive something in return changes while following the subscription model. A thorough plan must exist to make the buying process for customers smooth. Multiple modes of payments and gateways must exist for online payments and purchasing to make the business successful and run smoothly.
What Makes the Subscription Model Different from Traditional Models?
An e-commerce organization following the traditional model for their business relies on the purchasing of items and inventories when there is a need. This is why they rely heavily on the total revenues generated. On the other hand, subscription models follow the method of purchasing goods in advance and rely on the recurrence of revenue.
Each subscriber is considered as a recurring and predictable source of revenue. This is because organizations have the ability to forecast the amount of revenue that is to be generated from the total number of subscribers of the commerce services. Managing inventory and maintaining the retail cycle becomes a smooth process with the passage of time in a subscription model. The predictable revenues can help organizations fight slow business times such as the recent COVID pandemic.
Success Stories of Organizations Following Subscription Models
As soon as the subscription model comes into mind, people automatically think of streaming platforms such as Netflix and Spotify. However, almost every industry has incorporated subscription models into their businesses. Here are some of the top examples of organizations using subscription models:
- FitBit
Around 2019, the sales of the Fitbit devices were plummeting against the fitness watches offered by Apple and Xiaomi. Realizing the rapid loss of shares in the market, FitBit quickly devised a plan to gain new and retain their old customers by offering premium subscription services. For a few hundred dollars, users now have the ability to set personalized goals, keep an eye on their heart health, total physical activity, receive personalized coaching and guidance.
- PlayStation Now
PlayStation increased their total number of subscribers from 700,000 to around 1 million in 2019 by offering online subscription services. They offer customers a library of more than 600 games available at a meager amount of $9.99/month. They have further reduced prices for customers that have an annual subscription.
- BirchBox
BirchBox is a beauty organization that recommends products on the basis of customer’s skin types and personal preferences. Customers can subscribe and get their products refilled on a regular basis. Everytime, a new product is launched it is offered to customers with similar product requirements. This way, they retain customers by constantly catering to their personal needs and updating their products as well. As of 2019, it caters to over 6 million people all around the world.
- Peloton
According to Statista, Peloton has grown over 2.3 million subscribers. Along with the normal exercise equipment on their e-commerce platform, they offer personalized and live training sessions. Even though their exercise equipment is great, if the customers want the full experience after their purchase, they must subscribe to the content that they offer. Now that is truly killing two birds with one stone for a revenue generating strategy.
Each success story of the subscription model discussed in the above examples is proof that every industry in e-commerce can utilize the subscription model strategy.
Different Models Used in E-Commerce
Multiple types of subscription models are followed in the e-commerce industry. It is important to identify which one fits best with your business needs and then follow it. Following is a brief description of three types that the McKinsey Group of Company has grouped subscription based models into.
Curation Subscription Model
Utilizing existing data on sales or getting data about customers via quizzes and questionnaires, allows organizations to curate a set of tailored products that are delivered to the customers in a specific time frame. It targets the kind of customers that enjoy surprises and satisfies their need of finding unique items every time they open a box. According to McKisney, 55% of the total subscribers fall in the category of the curation model.
A mystery solving game called “Hunt a Killer” is a great example. Each month they deliver a set of rules and clues to their subscribers that have to solve the game through them. It has quickly become popular and the total number of interested people are increasing day by day.
Access Subscription Model
Most of us love to feel special and want special deals and discounts from our favorite brands. Access subscription model targets exactly these kinds of people. By offering access subscription models, e-commerce platforms provide their members exclusive promotions, benefits just for members, and first access to deals offered. Only 13% of subscribers fall in this category.
JustFab is a fashion business. They sell pieces of clothing and other accessories to people all around the world. As a result, people that have subscribed to their services receive special discounts (up to 30%) and many other perks on a regular basis.
Replenishing Subscription Model
A research done by McKinsey shows that 32% of the world’s subscribers fall in this category. Consumers often sign-up to receive goods on a regular basis that are used in daily life such as groceries, razor blades, fruits and vegetables. The prices of these products rarely change and they are used within a specific time frame. Subscribers can receive these products without the hassle of having to repeat their order process.
Amazon is a brilliant example that follows the replenishing subscription model. They allow their customers to save the purchases they made and then offer them a subscription for delivering the same set of products repeatedly. They even offer discounts to customers that opt for this option.
Why Should You Implement the Subscription Model?
Here are four of the most obvious advantages of implementing the subscription model on an e-commerce platform:
- Easier to Retain Customers
The marketing costs to attract and convert a customer are much higher than retaining an old customer. This is perhaps one of the biggest advantages of this model. Organizational costs are reduced drastically as the same customers automatically keep buying your service or products on a regular basis.
- Consistent Revenue
The total number of subscribed customers determines the amount of revenue generated each month. This makes incoming revenue predictable for most organizations, as all resources are easy to estimate. Subsequently, budgeting for the business becomes quite straightforward.
- Smoother Inventory Management
Organizations know the total number of customers that have subscribed to their services and products. As a result, inventory management becomes a breeze. If you have a total of 100 customers for a specific product, you’ll have to order 100 pieces of that item. Likewise, this will reduce any wastage of the product hence reducing the overall costs.
Read this blog by UpStart Commerce if you want an easy yet smooth strategy to manage the inventory and items.
- Increased Ease for Customers
The ultimate goal for any business is to build a good relationship with its customers. Hence, utilizing subscription models to easily place the order for an item once and then receive it on a reoccurring basis. Subscription models increase ease for customers which is why their relationship with the organization is largely positive.
How Does the Future of Subscription Models Look?
Since the pandemic has began to die down, many e-commerce organizations are beginning to wonder whether subscription models still hold the same advantages. The truth is that the future of the subscription model is quite bright.
According to Forbes, subscription models are the right choice for organizations that want to increase their revenue streams. This is due to these subscription based business models helping build loyal relationships with customers and increase their ability to forecast revenues and demands.
Secondly, Cision PR suggests the global eCommerce market will reach a worth of $246.6 billion by 2025. Research conducted by Univdatos Researches shows that 5.7 million people have subscribed to some kind of an e-commerce platform. There are approximately 2,000 different subscription services available from all kinds of industries. As a result, this number is likely to increase.
Conclusion
Above all, subscription models are adaptable in any industry including e-commerce and are here to stay. According to Gartner’s predictions, 75% of online direct-to-consumer businesses will switch offer subscriptions for their customers. If you are a DTC business, it is high time to consider this business model.
UpStart Commerce can help your business shift to the subscription model in a very smooth way and within no time. Our technical experts ensure that there are no payment gateway issues and implement each aspect of the model carefully.
