One of the many challenges facing online retailers is being able to accurately predict future sales and plan just the right amount of inventory.
A subscription business model, in which your customers pay a certain price at regular intervals to access your products or services, helps solve those challenges. It can help you:
- Predict your future sales
- Better manage your inventory and reduce waste
- Spend less money per customer
- Better understand your customers and improve segmentation
- Allow your brand to stand out from competitors
- Gain more loyal customers
So it’s no surprise that more and more eCommerce stores are developing subscription business models. According to McKinsey, subscription eCommerce has grown over 100% over the last five years. And 15% of online shoppers have subscribed to some sort of eCommerce subscription.
And want to know the best part? It doesn’t matter what you sell: Any type of eCommerce company can use a subscription business model to generate revenue.
Take a look at some of the most popular categories of subscription eCommerce:
Who Buys Subscription Products?
A 2018 McKinsey study found that subscriptions are particularly popular amongst young, wealthier people. Subscribers are most likely to be between the ages of 25-44, have an income of $50,000-$100,000 and live in a Northeastern city.
Women are more likely to subscribe (60% of subscribers are women), but men tend to have more active subscriptions.
Types of Subscription Models
According to McKinsey, there are three different types of subscription models: replenishment, curation and access.
A replenishment subscription model is based on convenience, so customers don’t have to worry about remembering to reorder items when they run out. A good example is Dollar Shave Club, an eCommerce company that sells razor blades and other grooming products on a monthly basis:
A curation subscription model is meant to surprise and delight the customer with something new and different each month. BarkBox, for example, sends their subscribers a box of dog treats and toys each month:
An access subscription turns its subscribers into “members” and provides them with access to exclusive benefits and perks. For example, Amazon Prime members pay $12.99 per month (or $119 per year) and are spoiled with free, two-day shipping on all Prime products, along with access to Amazon movies, music and other deals.
Here’s a brief overview of the main differences between the three types of subscriptions:
Why Do People Sign Up?
According to McKinsey, the majority of people who sign up for replenishment subscriptions are motivated by more practical financial incentives (or saving money).
Those who sign up for curated and access subscriptions are often looking to try something new and are encouraged by recommendations. 28% of curated and access subscribers said that a personalized experience was of the utmost importance in continuing their subscription.
Why Do People Cancel?
One problem facing subscription-based businesses is churn rate or the percentage rate at which customers unsubscribe. McKinsey found that more than one third of subscribers cancel in less than three months, and over half cancel within six months. Replenishment subscribers tend to stick around the longest.
The same research from McKinsey found that people are likely to cancel their subscription when they don’t feel like it’s of high value. They are also prone to cancel when products accumulate or when they’re unable to customize the order volumes based on what they need.
The Downsides to a Subscription Business Model
In addition to finding ways to decrease churn rate, subscription-based businesses face several challenges:
More Expensive Packaging
For one-time payments, you can probably get away with sending your products out in simple, nondescript packages. But people tend to have higher expectations for curated—and even replenishment—subscription products.
Birchbox, an eCommerce cosmetics company that sends out a box of curated, personalized beauty products each month, meets customers’ expectations with thoughtful and beautiful packaging:
With a curated subscription model like Birchbox, you’re essentially sending your customers a gift each month. So you can’t just throw a few products in a box and call it a day. You’ve got to put some real thought into the packaging. Your customers should be eagerly awaiting that box and excited to open it.
Harder to Sell
Have you ever seen a free trial for something and not signed up because you were worried that you would forget to cancel it? I know I have.
A subscription service is a commitment. Presumably, many people hesitate to subscribe because, even with the promise of free cancellation, they’re worried that they’ll forget to cancel and be charged month after month.
With that being said, you can probably expect your conversion rates to be lower than non-subscription products. And you’ll have to work harder to sell your subscription service to your customers (more on that part shortly).
With traditional eCommerce stores, it’s not the end of the world if one of your products runs out of stock.
But if you rely on a subscription business model, your customers have already ordered (and perhaps even paid for) those items. So if something happens and those products run out of stock, then you’ll have to explain to your customers what happened. If this scenario does arise, it would probably be a good idea to offer them something in exchange for the inconvenience.
Creating a Subscription Business Model
So…Decided that the pros outweigh the cons and you want to jump on the eCommerce subscription bandwagon after all?
But before you get started, there are a few things that you’ll want to do:
Think About Price
The price of your subscription has got to be a good value for your customers and increase your overall revenue. So it’s important that you put some thought into this. Can you afford to be generous? Or are your profit margins already tight?
If you want to create a replenishment subscription program, then the price of your program is particularly important, since the majority of people who sign up for these types of subscription programs are doing so to save money. If your replenishment program isn’t saving your shoppers any money, then how can you expect them to want to sign up for it?
But even if you sell a curated or access subscription, it can’t hurt to convey the value of your service. See how the whisky subscription company, Whisky Loot, advertises the value of their offer:
$380+ worth of whiskey for only $59?! If you’re a whiskey-lover, how can you say no to that?
Given that many customers cancel subscriptions that aren’t customizable to their needs, making your subscription program flexible is a no-brainer.
No matter what you sell, your customers are bound to go through the products at different paces, so allowing them to receive their subscriptions on their own timeline will help decrease cancellations and lower churn rate.
The Honest Company advertises their flexibility and the fact that subscribers can select their own products, choose their own order frequency and cancel at anytime. They lower the risk of joining to practically nothing.
So be as flexible as possible. Allow your customers to customize their subscription so that they can receive their orders at an interval that’s best suited to their needs.
Make it Convenient
We know now that many people are drawn to subscription programs, especially replenishment programs, because they’re convenient. They just make life easier.
Instead of having to go out and buy razors each month, Dollar Shave Club subscribers get razors delivered straight to their doorstep. Instead of having to buy new vitamins every other month, people who take advantage of Amazon Subscribe and Save don’t even have to think about reordering when their bottle is almost empty.
Think about how you can simplify things for your customers and make life just a little bit easier for them. And then remind them of that.
Surprise and Delight
Whatever type of subscription you’re selling, you should aim to be continually surprising and delighting your customers. But this is especially important if you sell a curated or access subscription, since this is why people signed up in the first place.
Take Sock Fancy, for example. Sock Fancy is an eCommerce store that sells sock subscriptions. Yup, you read that correctly. They gift their subscribers with a new pair of socks each month.
Now, if their subscribers really needed new socks, they would probably just go to the store (or online) and buy several pairs at once. But people sign up because they want to be surprised and delighted with a new pair of socks each month. It’s fun and exciting to not know what you’re going to get and to have something to look forward to (especially if you’re a sock-lover).
But even if you sell a replenishment subscription, that doesn’t mean that you shouldn’t be surprising and delighting your customers. Send them free samples or a funny how-to guide. Give them a discount on their next purchase. Remind them how much you appreciate having them as customers.
Create an Agreement Plan & a Process Plan
In the book Building a Storybrand: Clarify your Message so Customers Will Listen, author, Donald Miller, talks about the importance of creating an agreement plan and a process plan for your prospects.
An agreement plan tells your customer what you promise them if they choose to buy from you. It addresses any fears and hesitations that they might have in the buying process.
A process plan tells your customer what steps they need to take in order to become your customer; it helps to resolve any confusion that they may have on their end.
Your subscription program should come up with both an agreement plan and a process plan. When crafting your agreement plan, think about the reasons why people might not want to join. Is it the commitment part? Tell them about how they can cancel at anytime, like The Honest Company does.
Do you think they might be afraid that they won’t like the product selection? Offer to let them choose the products they want—or to swap out any products that they’re unhappy with.
In your process plan, you’ll want to outline the steps that your customers will need to take in order to become subscribers. See how Birchbox does it here:
Considering that 28% of curated and access subscribers expect a personalized experience, you also need to make sure that your subscription service provides that.
The online retailer, ShoeDazzle, sells a subscription service that provides its members with exclusive access to a personalized selection of shoes, handbags and clothing.
In order to make sure that the style suggestions are accurate, they have users take a quiz to find out what their fashion preferences are:
And there’s the beloved Birchbox, which, as mentioned, sends a box of curated beauty products to subscribers each month. But that’s not all. Each box is personalized to the customer, based on their recommendations.
They also let customers leave reviews on the products so they can learn more about them and improve future product selections:
Like the aforementioned brands, make your subscriptions as personalized as possible. Not sure what your subscribers are interested in? Have them take a quiz before signing up in order to find out.
Then, after the first month, send out an email and garner their feedback to find out what they like and don’t like, so that you can continue to personalize and provide an even better experience for your customers.
Make the Benefits Clear
If you allow your customers to choose between making a one-time purchase and subscribing, then you’ve got to make it exceptionally clear to them why they should subscribe.
Do you offer free shipping on all subscriptions? Is it cheaper to subscribe than make a one-time purchase? Do you give free samples to all subscribers?
Think of something that you can offer your subscribers that they can’t get with a one-time purchase. Or better yet, think of something that you can offer your subscribers that they’ll be hard-pressed to find anywhere else.
Whisky Loot makes the benefits of joining very clear to their customers:
Not only do subscribers save a ton of money on whiskey, but they’re also treated to whisky that comes from “hard to find, small batch distilleries” and “an ever-changing selection of expert curated whiskies.”
A subscription business model isn’t only for eCommerce companies that sell replenishable products, like grooming products and dog food.
The fact is that any eCommerce company can (and should) create a subscription business model to generate revenue. If you currently rely on one-time payments, this doesn’t mean that you should turn your entire business into a subscription-based business overnight. You might find, instead, that a hybrid model works best.
But whether you decide to sell a replenishment subscription, a curated subscription, or an access subscription, find a way to sell something to your customers at regularly recurring intervals. Hopefully this blog post has provided you with a bit of inspiration and direction on how you can go about doing that.
Still have questions? Or need help creating a subscription business model for your eCommerce store? Get in touch to find out how our eCommerce web design agency and eCommerce marketing services can help.