Subscription model for selling goods - the great return of a new-old strategy

Subscription sales model

The great return of a new-old strategy

One of ‎ the major challenges in e-commerce ‎, which is experiencing a slight downturn after the boom during the pandemic, is retaining customers and convincing them that it's worth coming back to the store for more. There's nothing strange about this because the likelihood of selling to returning customers is 60-70 percent, while for new customers, it's 5-20 percent. Additionally, the expenses that e-commerce businesses incur to acquire new customers (advertising campaigns, SEO, etc.) often exceed the margins on their first purchases.

Knowing this, it's worth considering a new strategy that ensures a consistent demand for products and services offered to returning customers. One of such strategic models is subscription sales. This is not a new trend – this model worked very well even before the internet era. Do you remember newspaper subscriptions?

Subscription e-commerce sales in the United States in recent years in 2019-2023 (In billions)

The subscription model is a form of sales in which customers are charged periodic fees for access to products or services. The benefit for brands is that they establish long-term relationships with customers and can better predict revenues. For the customer, they don't have to spend time each month placing another order – it happens automatically. Are we dealing with a win-win situation? Perhaps.

It pays off. For everyone.

It's the ease, hands-free nature, and relatively lower cost of services or products that make subscriptions an increasingly common way of buying. Data shows a growing trend. Statista predicts that the value of e-commerce subscriptions will reach 38 billion dollars this year. Other data suggest 478 billion in global terms by 2025. Adding to this is the fact that 15 percent of the 2.14 billion online shoppers already use subscriptions, and companies employing this model grow five times faster than those in the S&P 500 index. I probably don't need to emphasize that this market is huge and continually expanding.

In the USA, where subscriptions are popular and growing the fastest, half of consumers use this purchasing model. The average customer has two subscriptions, and a whopping 35 percent have three or more. Among those utilizing this system, there are more women. On the other hand, the average number of subscriptions per person is higher among men. Gentlemen are convenient.

You can subscribe to almost anything, well, almost anything.

When we say "subscription," we often think of digital goods. There's a lot of truth in that because digital services like Netflix, software, online learning have been responsible for the trend of this consumption model. However, as I mentioned earlier, this is an old strategy that was once "reserved" for sectors such as telecommunications, energy, or media.

Does the subscription model today only apply to services? Not necessarily. Let's think about products. During the pandemic, there was a rapid development in industries like meal kit delivery, but we also subscribe to items like coffee, cleaning products, and even socks. Yes, socks. One Czech company sells its products in this manner.

https://www.ponozkovice.cz/ Subscription sales of socks.

There are three types of subscriptions: replenishment, curation, and access. The first type, replenishment, allows customers to automate the purchase of regularly consumed goods, such as diapers, razors, laundry detergent, or coffee. I recommend visiting the website dollarshaveclub.com, where you're asked to complete a simple questionnaire to assess your needs, and then you receive a tailored offer.

Dollar Shave Club.

I was offered a subscription for $40, which would provide me with five shaving products every two months. The estimated revenue for this business in 2023 is $76.3 million, and the company currently serves 3 million customers. Who wouldn't want that? Curation involves delivering a very good, often personalized experience, mainly in segments like clothing, beauty, and food. In this category, you'll find meal kits, supplements (e.g., Sundose), and even socks.

Stitch Fix is an interesting example of using this model. When you visit their website, your task is to fill out a detailed style matching questionnaire. To be honest, the questionnaire is quite lengthy. While filling it out, I had the feeling that it would never end. When I finally reached the end, I received information that for just $40 per month, I would receive a package with new clothes. I wasn't sure what exactly would be in the package, but they assured me it would be well-matched to my needs since the service had gathered so much information about me. The precise contents of the package would be a surprise. To meet my expectations, a team of over 5,000 stylists is working, supported by analytical software.

Stitch Fix. The appearance of survey results with a subscription plan.

Access is a model in which consumers, after paying a subscription fee, gain the ability to purchase at a lower price or access products exclusively reserved for members (subscribers). In Poland, the most popular service of this kind is Empik Premium, where, for a fixed monthly fee, customers have access not only to cheaper products and free deliveries but also discounts for cinema and coffee shops. The company proudly states (as of August 25, 2022) that since the program's launch, 8 million members of this club have collectively saved 380 million Polish zlotys, with one record-holder saving as much as 73,500 zlotys. I wonder how much he spent in the first place...

Graphic from empik.com showing the value of discounts for customers in the program

It's harder to acquire a customer, but they are more loyal

As you can imagine, the decision to join a subscription program is not that simple. In the case of one-time purchases, the risk is lower, and you can always return the product. McKinsey points out in their report what convinces customers to join such programs. Recommendations from friends are always important, but access to personalized products is also a significant argument. Those who order regularly consumed products are enticed by lower prices and the convenience of not having to remember to make regular purchases. Certainly, the cost of acquiring a customer is lower in this model because they stay with the brand for a longer time. On the other hand, it's more challenging to convince them to transact, especially in Poland, where we are not fond of making credit card payments in e-commerce. You also won't succeed in this business if your customer service is subpar. This group of consumers expects better experiences and excellent service, considering they regularly contribute to the brand's account with their payments.

Challenges in the subscription model.

In the subscription model, customers might feel like they're buying a pig in a poke. Literally, because I still don't know what package Stitch Fix has prepared for me, as mentioned earlier. If we don't provide customers with satisfying experiences and emotions, they will quickly opt out of such a service. This is what happened with the Sephora Play program, which ended in April 2020 after five years in the market. In this case, acquiring expensive products from brands and sending them to customers did not pay off, despite initial success.

Customers expect exclusivity; they want to be surprised. That's why most cancel their subscriptions either when they no longer need the subscribed products or when they find them less valuable than expected. McKinsey research, in which over 5,000 consumers participated, clearly shows that one-third cancel their subscriptions after three months, and half do so after six months. For example, the meal kit category saw around a 70 percent churn rate in the first half-year of subscription, although consumers in this case likely switch to other brands.

Subscriptions can be good for your e-commerce business.

The subscription market will continue to grow because this model benefits both the customer and the brands. Consumers get efficient, automated processes and don't have to constantly fill out forms, manage payments, or remember to restock. This seamless service, security, and advanced product or service personalization increase customer loyalty, which is the Holy Grail for brands. Long-term relationships, managed through multiple channels, can translate into additional sales because many subscription companies also sell products in the traditional model. If a customer loves a brand that consistently delivers attractive packages each month, they will come back for more.

Additionally, traditional e-commerce businesses can expand their sales through the subscription model. Imagine an online appliance store. I'm not suggesting selling a dishwasher in a subscription model – a new one every month? (That would be quite unusual!). But if we could buy a dishwasher and subscribe to dishwasher tablets or laundry detergent in the case of a washing machine, it would be an interesting concept.

Predictable sales and, consequently, revenue allow for better decision-making and more effective supply chain management. I know from experience that these are challenges for most e-commerce businesses I've worked with. Therefore, it's worth considering the subscription sales model.

How to get started?

Just like in any business, you first need to carefully consider what, for whom, and how you want to do it. Thinking about models that can make customers' lives easier is the right track. Based on this, it will be much easier to define the Unique Selling Proposition (USP) of your product, which potential customers need to believe in. Only then will they consider whether it's worth it. Retaining customers, although theoretically easier than in traditional e-commerce, is also a challenge. If you don't invest in improving experiences, if the user experience (UX) of your store is poor, if you don't surprise customers, you won't succeed, and the customers who came to you so easily will leave just as quickly. A good practice, but only for digital products, is to offer free trial periods. It doesn't cost much because it eliminates fulfillment processes and the need to invest in physical products. Additionally, even if the customer doesn't choose to stay with you for the long term, you can always entice them through social media or email marketing. It's important for such actions to be conducted thoughtfully. Choosing a platform is another crucial step in preparing to launch a subscription model. In fact, all major e-commerce platforms have such options, which is definitely helpful. It's also worth considering a mobile app, which can become the heart and brain of this type of business model.

Is a mobile app necessary?

The answer to this question is clear. It's not necessary, but it's highly beneficial for several simple reasons. Firstly, customers always have their smartphones with them, so they can quickly engage with the brand without having to search for it in a browser. Secondly, an app is an excellent tool for a loyalty program, which is particularly important for businesses that sell products both in physical and online stores. Thirdly, customers will find it easier to manage subscriptions, and that's what it's all about – convenience, accessibility, and hassle-free experiences. There may be more reasons to consider a mobile app, and they could be specific to different sectors, but in every case, the customer gets what they're waiting for—convenience.

Summary

The e-commerce subscription market is growing rapidly, and as data shows, it will only accelerate because it's typically a more cost-effective and enjoyable sales model for consumers. However, it's crucial to ensure the best customer experiences and develop the business in a way that puts the consumer first. It's an excellent way to diversify revenue and better cater to your target audience, provided you think through your strategy.

It's also worth looking at the big players, like Dollar Shave Club, Blue Apron, Hello Fresh. You can learn a lot from their mistakes, and they surely made plenty. I wish you good luck, and I secretly hope that after reading this article, some of you will decide to adopt this sales model. I wish you success and am more than willing to help with my knowledge and e-commerce experience if you ever need support.