Subscription models – The new era of e-retail business
Subscription business has exploded. From Netflix to books to groceries, there is a subscription for everything today. Gartner predicts that 75% of organizations selling direct to consumers will offer subscription services by 2023. Subscription business model is here to stay.
While the subscription model can apply to Software as a Service (SaaS), streaming services (Netflix, Amazon Prime), and digital products (media), the focus in this article is specifically on physical products and their impact on e-retail. Here, we discuss the questions an e-tailer may have while contemplating the suitability of subscription business model.
What is a subscription model, and why consumers/ businesses are inclined towards it?
Unlike traditional online retail which is based on one-time or ad hoc purchasing, subscription models rely on pre-planned purchasing, i.e., recurring revenue. The value of a subscription is in this recurring, predictable revenue.
Also, consumer buying habits are trending toward hassle-free shopping experiences, personalization, free delivery, and instant gratification. The subscription model serves all those needs, providing value to the customer with low effort and incredible growth opportunities for subscription-based businesses.
Moreover, subscriptions are about building strong customer relationships. Here, businesses pay more attention to regular customers, playing more on customer retention than customer acquisition.
What are the types of subscription models in e-retail?
There are three types of commonly recognized subscription models: Replenishment, Curation, or Access.
- Replenishment subscriptions (subscription boxes) enable consumers to automate the purchase of necessities, such as groceries, medicines, childcare, etc. repeatedly on a scheduled basis
- Curation subscriptions offer new products or highly personalized experiences in categories such as apparel, beauty, and food
- Access subscribers benefit from lower prices or members-only rewards
Having the basic idea of the subscription model and several types, let us look at the advantages and challenges offered by the subscription business model in e-retail.
What are the advantages of running a subscription-based e-commerce model?
- Improved Retention: Subscription businesses tend to have closer, more targeted relationships with subscribers than with typical consumers. It leads to reduced churn rates.
- Better Predictability: With the power of pre-planned purchasing, subscription business models come with better predictability in terms of inventory and revenue. These insights help businesses to order and manage inventory efficiently. Moreover, understanding a customer’s lifetime value in a subscription business can help brands spend wisely on acquisition in slow-selling seasons.
- Increased engagement: Subscription models provide businesses with a vast amount of data about their customers. They can use this data to generate insights that further help them create enhanced cross-selling, personalization, and marketing strategies that are not possible for typical retailers.
What are the challenges of running a subscription-based e-commerce model?
Offering a subscription product or service and collecting recurring payments is not as straightforward as it sounds. There are multiple unprecedented roadblocks or simply layers of complexities that subscription businesses need to be prepared for to provide a memorable experience and a hassle-free journey to their customers. These hurdles include changes in payment processing, managing customized orders and varying membership levels, packaging and shipping complexities, timing deliveries, customer churn, rapid growth, and integrating rewards and loyalty programs.
It does not end with keeping up with the trend and adopting the subscription business model. Businesses must measure the performance of their offerings, try to understand what is driving the most success and where they are lacking, and optimize their model accordingly. Here is how businesses can measure the value of their subscription services.
How to measure the value of subscription services?
Businesses should note that subscription models have unique data points and KPIs that traditional reporting and analyses cannot serve. Hence, to be successful, subscription businesses should track metrics tailored to their recurring revenue business needs.
Here are the top metrics that every subscription-based business should keep a close eye on:
- Annual Recurring Revenue (ARR): It gauges the performance of the business on a year-over-year basis. This metric is critical for cash flow forecasting and real-time insight into financial health.
- Monthly Recurring Revenue (MRR): This metric gauges the revenue a business can depend on from month to month. It helps in measuring the immediate effects of product or pricing changes and helps track seasonal fluctuations.
- Average Revenue Per User (ARPU): This metric measures how much an average customer spends with the business. Beyond the regular fee, revenue can rise or fall due to discounts, freemiums, upgrades, downgrades, or one-time purchases. ARPU takes all these variations into account.
- Customer Lifetime Value (CLTV): This metric talks about how much revenue a subscriber generates in total. Businesses can use this metric to gauge if the newly acquired customer is worth it or not.
- Customer Acquisition Cost (CAC): It shows how much a business is spending on acquiring a customer. It also provides visibility into acquisition campaign efficiency and helps keep marketing and sales budgets in check. Unlike traditional e-commerce sales, CAC in the subscription business is driven by CLTV. CAC must be lower than CLTV. A preferable ratio of CLTV to CAC is 3:1 or higher.
- Churn Rate: Churn is the moment when a subscription ends, and renewal does not happen, or when a customer cancels. The metric can be broken down into two categories: voluntary churn and involuntary churn (due to failed payments).
Subscriptions are changing the business landscape for both customers and business owners. From a consistent income stream and a loyal customer base, subscription models have much to offer.
E-tailers can make the most of it only by developing great experiences (as opposed to great subscriptions). It helps them avoid high churn rates and accelerate both growth and profitability.