Ecommerce Subscription model: Pros & Cons
We’ve taken a deep dive into the world of ecommerce subscription services.
Are you considering starting an ecommerce subscription service for your product or service? You might be asking yourself: can my product or service work as a subscription model? We’ve taken a deep dive into ecommerce subscription services, to help you decide for yourself.
What Is a Subscription Business Model?
The subscription-based ecommerce is a business model that charges customers a recurring fee, that is typically monthly or yearly to access a product or service.
When most people think of ecommerce subscription services, they think of a standalone service selling a monthly box like Birchbox or Hello Fresh. While this is a huge part of the market, digital products have a place too. Software, ebooks, online education, apps, movies, video games and music are just a few types of digital commerce.
The subscription-based business model is by no means new. In fact, it can be traced back as early as the 17th century. Publishers pioneered this model as a way to distribute books, atlases and literature on a regular basis. Fast forward to the 21st century, thanks to digitisation the medium has evolved, yet today’s biggest producers and retailers of this type of content like Audible and Amazon still use the subscription-based model. Gartner estimates that "by 2022, more than 90% of software providers will have migrated to a subscription-based business model." And that's just one industry.
“"by 2022, more than 90% of software providers will have migrated to a subscription-based business model."”
3 Types of Subscription Ecommerce
Generally speaking, there are 3 types of subscription ecommerce services:
Replenish the same or similar items, they will most likely be commodities. Examples include coffee, craft beer, teas like Suki Tea and vitamins. According to Forbes, 32% of consumers subscribe to ‘replenishment’ subscriptions.
Receive a curated collection of a variety of items, often luxury or niche products. Examples include food & drink clubs, gift boxes, beauty boxes and clothing like Monthly Tee Club. According to Forbes, 55% of consumers subscribe to ‘curation’ subscriptions.
Earn membership access to exclusive items or services, these are often digital products. Examples include specialist instructor courses like Linkedin Learning (formerly Lynda.com), access to specialist education or exclusive product releases. According to Forbes, 13% of consumers subscribe to ‘access’ subscriptions.
Benefits of an Ecommerce Subscription Model
If you’re already selling via ecommerce then you know how important it is to listen to your customers and understand their needs. But is that understanding really enough? Does your ecommerce model place enough emphasis on reaching repeat customers? Are your follow-up emails being opened? Are these customers returning to shop with you again? An ecommerce subscription model may be the solution to these problems.
A subscription model could well be a way to stand out from your competition. A subscription service can add some competitive advantage to even the most commonplace of items, for example; tea! For Belfast based tea makers, Suki Tea we introduced a new ‘Tea Box’ subscription-based ecommerce model to drive repeat orders & lower retention costs. The introduction of a subscription-based ecommerce model that enables customers to sign-up for regular deliveries of Suki Tea on a monthly basis helps drive on-going revenue and reduce retention costs. We developed a bespoke subscription management system that enables the warehouse team to easily manage order fulfilment on a daily basis. With the first year, overall online sales increased by 72%. which shows that there is real potential for established brands to extend their offering via subscription.
A subscription model simplifies the process for both the consumer and the business. You can more accurately predict what stock you need, what your shipping costs will be, the spread of your delivery destinations, your warehouse staff requirements and your estimated future income. This predictable monthly revenue stream can be built upon which will ultimately drive faster growth.
Higher Customer Retention
A subscription model ensures that the business is retaining a larger number of customers on a consistent basis. The model allows the opportunity to get upgradations and increased revenue opportunities from existing customers. This, in turn, will mean a lower retention spend. Knowing the customers for a long period of time and solving their problems helps in coming up with solutions more suitable for the business. For example, Graze receives more than 15,000 ratings per hour on the contents of its boxes, this data helps to hone and improve its offering.
Disadvantages of an Ecommerce Subscription Model
Churn rate is the percentage of customers who discontinue their subscriptions to a product or service within a given time period. McKinsey found that “nearly 40% of ecommerce subscribers have cancelled their subscriptions. These rates are similar across replenishment, curation, and access subscription services.”
“Nearly 40% of e-commerce subscribers have cancelled their subscriptions. These rates are similar across replenishment, curation, and access subscription services.”
Competition is heating up as subscription boxes especially have become a hot segment of the market. The king of ecommerce, Amazon also has its own replenishment subscription service - Subscribe & Save. This automated service dominates when it comes to basics and every-day household items. The good news is it leaves a lot of opportunities to forge your own subscription path and give your customers more than just the basics. Collect and analyse your consumer data to create a subscription service that fits your audience niche, that appeals to their interests, desires and emotions.
Difficult to Scale
Evidence shows that the cost of acquisition for subscription boxes is increasing which will prevent many subscription services from growing. Businesses may be tempted to get complacent. Why keep on top of things if you’ve essentially got a captive customer base? A captive customer base does not mean an engaged customer base. To counter this you must maximise the value of each customer you acquire.
One way to up the ARPU (Average Revenue Per User) is to upsell to your subscriber base, which in turn keeps them engaged and excited to receive their subscription. For a masterclass in the art of upselling look at Dollar Shave Club. They offer everything from hair care products to toothpaste, alongside their namesake; razors. Of course, not every customer wants all of these products, but those who do are willing to pay. By offering these extra products the potential to raise the ARPU is much greater.
Should Your Business Offer a Subscription Service?
There is a great opportunity for established ecommerce store owners to start a subscription service as part of the overall sales strategy to grow faster, and to keep customers happy. If you’re thinking of starting your own ecommerce subscription service, we can help. Get in touch to discuss your options.