Friend: What plans for the weekend?
Me: Netflix and Chill
The phrase ‘Netflix and chill’ isn’t just a trend anymore. It’s become a lifestyle habit.
How did Netflix manage to blend so effortlessly into our lives?
The credit goes to its subscription-based ecommerce model that allows the streaming service to meet specific user demands and cater to a wide-ranging audience. Safe to say subscriptions are no longer limited to only magazines and newspapers. They have crawled their way into the digital foray as well. Today consumers have surrendered the hassles of buying everyday groceries, movies and music for entertainment, cleaning services and even apparel to online subscription services.
Tanya Yablonskaya, an ecommerce industry analyst at ScienceSoft sees it going beyond. She says, “Usually, sellers use this technique for recurring orders. But we have witnessed how its discovery model works for niche stores and becomes an ingenious customer perk. Imagine an online store selling organic and natural products (food, health and beauty). With a growing tendency to healthy living, there may be a segment of potential customers who are only stepping to the ‘green’ side. Certainly, they haven’t decided on their preferences yet. Subscription boxes with miniature samples of goods can be a great opportunity for them to try products out before ordering full sizes. Meanwhile, a seller benefits from promoting their diverse categories at once.”
Let’s understand in detail what they are and how exactly do they work.
What are Subscription-based Ecommerce Business Models?
Subscription-based ecommerce business models provide a sensible alternative to customers to buy regularly needed products on a recurring basis rather than every single time.
Subscriptions can be offered weekly, monthly or annually or any other frequency preferable to the customer.
How do Subscription-Based Ecommerce Models Work?
Subscription-based ecommerce stands on the concept of getting recurring revenue from customers, on products and services, at a chargeable fee. The revenue generated from such items is considered as subscription revenue and can be accumulated on the basis of the specific subscription time, be it monthly, yearly, etc.
In these models, regular customers are paid more attention, making it more about customer retention than customer acquisition. Subscription-based models try to convert long-term customers from one-time purchases to recurring purchases, by giving them continuous access to a product or service they always need.
Types of Subscription-based Models
Subscription models are primarily of three primary types: 1.) replenishment/ consumables, 2.) curation/discovery, and 3.) bargain/access model
1.) Replenishment subscription model lets consumers automate the purchase of commodity items, such as flowers, body care products, diapers etc. Eg: Amazon Subscribe & Save
2.) Curation or the discovery model is meant to surprise and delight the customer by providing new items or highly personalized experiences in categories like apparel, beauty, food etc. Eg: Birchbox
3.) Bargain or access subscribers pay a monthly fee to avail bargained prices or members-only perks, primarily in the apparel and food categories. Eg: NatureBox
Curation model, is by far the most popular, suggesting a strong desire for personalized services, followed by replenishment and access model.
A few more types:
- Fixed: One set price for a specific set of goods/service for a defined duration.
- Unlimited Use: Fixed price for unlimited use of a collection of goods and services. The service can be used personally or by a group.
- Pay as you Go: This is also called a convenience model. Users pay for the product/service only when they use it.
- Premium Member Subscriptions: Users pay a basic access fee to use products/ services, but are charged additional fees to access premium content.
- Freemium: Basic services are offered free in exchange for a user’s contact information.
Now you know what subscription-based ecommerce is all about, so ever wondered why so many businesses are dabbling in it?
Growth Potential in Subscription-based Models
No wonder the subscription ecommerce market has grown by a whopping cent percent in the last five years. Yes, a 100% growth!
Obvious reason: The time belongs to the millenials and urbanites with the highest spending power – and who are looking for convenient, personalised, time-saving, cost-efficient ways to consume, and consume more.
This obviously has fuelled the desires of all – startups and their venture capitalists, consumer brand manufacturers & retailers, giant marketplaces and who not. More points to prove the point:
- Between 2011 to 2016, revenue for the largest retailers in the ecommerce subscription market rose from $57 million to $2.6 billion.
- In early 2017, monthly subscribers to U.S subscription box sites crossed $40 million and $17 million paying subscribers.
- A recent Mckinsey and Company report states that 15% of online shoppers have signed up for one or more subscription boxes to get products on a recurring basis.
Surely enterprises are finding this model hard to ignore!
Learn From the Famous
With a little creativity in implementation, subscription-based business models can be offered by any industry be it fashion, automotive, beauty, music and more. Here are a few famous examples of companies from diverse industries that made it big with subscriptions.
Surely you’ve heard about the “Subscribe & Save” retail subscription model from Amazon, the online retail behemoth. This subscription service offers delivery of recurring household needs, from goods to beauty, personal care items to baby care, automatically every month. Amazon provides a discount of 15% on goods if you subscribe and buy five or more products monthly. Prime members get 20% off these prices. Free shipping is also included and shoppers can cancel subscription anytime for free.
Another notable subscription option is Amazon Fresh, wherein customers can set up recurring grocery deliveries as part of their Prime Membership. In the UK, sales reached £150m in 2018; the figure is expected to rise.
Venturing into the fashion industry, among the top subscription-based giants is JustFab, an online subscription-based fashion retailer. They operate on a subscription-based ecommerce model that provides an unparalleled shopping experience to the customer. The combination of the bankable fashion industry, the convenience of subscription services, and the attraction of personalized professional styling makes it a win-win model for the retailer.
Here’s how they go about it. After taking a short style quiz with the visitor the site records your “style profile” to give recommendations in your customized “Showroom.”
As a VIP member, shoppers get a 30% discount on the retail price and a monthly personalized boutique. A new boutique is delivered on the 1st of every month while the fee for the membership is automatically billed at the beginning of each month. If customers wish to skip a month, they are given 5 days time.
Birchbox of the Amazon has a fantastic success rate as far as subscription-based ecommerce models go. They operate in more than 6 countries with over a million subscribers.
Subscribers are required to select their skin types and style preferences. Birchbox then delivers a box full of beauty samples every month. The subscription does not simply entail buying 5 products but also discovering new products and getting personalized recommendations.
Subscription-based ecommerce business models have given a new lease of life to the turbulent music industry. One such company that has made it big and is still evolving is Spotify. Spotify has two subscriptions, one the paid subscription and the other is a free service which is ad-supported.
For a monthly subscription, users get access to any song they want, from as many different recording artists, whenever and wherever they want. The company generated over €4 billion in 2017, of which almost 90% revenue was based on premium memberships and 10% based on a free service which is ad-supported.
Imagine paying a monthly fee to drive the Porsche of your dreams, and also having the option to swap for a different model a few weeks later. That is the Porsche Passport program.
Other top companies like BMW is testing out a subscription service, allowing customers to trade vehicles as regularly as they want in a month. Cadillac offers the BOOK by Cadillac subscription system, in which consumers can rent up to 18 different cars per year. Volvo already allows US customers to subscribe to its compact SUV, Volvo XC40 for $USD600 per month. This fee includes insurance, maintenance, wear-and-tear, 24/7 customer care and additional concierge services.
Small but Success Stories Nonetheless!
We asked a few small sellers and business owners, how the subscription-based ecommerce model has helped their business. Read on to know how they achieved great results with this model.
Ketan, who owns a funky socks and underwear store named Mojja, says, “While I didn’t believe in subscription models at first, it’s been one of the fastest growing offerings for us. We currently carry a subscription on our ecommerce site, for socks, and underwear. People can subscribe to 3, 6 or 12 month options.
This model works for a variety of different reasons.
1) It makes gift giving so much easier for the customer- They don’t have to spend time to think about what to buy (think about how draining it can be to go to the mall, search for products, wait in lines, wrap the gift, etc.).
2) Enables buyers to buy something that will get shipped anywhere – we currently have a base in Canada and the United States.
3) Makes forecasting of products easy for us as sellers- I’ll know what I need to hold for inventory based on pre-paid purchases.
4) Who doesn’t love surprises every month in the mailbox?! It’s sure is better than getting bills in the mail.
Yoga pioneer and physical therapist Lara Heimann has had wonderful success with her subscription-based model. The creator of the LYT method of yoga- the only yoga practice that is rooted in physical therapy- has developed movementbylara.com, an online living breathing site that offers a class daily to all subscribers. Each day a new class is uploaded, and the subscriber has the option to take the classes from the previous 2 days only. There is no larger catch-all database of content, creating urgency to take the class and plug in before you miss it!
Prior to creating this platform, LYT was offered in person at Heimann’s yoga studio, Yoga Stream in Princeton NJ. In person, her classes attract 200 students per week, but with her online classroom, reaches over 10,000 students globally. At $30/mo it is far cheaper than taking a class in a brick and mortar space, where the average CLASS is $20. There is also an undeniable convenience factor. You can take these classes anywhere at any time and not reliant on the class schedule of your local gym or studio. She also has a corresponding podcast that she hosts 3x per week to talk more about the brain-body connection and the evolution of yoga for the modern lifestyle.
So we’ve delved deep into what subscription-based eCommerce business models are and how they work. Clearly, if subscription services have gained such immense popularity, they must boast some incredible benefits isn’t it?
Benefits of Subscription-Based Ecommerce Models
Subscription-based ecommerce models can be supremely beneficial for both businesses and customers.
Say No to War of Competition!
Subscription models save sellers from battling constantly against the competition to gain customer loyalty and bring them back for repeat business.
Financial Forecasting Becomes Better
Subscription-based e-commerce business models make financial forecasting much easier. This is mainly due to the fact that the same fluctuation that accompanies standard e-commerce business models, where a sudden flurry of purchases could come all at once, or, vice versa, an unexpected dry spell.
Stacy Caprio, Founder of Growth Marketing thinks, “Subscription-based ecommerce is huge for sellers because they have a projected and semi-guaranteed income month to month whereas income for regular ecommerce sellers can fluctuate drastically by month, day and season.”
Revenue and shipping costs are easier to calculate as there’ll be a steady number of packages or deliveries per month.
Better and Stronger Client Relationships
It’s possible that dissatisfied customers might cancel their subscription, however, with subscription models, customers are more likely to stay. Mostly because they establish an ongoing relationship with your brand and the convenience they get.
Ali Najafian, CEO at Trendy Butler says, “The subscription revenue is considered (and is) a higher-quality of revenue because it is recurring revenue. This allows for better predictability of cash flows and presents opportunities to increase Customer Lifetime Value – if you are able to keep your current customers happy.”
Greater Inventory Control and Consistent Business
With the help of a subscription-based e-commerce mode, inventory management becomes easier. You have a better idea about the status of your inventory every month and also anticipate demand and supply with ease. Since each shipment will always contain the same products for the respective subscription plan, you can regulate stock levels, and calculate reorder points accurately. This reduces waste and avoids storage issues. The advantages can be extended to delivery and supply chain as well. The different vendors for product delivery can be selected in advance, saving time, effort and costs.
Marketing Opportunities Go Far and Wide
The subscription-based ecommerce business model ensures customer engagement through various platforms on a regular basis. Email campaigns assist upselling and cross-selling opportunities.
Keeping abreast of user preferences and usage behavior helps business strategize their social and content marketing campaigns accordingly. Gathering feedback and testimonials from long-standing customers and adding to the website creates a positive brand image for potential customers.
Jay Perkins, Co-Founder, Kettlebell Kings, has his own growth story to tell as an ecommerce equipment retailer. He says, “In the past 8 months, we have started moving to a subscription model with our new training site www.living.fit. We are using this to create new workout content, helpful tips, and techniques about how to use kettlebells, battle ropes, healthy living and more. We always focused on content production as an ecommerce company with our blog so this is a natural extension of that. Additionally, this will be a powerful tool for us as we enter new equipment markets. It can help us be impervious to fluctuations in our raw material costs, government rules and more that will affect our current core product, kettlebells. Even if our cost goes up, we can drive revenue and branding through our subscription model as well.””
Customers prefer subscription-based models for convenience. The ‘set it and forget it’ feature saves them from remembering to replenish their supplies since the products are delivered to them automatically when they need.
Customers also opt for the subscription-based model as it allows for easy budgeting. Products and services are available at a flat price enabling them to stick to their budget and monitor expenditure efficiently.
Challenges of Subscription-based Ecommerce Model
Not for Everyone
The subscription-based ecommerce model is not suitable for all businesses. To reap the highest benefit of this model, it is important your business stays relevant and useful to customers for the long-term. For example, if its content (music, movies, books) then it needs to be regularly updated and if its physical products, you must maintain high quality and improve with time. If you offer products that are occasionally purchased, then people won’t be willing to give regular payments.
Credit Card and Payment Issues
Subscription-based e-commerce business model is based on deducting regular fees automatically through the payment information given by your subscriber. Yet, it could happen that at times their card doesn’t work or is expired. In such cases, you allow delayed payments, but it could negatively impact customer experience.
Subscription fatigue is the term given to the state of overwhelming feeling that customers face when they have too many subscriptions and think they become nervous about not being able to use what they’re paying for. The customers might end up canceling their membership as a result.
Best Practices for Success with Subscription-based Model
When implemented well, subscription-based ecommerce models can really hike the revenue for your business. You can take cues from some of these best practices to get on track.
You need to price your subscription plans keeping in mind the cost and the value of the product/service you’re offering to customers. How your subscription is priced will set an expectation for your customers. If the price is too low, they’ll feel its a waste, if too high, they might avoid it.
A tiered subscription model will be most profitable since it offers personalized experience according to customer requirements and revenue security for business.
Keep updating Content and Features
April Lee, Business Development Consultant at QuikStor Security & Software opines, “ A subscription-based model allows as well and encourages eCommerce companies to continue to evolve. Optimizing the online experience keeps customers happy and eager to come back.”
With a subscription-based business model, you need to constantly bring fresh content and updates to your subscription service. There will come a time when customer satisfaction might get saturated with your product/service.
Stay on top of the trends and offer the latest on your subscription service.
Distinguish yourself from Competition Clearly
With the modern customer, it’s not simply about pricing, but other factors are equally important. Customers also consider elements like customer service, easy payment and billing options and CSR while purchasing from you. So make sure you set yourself apart from competitors by clearly communicating the value of your service to make it an enjoyable experience for customers.
Subscription-based ecommerce business models have seen fantastic growth which is only expected to rise. Obviously, when implemented properly, it is a beneficial way of business for both sellers and customers owing to its convenience and recurring revenue stream.
Overall, a subscription-based ecommerce model can be applied by a variety of businesses and even if you don’t have one, you can always consider offering this alternative to customers.