The retail subscription service industry is booming, with massive growth in recent years.
In fact, from 2014 to 2018, the industry saw 890% growth. That is unprecedented for most industries.
A subscription service is a business model in which customers are charged a recurring fee, usually monthly, quarterly, or yearly, for access to a certain product or service. This can be in the form of a subscription box or subscription plans for specific products.
The industry is popular for a reason. Customers can sign up for subscriptions in several retail sectors, including dental care, health supplements, food, apparel, and eyecare.
However, the business model is still relatively “new” within the ecommerce industry. There are several areas of the direct-to-consumer subscription model that can be improved.
As more consumers become interested in the ease and predictability of subscription services, ecommerce brands must adjust to new challenges, ranging from delivery issues to customer service.
In this article, we’ll define what a subscription service is, the challenges you can expect to face, and how to overcome them for business success.
Table of Contents
- How a Subscription Service Works
- What is Driving Subscription Services?
- The Challenges of The Subscription Service Model
- How to Overcome Issues With Subscription Services
How a Subscription Service Works
A subscription service is a business model in which customers pay a recurring fee, usually monthly, quarterly, or yearly, for access to a specific product or service.
You may already be well-acquainted with this business model in the entertainment segment, where services such as Netflix and Spotify offer payment plans in exchange for their library of content.
But what if you’re an ecommerce company that sells products? Is the subscription model sustainable, and is there a business rationale?
Proof that ecommerce subscription services work can be seen in one of the biggest success stories in this segment ― Dollar Shave Club.
Source: Dollar Shave Club
Launched in 2011, when subscriptions were still in their nascency, the brand’s business model was simple: deliver razor blades every month to the doorstep of every subscriber.
Not only did the initiative result in a successful acquisition for them, but it also significantly increased their brand awareness.
With more repeat business, demand forecasting likely became more accurate. Customers gained a deeper relationship with the brand as a result, and Dollar Shave Club saw improved customer retention among subscribers.
The psychology behind this is simple – once a customer subscribes to a service, they’re less likely to opt-out or shop around, making this a very useful business model.
What was the secret behind their success?
Customers do not have an inherent fondness for signing up for an automated payment model. They tend to only sign up for subscription services if it provides tangible benefits such as lower costs or increased personalization.
In the case of Dollar Shave Club, this tangible benefit came in the form of lower costs with an entry plan cost of just $1 month. Personalization came later, as the brand began including additional grooming items in new subscription bundles.
Source: Dollar Shave Club
How can ecommerce companies take advantage of the subscription model?
The first step is to bet on customer experience and develop a robust multi-channel ecommerce marketing strategy.
If your brand doesn’t deliver a superior end-to-end experience across all your channels, customers will quickly cancel their subscription. We’ve written a guide on multi-channel ecommerce marketing, which you can read here.
It’s also important to consider which subscription service model will best serve your customers. Unlike Dollar Shave Club, not all subscription services deliver the same items to their subscribers every month.
Birchbox, a monthly beauty subscription service, runs on a different model – a subscription box.
Subscription boxes include four to five different sample beauty products every month to send to its subscribers. While boxes are less focused on long-term retention, it may appeal to some companies looking to test the waters before launching a full service.
Subscription services can vary depending on your niche and customers – let’s explore some trends in the ecommerce subscription industry.
What is Driving Subscription Services?
According to a survey conducted by Clutch, 54% of online shoppers said they pay for a subscription service.
What’s behind this trend? The success of subscription models is due to the change in the buying habits of the modern, millennial consumer.
The effects of new subscription models on successful platforms like Alibaba and Amazon also make an impact. For example, Amazon’s famous Amazon Prime service offers faster delivery times and other benefits, establishing a popular subscription service for customers.
Consumers know they can purchase the same product online and have it delivered to their door in a matter of hours. Yet, once they’ve found a brand, they are more likely to commit to buying straight from the source if they can get a great deal.
For today’s consumers, who shop through a diverse set of channels, traditional retail is not enough. Download our free guide.
Hence, the next wave of ecommerce expansion rests in the growth of ecommerce subscription services. Brands are creating product boxes or subscription plans to excite online shoppers and reward customers by removing the need to go through the purchasing process again.
For product box subscribers, there’s also an inherent element of surprise and excitement with each delivery. While customers usually don’t know what they will receive, they trust you to curate and pick the right items for them.
Of course, this doesn’t mean that businesses should do away with traditional retail and ecommerce businesses altogether. The best practice here is to integrate subscription services as part of its overall multi-channel strategy.
While subscription services add complexities to your inventory and shipping infrastructure, there are some benefits:
Subscription services improve retention rate as it allows brands to maintain an open line of communication with customers. Companies can use interactive email campaigns, feedback forms on their website, or promotional materials in each shipment to engage customers.
Bringing customers back around helps brands continuously learn about their customers. Using this knowledge, they can continually tinker with their product to ensure that maximum value is delivered.
This approach leads to increased customer loyalty, which comes with a higher customer lifetime value (LTV). A high LTV is a hallmark of a good company because it indicates profit margins are high. If this is something your business needs work on, subscriptions can be a viable solution.
Moreover, since you know how many people subscribed to specific products, you will be able to make better predictions about your inventory and fulfillment needs.
While the data may inspire you to kickstart a subscription service, you will face challenges. You must understand the common pitfalls of subscription services so you can tap into the benefits they can bring to your business.
The Challenges of The Subscription Service Model
Starting a subscription service requires you to overcome several key obstacles.
Launching a subscription service requires a significant amount of capital to get it off the ground. Whether you are building your service from scratch or are an established brand hoping to add subscriptions to your sales strategy, you will need to be prepared to invest heavily in multiple areas.
Some of the costs associated with the service include inventory, warehouse space to hold items, packaging, shipping costs, and marketing. If you don’t already have the budget to fund the subscription service, you will need to explore other options, including:
- Crowdfunding: Many brands find success kicking off with crowdfunding campaigns. Using sites like Kickstarter, brands can get the seed funding needed to launch a successful service.
- Pre-Sale Campaigns: These work best for established brands. While this can help with securing money quickly, it is a risky strategy because you are required to fulfill the orders no matter how successful (or unsuccessful) the pre-sale campaign is.
- Capital Investment: Securing funding or a loan from investors or lenders is a quick way to infuse cash into your business. There is some inherent risk with this approach, especially if you are not able to pay back the loan provided. You should have a solid plan in place to determine what you will do if your subscriptions don’t grow as quickly as anticipated.
It is important to test the launch of your subscription service before adopting a riskier funding strategy like capital investment. Conducting a limited offer on a temporary recurring service can help determine if there’s enough interest among your customers to commit to this strategy.
The greatest challenge is subscription fatigue.
Source: ReCharge Payments
In the face of such stiff competition, it has become challenging to stand out from competitors who offer similar services. So how can you overcome this?
Create a specific, unique, and irresistible offering that provides so much value to your target market that fatigue doesn’t factor into their purchasing decision.
To do this, create buyer personas for customers in your niche and find out what excites them or what can add value to their lives.
For example, a fashion-based subscription box provider might provide visual guides with outfits for the products and accessories they send.
Another way around subscription fatigue is by offering discounts to customers on your subscription service, which adds value to any products that you may be selling.
Some companies accomplish this with marketing materials included in the packages that get sent to customers. The offers are exclusive content that can forge a stronger connection between the customer and the brand.
Finally, brands can also run campaigns to donate to a charity your subscribers care about. With each recurring purchase, the company makes another donation. This strategy can be taken a step further by informing customers about the positive change they are making.
Once you’ve overcome subscription fatigue and have the customer onboard, you will need to determine how to manage customer expectations and efficiently deal with delivery.
In the urgency for speed and scalability, it’s easy to forget accounting for scenarios such as missing credit card information, delays in unsubscriptions, or a lack of inventory to accommodate a sudden influx of new subscriptions.
Automation and smart AI have a role to play in reducing incidences while ensuring growth. Assessing e-commerce software to run your operation is an important task. You want to make sure you choose an inventory management system that can handle situations that are unique to the subscription model.
Another factor to consider when setting up a subscription service is to select what subscription model ─ replenishment, curation, or access ─ is right for your business.
Inevitably, this will determine the subscription revenue model.
In this model, the ecommerce subscription service provides regular deliveries of consumable products. Subscription services that deliver items such as razors, toiletries, food, and groceries, fall under this category.
An access subscription service is different from the previous models in that customers pay a fee to have the exclusive rights to purchase items from a brand.
It doesn’t necessarily mandate a brand to supply products to customers. A great example of this can be seen in the retail market, where brands such as Menlo House which offers exclusive access to discounts across their store for members.
When attempting to start a subscription service, most ecommerce brands will undoubtedly stumble on inventory management and fulfillment, so let’s break that down further.
How to Overcome Issues With Subscription Services
So, you’ve decided to start your subscription service. How do you go about it? What issues can you expect and how can you overcome them to ensure success?
Your biggest challenge will be how to delicately balance your inventory for both your subscribers and one-off customers without overstocking items as that will negatively impact your revenue.
Here’s how to mitigate that outcome.
Inventory management systems
One option is to use an inventory management system such as Skubana, which lets you ‘lock’ or hide a batch of inventory from appearing on your traditional sales channels. When you’re ready to ship products out to all your subscribers, you can ‘release’ them so they can be marked as delivered.
Inventory management systems also include inventory replenishment automations that can make procuring stock for subscriptions more precise. This allows you to estimate how much inventory to purchase and, therefore, will enable you to separate your subscription service inventory from stock for regular orders.
Skubana Auto-PO Rules. Get a demo of Skubana’s inventory replenishment automations.
Another challenge is managing subscription returns with a solid returns policy. Since product returns are inevitable and have an impact on customer retention, your goal is to minimize the number of returns.
Your first line of defense should begin before sending the product to the customer. This includes checking product quality, choosing the right packaging, and creating effective buyer personas to ensure you are shipping products that will excite the recipient.
However, since returns will happen and the subscription model relies on recurring payments, it’s a good idea to send prepaid return shipping labels with your packaging. Not every customer will make use of the service, and offering free return services is an expected service by consumers.
While superior customer care will bring you success, there are other tricks you can implement to increase revenue.
A commonly employed business strategy is product bundling, where you can entice potential customers to sign up for your subscription in exchange for heavy discounts on other items. This strategy only works if you include products in a bundle that the customer values and can acquire at a cheaper cost than buying separately.
It is also always a good idea to mimic strategies that are proven to be effective with other brands.
For example, a brand that provides excellent customer support is FirstLeaf, a wine subscription service, which guarantees subscribers that it will replace any delivered wine if you don’t like it.
This communicates that they know their customers well enough to understand their needs, and also upholds the principle of superb customer service. Some other tactics include brands rewarding their customers with early access to products that are not yet publicly available or the opportunity to shop for member-only sales.
As consumer habits change, ecommerce brands can not afford to shy away from subscription models.
Even large retailers are jumping on the subscription services trend to catch up with smaller, independent e-commerce startups. While implementing a subscription service might seem difficult at first, following the right practices and establishing the proper channels to ensure success will help your business flourish.