While e-commerce puts the control of purchasing in our hands, subscriptions on the other hand have made shopping convenient by relieving us of shopping lists and remembering what to buy each month.
In May 2020, online spending reached a record high of $82.5 billion, which represents a 77% increase from 2019. As consumers nowadays favor consumption and value over ownership, businesses are more likely to try out subscriptions. Subscription e-commerce has been on the rise for a while now and the pandemic has expedited the trend.
What Is Subscription E-commerce?
Subscription e-commerce is a business model where customers pay a recurring fee to obtain goods or services. In such a model, consumers pay for a regular supply of goods or services. Subscriptions can be provided weekly, monthly, yearly, or at the request of the client.
Subscription e-commerce has become a vital aspect of modern shopping and includes everything from meal packages to streaming services to gym subscriptions. This model can increase your customer’s lifetime value considerably as customers pay a recurring fee to obtain goods or services regularly rather than a one-time payment. As long as your consumers continue to see the value your business offers them, they will continue to pay you for it.
Benefits of Subscription E-commerce
The subscription e-commerce model is dominating the industry and businesses that have chosen it are witnessing tremendous growth. The benefits of adopting this model are:
1. Recurring and predictable revenue
The number of customers you attract and lose over time will become more predictable once you’ve been in the business long enough to gather data. This makes it easier to anticipate how much money you’ll make each month. The recurring fee structure makes it possible to anticipate your revenue stream and gives you the ability to manage your finances and make informed business decisions.
2. Stronger customer relationship
With one-off pricing, clients pay you once and the connection disappears until they require customer service or a new version is launched. Your capacity to quickly respond to the client’s input enhances and strengthens your relationship with them.
3. Better inventory management
An e-commerce company’s inventory management strategy is very crucial for its business. But with the subscription model, you are aware of exactly how many customers you have and how much inventory you will require. This makes it possible for you to confidently predict demand and prepare your inventory well in advance.
4. Lower costs for acquiring new customers
The primary rule of any business is to keep customers happy and establish a lasting relationship with them to reduce client acquisition costs. Selling to an existing customer has a 60-70% chance of success, whereas selling to a new one has a much lower success rate of anywhere between 5-20%.
5. Upselling or cross-selling opportunities
Subscription plans are more flexible as they offer a variety of features for a wide range of prices, hence adding more options for subscription-based services makes more sense. Customers are more inclined to explore a higher tier as it is easy to switch between plans.
Challenges of Subscription E-commerce
Subscription e-commerce is appealing to both brands and consumers as it has many benefits. If you’re considering adopting a new business model, it’s critical to understand the challenges involved. Most of these challenges for e-commerce subscriptions have to do with how you draw in, provide value and retain customers.
Selecting a strong pricing plan is a crucial choice for a subscription e-commerce business. It needs a lot of data to understand how to link the value of your service to the client’s willingness to pay and if you’re incorrect, you end up losing a customer.
The subscription e-commerce model is one of the finest business models for increasing revenue but upselling and cross-selling to existing clients can be challenging. A customer won’t upgrade from a free subscription to a premium one unless they believe the value received is worth the cost.
Subscription e-commerce businesses need to keep their churn rates under control to retain any kind of development. Anything above 5% could potentially damage your business. As a result, retaining consumers becomes one of your top objectives.
Types of Subscription E-commerce Models
It is only natural that subscription e-commerce would gain popularity as long as consumers continue to demand simplicity and comfort in their purchases. Below are three types of subscription e-commerce models. The ideal model for you will depend on the product or services you offer.
1. Access subscription
This typically works with content and media services. For example, a membership subscription to Netflix, Forbes, etc., allows users to acquire access to locked content as well as perks like discounts and exclusive products.
2. Curated subscription
In this subscription, customers purchase customized packages of products regularly, based on certain categories like apparel, pet supply or cosmetics. Pura Vida Bracelet Club, FabFitFun, BarkBox and HelloFresh are all examples of curated subscriptions.
3. Replenishment subscription
The replenishment subscription is a subscribe-and-save model where consumers can automate their purchases and ensure that they consistently receive the refill delivery. Groceries, personal needs, and daily needs services like Hello Bello and 1st Phorm usually utilize this model.
Some Examples of Subscription Models
The first step to better understand the strategy is to look at some successful subscription firms across industries, regardless of whether you’re a software-as-a-service (SaaS) company, streaming service or subscription box.
1. Streaming services
Content streaming is one of the popular examples of subscription e-commerce. Companies like Netflix, iTunes, Hulu, Amazon Prime Video and Spotify have effectively used the subscription market and have achieved incredible success.
2. Software subscriptions
Instead of waiting for the latest release of the software, consumers who purchase software on subscription have access to the most recent versions right away. Major competitors like Adobe and Microsoft have also endorsed this approach.
3. Magazine subscriptions
They are the oldest subscription-based services and may now be available digitally or in print. Customers who want access to the most recent information are prepared to pay a regular subscription. People Magazine and U.S. Weekly are popular magazine subscriptions.
4. Food services
Food services also use the subscription-based approach wherein providers like Blue Apron and HelloFresh add value by catering to different types of diets.
5. Health and wellness
These subscriptions cover a wide range of categories. BeachBody (a fitness company), for example, has introduced a streaming service that requires a subscription. Whoop on the other hand charges a monthly subscription fee and offers a fitness band.
Methods To Build Your Subscription Business
Using subscription pricing as a business model is effective and flexible. But you need to employ sound strategies and instruments to accomplish your business goals. Following are some tried and tested methods to follow when creating your subscription business.
- You should avoid making the error of charging more than your customer is prepared to pay. With the use of market research, you can adjust the price you charge for your products or services and possibly divide them into several subscription levels.
- Deciding your targets early ensures that you’re developing the appropriate pricing approach for your particular objectives. The ability to think strategically over the long run is crucial when your recurrent revenue is directly related to the monthly or yearly payments.
- More clients mean more revenue. This important reality explains why registering for your subscription service should be as easy as possible. A positive client experience will eventually increase your acquisition rates.
- Don’t let your unreliable subscription billing system cost you money. Avoid complex billing processes as this could cause challenges for customers and lead to dropouts.
- You must focus on retaining customers and maintaining strong and lasting relationships. Unhappy customers will end up canceling their subscriptions and also spread negative comments that might hamper your brand.
With good business strategies and the tips provided, you can scale your subscription business. When compared to churn rates and operating expenses, the consistent and predictable cash flow guarantees that the growth you anticipated will be sustainable. However, if you are unaware of this your infrastructure could easily become overburdened by your expanding customer base.