We’ve seen quite a few ecommerce sites built around subscription models in the past few years.
So what are the advanatages and disadvantages of this business model?
- Philip Wilkinson, founder of Kopi, a subscription gourmet coffee business.
- Dan Barker, e-business consultant.
- Chris Bishop, CEO and founder at 7thingsmedia
What are the advantages of subscription ecommerce?
A two-fold answer as it has benefits to both the customer and the business. For a customer, it’s all about time and convenience whereby you are receiving something you need on a regular basis to your door.
You don’t have to keep placing an order – it just turns up. With Lovefilm, your next movie arrives; with Graze you get your next box of snacks to eat; with Kopi you get your monthly or bi-weekly little coffee treat.
Going through the letterbox is perfect.
The best ones also have an element of curation and personalisation to cater to your tastes (healthy snacks, or espresso based coffee perhaps). Often they have products in there that you can’t easily get elsewhere and different each time.
For a business, it’s a much better way to predict volume and demand in advance and buy just the right amount of product and reduce wastage. Often the money is upfront too so it’s great for cashflow.
Also, it always looks good to investors when you have a predictable cashflow.
It depends on your point of view, but for the business, one of the big advantages of ‘subscription’ ecommerce is that acquiring a transaction means you acquire a customer over the longer term, rather than just that single one-off purchase.
There are lots of benefits of that:
- Higher margin: It usually means higher margin, which also means you can afford to ‘pay more’ for a customer, and often to grow faster by ‘buying’ customers more quickly than your one-off-transaction competitors, or spreading to new territories in the knowledge you’ll have the future income to pay for it.
- Greater predictability: You have a much closer idea of how much stock you need, what your shipping costs will be, the spread of your delivery destinations, your warehouse staff requirements, your likely future income, and more.
- Lower retention spend: Your customers automatically ‘buy’ from you each month, without the need for you to bring them back via display retargeting, social, email, etc. (albeit you’ll most likely do some of this anyway), which means you have lower retention cost.
- A big extra channel: Fulfilment. For large companies like Amazon, fulfilment itself is a channel – it gives them a medium to communicate offers, cross-sells, etc to their customers. For smaller retailers that’s usually more difficult: They may only sell to a customer once or twice a year. With a subscription business, that gives them the ability to communicate through this channel far more regularly with customers, and build the relationship deeper much more quickly.
- Faster feedback loop: Again, if a customer orders from you twice a year, it takes you a long time to understand any problems and prioritise them highly enough to iron them out. If customers buy every month, they soon tell you of the issues, which means you remove problems quicker and in turn create a better product that may both attract more customers, and mean your existing customers stick around longer.
- Company value: A company that can say “we’ll generate £3m next month” and know it for sure is usually going to be viewed as more attractive than the same company without the near-guarantee of income.
- Amplification: A silly term perhaps, and really related to the ‘faster’ and ‘frequent’ elements above, but – if a customer receives something from you every month – you become part of their life, and they can help amplify your brand via word of mouth, social media, etc. Even if you don’t specifically take action to nudge this, the frequency itself sometimes means it happens.
There are lots of other odd benefits too, of course – from the ability to think a bit longer term, to the ability to hold a much narrower range of products and still compete – but many of those can be achieved without subscription too.
- It should mean a steady monthly revenue, plus it sure is easier forecasting consumers’ lifetime value.
- It also opens up customer data and communication possibilities. Continual streams of actual monthly client habits, groupings and nuances.
- No Black Friday or orders on 13th February to melt your warehouse and upset your loyal customer.
- A fixed regularly shipping window and typically product size soothes out the risk of unpredicted daily demand on your fulfilment.
What are the ‘cons’ compared to ‘normal’ ecommerce?
You’re committing to a regular payment with a leap-of-faith into how easy it might be to leave anytime you want, as there’s always that doubt the company might make it hard for you and too much hassle.
They can get boring. A lot of subscription businesses just send the same thing each month and then it just becomes a dull commodity item.
Volumes are always a difficult balance as you end up with too few and too much of the subscription product for your needs, as the businesses has to try and standardise the sizes.
That’s the same issue whether it’s a 250g premium coffee with Kopi, a box of four different spirits, fruit & veg pack, or boxes of snacks… it will always be slightly too little or slightly too much.
Some people like to be in control and discover and buy their own things… a subscription business is trying to take some of that control away (albeit making it easier by curation).
There are a few negatives, some of which are ‘good problems to have’, and some of which are genuine risks:
Attribution: There’s more thinking to do around ‘attribution’. Do you class the return from your first month’s customer revenue as the result of the channel that brought them to the site? Or the entirety of their spend with you? Or cut off at an arbitrary point? What about cancellation (aka ‘churn’)?
If customers unsubscribe after six months, do you have the ability to trace back to the original marketing channel and understand that customers from that source are more fickle than others? Etc.
- Levers: If not careful, your only levers may become customer growth or cost reduction. Whereas transaction-by-transaction retailers can cross-sell, up-sell, increase the frequency with which customers buy, it’s sometimes harder for subscription businesses to expand the value of each customer.
Susceptibility to big issues: If something goes wrong with stock or delivery or product failure, it affects most companies for a few days. If the problem persists, they can temporarily hold off taking new orders, or recall the individual product.
If something big goes wrong for a subscription business, they may affect that entire cycle (usually a month). Customers already expect their items to arrive, removing some of the leeway to react and stem the flow of problems.
Product quality: If my website has 60,000 products, I’m essentially diluting the risk of those products on the assumption that some will be really popular, and those will make up for the duds. I can also then optimise that: I can mine the data and remove the products that don’t convert, or get high returns.
If I’m sending out just a few products each month, the ‘popular:dud’ rate should be much higher, yet I have less opportunity to learn which are poor.
- Product hooks: Related to the above, if I’m only selling a couple of products, it’s harder to acquire search and social traffic to them than it is to a range of dozens of products, or hundreds, or thousands.
- Subscription fatigue: Some customers love subscription buying; some don’t like it at all, for most it’s somewhere in the middle – they’re happy to sign up for a handful of subscriptions in categories they really love, but if they don’t love what you sell, or they already buy from their max number of retailers on a subscription basis, you’re not going to sell to them.
Perhaps not within the intended scope of this article, but: greater waste. Sending something to someone every month automatically means there will be times when it is neither wanted nor needed by the recipient.
That doesn’t directly harm the seller, but it’s a bit of a waste of money for the customer, and a waste of effort and resources for all of us.
Is subscription ecommerce simply a cooler way of discounting? A major initial disadvantage would be the margin hit for the introductory offer and then naturally waiting on the point when the customer becomes profitable.
Ensuring the customer lifetime value exceeds the cost of acquisition plus one time on continual discounted rate is obviously key!
Are they fads? Do they have longevity alongside the instant purchase? The marketplace is certainly becoming more competitive with many subscription clones popping up, therefore the skill and accuracy to cut through will naturally need to very high.
Do subscription sites have to work harder to convert, as customers have to commit longer term? How can they get around this challenge?
Subscription sites always have the challenge of getting people to want to buy that product online in the first place and then get them to do it with a regular payment.
You can buy the same things from elsewhere (a supermarket for coffee, snacks, and fruit & veg, download a movie from a streaming site, contact lenses from an opticians). You have to constantly reinforce why buying from you on a subscription plan is a better option.
Every month, the customer is always mentally justifying to themselves if they should continue with the subscription and eventually they will leave.
The trick is trying to draw that out as long as possible: churn can be a big issue for these types of businesses and they constantly need to keep spending money to acquire new customers and get others to return.
You have to keep things fresh for them, provide an amazing service every month and think of ways to get them to use it more so they are getting real value.
Sometimes subscription sites have to work harder to convert customers, sometimes it’s the opposite. For example: there are sites like Beer52 selling subscription craft beer.
I imagine there are very few people out there who would order a few bottles of beer in the post, but the idea of receiving a few bottles every month as a nice, automatic gift to yourself (or someone else) does have appeal.
Stack Magazines does similar: How many of us take the time once a month to think “I’ll buy a random independent magazine from the web”?
Yet Stack manages to sell exactly that, curating and sending independent magazines out to customers every month.
But of course some do have a harder time convincing users to spend $X per month, than just $X once – there’s a higher perceived cost and risk in signing up for something for a year, for example. Here are some of the techniques people use to reassure users:
- Discount entry points: e.g. ‘first month free’, a cheaper first month, ‘money back’ trials etc (these are particularly popular with SaaS tools, which you could argue are subscription ecommerce businesses).
- Community: Where you have thousands receiving a similar item from you each month, there are obvious opportunities to build communities. And communities both increase the perceived value of something, and lower the perceived risk (‘thousands of people seem to use them… oh, and there’s that person I know – if they buy it it must be good’, etc).
- Selling through other subscription services: Often you’ll find ads for subscription ecommerce businesses inserted in the delivery boxes of other subscription services. There’s a certain type of buyer that enjoys the subscription element itself, and reaching them obviously increases your likelihood of finding new customers.
- Up-selling from a one off: Naked Wines, a company I admire, used to do this (I think they still do). When you first go through the site and make a purchase, it appears that you’re just making a one-off purchase. At the point of transaction completion they offer you the subscription element of it, with a very appealing offer, and a great explanation of how doing so helps the world at large. Even if you don’t take the offer then, they can always try to nudge you toward it later on. (Naked’s model is unique, in that they don’t automatically ship products to you – they take the money, but they don’t send you wine until you ask for it. You can always say later “actually I’d prefer my money back”, but I think most don’t).
- Reducing perceive risk/increasing perceived utility: “change at any time”, “only £X per week/day”, “you’ll never have to shop for X again”, etc.
- Social referrals: Really this is already covered above, but where your relationship requires you to communicate with customers at least once a month, it also gives you at least one strong opportunity each month to ask them to talk to their friends about you.
- Selling on emotion, selling on personal/spiritual gain: Graze does this really well, some insurance companies do it well (which if you think about it could be considered subscription ecommerce). With Graze you’re buying a healthier you, not just some semi-sugary snacks in the post. With wine subscription, you’re buying the absolute right to consider yourself someone who is into wine and to tell other people about it. With insurance you’re ‘buying peace of mind’, as the cliché goes. And of course there is the classic charity model: Just £x per month will buy a positive outcome in the world far beyond the small amount it would mean to you or I.
Aside from the above three questions, here are two quick final thoughts on subscription ecommerce – whether that be physical products, or curated mixes, or SaaS tools, or charitable giving.
Firstly, there are some elements that are both ‘pros’ and ‘cons’, for example: Moving from one-off transactions to a subscription model means you move from a selling relationship to a service relationship.
That’s great from the point of view that customers don’t have to go through the physical transaction process, and you don’t have to worry too much about discounts and the like, but it also means your customers have a greater expectation that you’ll deliver: you are a trusted supplier rather than just a shop; they are backing you not just buying from you.
Secondly, it doesn’t have to be an either/or. Some sites can sell one-off products, and subscription products alongside each other quite happily.
Amazon’s a good example of that, with subscription baby products alongside everything else it sells. For Audible (also part of Amazon), it’s the entire model. And of course people like Microsoft and Adobe may sell you boxed products, but they often prefer to sell you cloud subscriptions.
As with any continuity or subscription model keeping the customer engaged will always be the biggest issue.
The sign up offer will always have been heavily caveated with the cancellation opportunity, so the reasons to stay always have to outweigh the direct debit chop.
Product naturally is the key to this, but I don’t think many subscription brands look outside of this and think about treating this clients like true VIPs offering them money-can’t-buy treats, tickets to the ballet, special access to newness, offline events, collaborations, or free stuff.
Look outside of your ‘club’ too. Can you profile your consumer to be a ‘clubber’?
If it is safe to assume the person who has their subscription box of healthy snacks also has a streaming media account, and is also part of a monthly wine club – why not create a partnership to connect all the dots?