“With Spotify, people don’t get it until they try it — then they tell their friends.” These words from Daniel Ek, the CEO of Spotify captures the powerful dynamics of consumer behavior around subscription e-commerce.
A booming business model
This blog takes a look at how subscription e-commerce is evolving and runs through a few practical tips for businesses using this model.
Simply put, subscription e-commerce is where consumers buy into services and products on an on-going basis, often monthly or annually. It isn’t a brand new concept, but is now a feature of daily life for many consumers around the world.
Globally, the subscription e-commerce market was valued at $34.7 billion in 2020 and is predicted to reach $2,643.6 billion by 2028 on an explosive CAGR of 73%. It can take many forms, but includes subscription TV services like Netflix, recipe box services like Blue Apron and consumer goods supply services like Dollar Shave Club.
The convenience for consumers is obvious and these businesses saw a huge boost during the pandemic – when home entertainment and home deliveries became important to consumers. The model also provides the brand with valuable customer interaction thanks to the ‘Swiping Right Generation.’ According to Gartner, “By 2023, 75 percent of organizations selling direct to consumers will offer subscription services.”
Such services have many types of models and the forms continue to evolve to today. Here are a few:
Replenishment (also known as subscribe & save and auto ship)
This model provides a convenient way to purchase consumable products where usage is consistent over a certain period of time. Consumer benefits include auto delivery at regular intervals and often at a discounted price.
These models enjoy high conversions and retention stats due to convenience and the cost-value they offer. However, for businesses to make profit, scale is important and is the only way the discounts and other privileges stay cost-effective. For instance, Natural skincare provider, Tata Harper attracts new subscribers with a 15% off of their first order and 20% off of recurring orders in addition to free shipping and the occasional gift.
Curation (also known as subscription or membership boxes)
Curation offers a collection of products based on each customer’s individual preferences. Advanced personalization methods have evolved significantly to incorporate data collection and synthesis or forming actionable insights that help deliver much sought after services.
These models capitalize on the right balance between cost and personalization ensuring high customer retention through positive influence. The models also factor in costs of personalization, branding and marketing that are often shared by customers, retailers and brands. An example could be how the American retailer of accessories, jewelry and toys primarily aimed at tween and teen girls, Claire’s offers a variety of subscription boxes containing age-appropriate makeup and jewelry. Claire’s makes it easy for online shoppers to switch from one box to another as their kids get older.
Access (including content, services, privileges and benefits)
“Access instead of ownership” made popular by services like dress rentals or privileged access to restaurants is an emerging trend amongst the Gen Z. Access subscriptions are prevalent in eCommerce and adjacent industries like media and entertainment, travel and hospitality, healthcare, education etc. Gen Z is favoring the convenience, long-term savings and wide range of products that such services provide access to.
When done correctly, this model not only leads to significant conversion and customer retention but also fuels data driven innovations that help companies come up with better products, services and offers. The caveat associated with this subscription model is – it requires periodic reviews of terms and offers, and consistent performance measurement to stay competitive in the given niche.
There are many benefits to starting or reviving a subscription e-commerce model, irrespective of product and service category. Some of the prominent benefits are:
A subscription based offering not only benefits the top and bottom line of businesses but also improves customer experience significantly when done right. Hence customers also benefit from this.
Challenges with subscription e-commerce models and how to address them
Subscription models are not just enabling a feature in the eCommerce platform. There are challenges to overcome. For instance, shoppers may not buy the product if they don't need it at the moment or if the value being offered is not aligned with their needs. Hence setting up and running a subscription experience could seem like an insurmountable task. Complexities also include the ever evolving subscription models and their impact on technology, customer service and other operational aspects.
Our experience of working with several retailers and e-commerce players helped us recognize the root cause of the challenges associated with setting up and running subscription models:
Subscription goals do not align with overall business goals creating misalignment at levels spanning strategy, cross-departmental prioritization and resource allocation. This leads to subscription being just another channel for the sale of products and services.
Reluctance in shifting from transactional to relational business processes where the customer journey is equally important after the checkout as it is before. Additionally, it transcends multiple transactions.
Lack of clarity on customer data and privacy strategy is complicated by the increased awareness, regulations and customer demands around privacy. To optimize, subscription models will have to rethink entire customer data journeys as they gather volumes of data.
Unable to stay competitive in a tough market where retailers have to strategize market penetration and stay competitive at more frequent intervals than other transaction based models of business.
Our guidance is to observe the key principles, shared below, which have often helped retailers and e-commerce players to drive success irrespective of whether they were starting or refining their subscription journey:
Carry out an extensive analysis on whether the offering (product/service/content/benefits etc.) has a subscription potential. Be as data driven and unbiased as possible.
Identify pain points in the current business model that can be addressed or alleviated by the subscription offering..
Examine and define the pricing strategy that can be lucrative to customers while not making a dent in the business’s P&L. This approach should be observed for every stage of the customer journey - acquiring, converting, retaining and re-engaging.
Define the value proposition that can make the business stand out from competition. Create high entry barriers for others.
Deliver personalized experiences. The perception of value is diverse which means, every individual should be offered custom experiences that are not templatized for all customers.
Build the right ecosystem including technology, cross functional processes and operational considerations. For instance, setting up a subscription storefront could ensue technical challenges due to the tightly-coupled nature of traditional e-commerce architecture. Here, headless platforms could be the solution. For challenges related to inventory allocation, omni-channel inventory management could be the answer. The ecosystem should be designed to enable a thriving business model.
John Warrillow in his book, The Automatic Customer: creating a subscription business in any industry said, “These four factors – the access generation, light-switch reliability, delicious data and the long tail – have led some of the world’s most successful companies and promising start-ups to shift their business models to a focus on subscriptions.” These factors when in the right combination provide the nurturing environment for companies to invest in subscription e-commerce.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.