Snapshot : With subscription models, customers buy more than just a product or service. They buy an experience. They commit to buying from you regularly in return for access to value, convenience or discovery benefits they can’t get elsewhere. You deliver these benefits with a great customer experience that keeps customers happy and loyal. Read on to find out more about how subscription models work and how to build them into your e-Commerce plan.
They demand commitment.
Commitment from customers to sign up and buy regularly. And commitment from you to keep those customers happy and loyal.
But there can be significant benefits for customers and your brand in return for those commitments.
Subscription models – definition
Subscription models are where customers pay a fee to access your product or service on a regular ongoing basis for a fixed period of time. Customers commit to buying repeatedly rather than as a one-off.
Customers expect some sort of extra benefit in return for making this commitment.
What do customers get out subscription models?
Regular one-off purchases are simple, right? Choose what you want. Pay the money. Get on with your life.
By making the purchase more complex, subscription models need to offer customers some additional benefit that makes it worth signing up.
This benefit is usually either value for money, convenience or discovery.
(see also our article on competitive strategy where the different options relate closely to these benefits).
Subscription model #1 - Value for money
The first benefit option is value for money.
In return for committing to the regular purchase, customers get a price discount compared to regular one-off purchases.
This approach works best for more basic and essential products that the customers knows they need to buy anyway.
For example, Amazon highlight pet food and paper towels on their Subscribe and Save page. Basic and essential products.
This type of subscription model is also common in entertainment and information related categories.
For example, newspapers and magazines have for a long-time offered price discounts to customers who sign up for a year’s subscription.
They lock in future sales by luring customers with cheaper prices, guaranteed and convenient delivery and the promise to never miss an issue.
The key to a winning e-Commerce positioning on value for money is to focus on your price and costs.
Subscription model #2 - Convenience
When you ask customers what they want from e-Commerce, convenience always scores highly.
It’s more convenient to shop when you don’t have to visit a store. This applies to subscription models too.
It’s more convenient to have regularly used products automatically delivered just when they’re needed, than to have to remember to re-purchase them.
Finally, it’s also more convenient to have awkward or heavy products delivered than to have to go out to buy them.
Categories where convenience is the key benefit in subscription models include razors, tampons, nappies and toilet paper.
The key to winning in convenience is to supply products that need regular replenishment at predictable intervals. Seek out a competitive point of difference– usually either on price or customer experience.
Examples include :-
Subscription model #3 - Discovery
The final option to provide a benefit through subscription models is discovery.
You offer products or services based on a theme. For example, these could be hobbies – e.g. fishing or gaming, or interests – e.g. beauty or fashion.
You curate and supply products and experiences around that theme, and that’s what customers “discover” when they buy. Unlike the previous models, the customer doesn’t always know what they’ll get.
There’s a mystery / surprise element.
The key to success with discovery is introducing customers to new, interesting or hard to find items. Customers won’t sign up if they can easily find those products elsewhere.
It’s also a great channel to provide samples. Rather than risk paying full price for products they don’t know, customers can try samples first. They can then decide if they want the full price product.
Examples include :-
The benefit is part of your positioning
Each models provides a benefit for the customer – value, convenience and discovery.
This benefit becomes part of your e-Commerce positioning statement.
This statement sums up your customer (target audience), your category (frame of reference), your offer (benefit) and your justification (Reason Why and Reason to believe).
Benefits work at a number of levels, from functional to emotional. Value, convenience and discovery are mainly functional benefits, as they focus on what the customer functionally gets from signing up.
But that doesn’t mean subscription model can’t also have emotional benefits too.
For example, customers might feel proud they’re not being wasteful with a value model. They might feel relieved they’re using their time wisely with a convenience model. And they might feel joyful they’ve got a mystery box to open every month with a discovery model.
The more relevant you make your functional and emotional benefits, the more impactful your customer experience will be.
What does your business get out of subscription models?
Successful subscription models depend heavily on customer loyalty.
You attract customers with a relevant offer, but then have to retain them so they don’t drop out.
There’s some key financial calculations to factor into setting up subscription models. The most important is measuring your ability to retain customers.
This is commonly called your churn rate and you want this to be as low as possible.
Your churn rate is the number of customers who drop their subscription (either cancel it early or don’t renew). It varies by category, but typically around 10% is good, and anything over 30% is a concern.
You forecast your future sales with this calculation :-
ARRty – Churn + NBR = ARRny
ARR is your Annual Recurring Revenue. (sometimes also expressed as a monthly number – your MRR). Based on the number of subscribers you already have, it’s your annual forecast if you did nothing else but keep those customers.
But obviously, that’s not a realistic forecast. You’ll lose some customers (your churn), win new customers and get more from some existing customers (your New Business Revenue or NBR). Losing and winning customers drives the difference between sales this year (ty) and next year (ny).
Your NBR number has to be higher than your churn for your business to grow.
Financial forecast and planning
The more accurate your ARR, Churn and NBR forecasts the better you can plan financial commitments and manage costs.
For example, you can buy raw materials at scale to generate volume discounts as you’re sure you’ll use up those materials over the year.
You can hire the right level of staff if you’ve a predictable usage rate on your subscription services and don’t have to worry about managing peaks and troughs in demand.
Also, as you know who your customers are from their sign-up details, you can track individual buying behaviours and long-term value. This Lifetime Customer Value (LTCV) is an important measure for any business, but it’s a critical one in subscription models, as it puts a value on individual customer loyalty.
You can use the LTCV to calculate return on investment (ROI) and cost per acquisitions (CPA). This helps you with investment decisions on media channels and brand activation. You can track the return on your marketing activity from how much the customer spends while they’re still a member.
This is important because you often have to spend more to acquire customers (your CPA) with subscription models. You need to spend more to secure their commitment. But, the spend’s offset by the higher LTCV with subscription models. You keep customers loyal, they keep buying and you eventually make more money.
Priority areas for successful subscription models
Successful subscription models must get the basics of e-Commerce stores right, but must also deal with additional challenges.
Deliver outstanding customer experience
Customer experience is always important, but it’s especially important with subscription models.
You’re asking for more commitment from customers, and your customer experience needs to encourage and reward that commitment.
So, look at every interaction between customers and your subscription model, and work out how to make them as simple, relevant and enjoyable as you can.
Don’t settle for meeting customer expectations, go out of your way to exceed them.
Great customer experiences create loyal customers who’ll tell their friends about your brand. Many subscription models pick up new customers by delighting existing customers, and getting positive word of mouth recommendations.
Delight customers with unexpected gifts. Reward them when they recommend you. (for example, on social media or product review sites). These small acts will have a big impact on your brand’s reputation.
Plan for inevitable churn
Churn is inevitable with subscription models. No customer buys forever, and all you can do is try to predict it and minimise it.
For example, if your product targets a specific age group (say babies or children for example) and you know customers stop buying after a certain age, you can predict that churn rate. Try to keep customers “in” as long as it’s relevant, but plan for new customers coming in as older customers eventually move “out”.
To predict churn rate on new subscription models, you’ll need to research other businesses, or look at industry standard rates. For established subscription models, look at your customer data history to work out how many customers you lose over time.
Experiment to find the best acquisition channels
You know who your customers are and what and when they buy.
Track how and when they signed up and you can identity which channels and activities bring in the highest quality and most loyal customers.
When you test new acquisition activities, you’ll see how many new customers you pull in. You can directly measure the impact of your advertising.
This measurement matters because as we said earlier the cost per acquisition (CPA) and Long-Term Customer Value (LTCV) are usually higher with subscription models. When you capture and analyse the data, it’s easier to do the financial calculations and work how much you need invest to grow the business.
Find customers most likely to remain loyal
Almost every category will have shoppers who love finding a good deal. (see for example our article on price discounting).
But deal-focussed shoppers don’t stay loyal to brands. They shop around. That promiscuity isn’t great for subscription models.
You need to make sure your subscription model offer doesn’t attract deal hunters who sign-up, but then quickly drop out.
Remember, they need to make a commitment, otherwise it can end up costing you money.
For example, consider setting minimum sign-up periods with increasing discounts for longer commitments. Consider cancellation or drop-out fees to discourage deal hunters.
Obviously, you don’t want to discourage genuine customers who’re likely to stay loyal. You need to reduce their perceived risk of signing up while also protecting your own sales and profitability.
Watch out for free trials for example. These can pull in more initial customers, but they discourage loyalty. Plus, it’s hard to get people to pay for something they’ve already had for free. It primes them to associate you with being free. (see our article on behavioural science in marketing for more on priming).
Category demand level and competitiveness
Start by researching whether subscription models already exist in your category. It’s a different challenge to persuade customers to buy on subscription in the first place, than to persuade customers your subscription model’s better than someone else’s.
If there’s no current subscription buying, it can take longer to persuade customers of the benefits of subscription. But if you’re the first to do it, you gain first mover advantage which gives you a strong competitive advantage.
If however there’s already subscription models in your category, you need to work out your competitive positioning, so you have unique appeal to customers. For example, some categories like food and drink, beauty, hobbies, fashion or household/homeware goods categories already have many competing subscription models.
You need to work out why and how your offer will be better.
Exclusivity / scarcity
You need to decide whether to sell your products and services only on subscription, or let customers also buy them as a one-off purchase (at the non discounted price).
For the value model, offering both options makes sense. You compare your subscription price discount to the full price cost of a one-off purchase.
For the convenience and discovery models, it’s less obvious. There can be advantages to limiting availability and going subscription only.
For example, behavioural science suggests product scarcity can help drive trial. Limited availability makes customers feel they’ll miss out if they don’t buy it when they can.
This subscription offer only lasts until Friday, or only 100 of these left for example can drive trial.
If your offer includes a range of products and services, you can make these a mixture of available and more exclusive offers. So for example, if you offer advice as part of the subscription service (as you might do with a B2B CRM program for example), you might send out generic advice to all customers, but offer direct access to bespoke expert advice for subscribers. (for example, access to a financial or health advisor).
The main place customers will interact with you will be your online store website. This is where they manage their orders and account.
But depending on the category and customer expectations, there can be more interaction points. Each interaction has a cost to set up and maintain, but can boost the customer experience.
Remember, subscription models depend on loyalty and strong relationships. Is your website really strong enough on its own to keep the customer engaged?
When you send out products, could you include a small gift as an unexpected surprise for example?
If you offer a service, how do you make accessing that service more enjoyable? If customers have to talk to your customer service team, how do you make that interaction more personable and engaging? (and not the standard “call centre” approach most businesses offer).
Customer service needs to focus on the customer and not the cost of doing business. Hiring, training and retaining expert customer service staff is important. Making sure they have the right equipment, easy access to data and systems and the power to fix customer problems helps them keep customers happy and loyal.
Think too about offering related cross-sells – related items that complement what they buy and upsells – more advanced versions of what they buy – to grow the LTCV of individual customers.
Pricing for subscription models can be tricky within the 4Ps of your marketing plan.
If the subscription price is too high, customers will see it as too risky and not good value.
But price it too low, and you won’t generate enough sales per customer to cover your costs and make a profit. It’s a fine balance between appealing to customers and your bottom line.
You should benchmark your pricing plan against similar subscription models in your category.
Most subscriptions work on a monthly delivery basis, and typically range somewhere between $10 and $50.
Decide early how you’ll communicate shipping and handling costs. Customers dislike hidden costs, so it’s normally better to make all costs clear up front.
However, avoid lumping the shipping / handling cost into the main cost of the subscription as this makes the overall price appear higher. (This is more learning from behavioural science). Customers anchor their thinking about price on the first price they hear, so make this appear low to makes it seem better value.
A price of $25 plus $10 shipping sounds better value than $35 including shipping, even though clearly it’s the same overall price.
(the same psychological effect applies in charm pricing where $9.99 seems disproportionately cheaper than $10 for example – see our guide to sales copy for more on this).
Your subscription business model also needs to work out the costs of the order to delivery process.
The more standardised your offer, the lower your overall cost per order will be.
You’ll benefit from economies of scale in purchasing and operations. This is why many value subscription models offer standardised products like razors or toilet rolls.
Costs are much more predictable and can be kept lower when you standardise the offer.
But, if customers can customise their orders, or you regularly change products (common in discovery subscription models), this adds cost. You need to source more products, and cover the extra cost of more bespoke filling of the boxes.
It’s more efficient and so cheaper for factories or warehouse to fill standardised orders than customised orders. Offering variety also increases the chances of the wrong thing being sent out, so there’s also the extra costs of returns and refunds.
The customisation trade-off
However, the flip side is that obviously customers like being able to customise. Customisable options make your offer more appealing and can drive more sign ups.
You have to carefully manage this trade-off between customer appeal and cost to serve. Ideally, you offer the customer some choice, but not too much. As per our article on design psychology, too much choice puts people off. Recent research by Nelson Cowan shows that four is about the optimal number when it comes to offering choices. This is how many information “chunks” most people can handle in their short term memory.
That’s not to say you should always only offer four options, but be careful of offering more.
Some standardised products – toilet paper or razors for example – may not even have four options. More diverse categories – say alcohol or fashion for example – you will need to offer more customisation to appeal to customers. (e.g. what types of wine go into a subscription box, or what sizes and colours go into a clothing subscription).
Frequency and length of subscription
Finally, think about how often you fulfil the subscription and how long the customer has to sign up for.
The industry standard on frequency is for monthly deliveries, but this isn’t universal.
Monthly deliveries work well because it’s regular enough to maintain the relationship, but not so frequent that it’s intrusive.
Most subscriptions also tend to work on an annual renewal basis. though some offer shorter options.
Subscription model commitments rarely go beyond a year, though there’s usually an easy renewal option at the end of the subscription.
Subscription models - success factors
Make sure you solve customer needs
Guaranteed future sales from signed-up customers always sounds attractive.
But subscription models only work when the customer benefit is clear and better than what already exists.
Remember, customers make a commitment to buy on subscription, so they need a relevant and valuable benefit in return.
Whichever benefit your model delivers- value, convenience or discovery, make sure it solves the customer need better than buying as a one-off.
Develop your brand’s competitive strategy and position
Competition can fierce with subscription models,. It may not just be direct competitors, but also big e-Commerce players like Amazon who offer competing subscription models.
Start with the customer need and benefit, and from there build out your brand identity, marketing plan and customer experience. Customers need to believe your subscription model is the best way to meet their needs. If you can’t convince them of this, they’ll never subscribe.
Go beyond optimising the transaction. Anyone can do that. Pure players like Amazon are experts at it. Find a way to build customer relationships that goes beyond the transaction.
Think about the content to support the overall experience for example. Is it entertaining? Or informative? (see for example our article on digital services). Does it serve a relevant purpose customers can buy into? Can they access experiences they can’t find elsewhere?
Could you post expert videos on You Tube about how to use your products for example? Or include bonus items that help make using your product or service more fun when it arrives?
These relationship-building activities set you apart from competitors. Customers will see your store as not just somewhere to buy, but representing a brand with shared and relevant values and interests.
Build amazing customer experiences
Once you’ve got a plan, next comes the exciting bit where you put it into action.
Examine every step of the customer journey closely.
Work out how to make each step of the journey better for the customer.
You know who these customers are. Analyse your digital data and track their interactions and purchase history. Build customer profiles of your best customer types and use these to shape your marketing plan.
Customer service is hugely important with subscription models. It needs to feel personal, authentic and efficient. Make sure your people, systems and processes can deliver a great service.
Consider how to keep customer loyalty going for existing subscribers. Give them a positive experience and they’ll tell all their friends about it. Their recommendation has more impact than any sales message you send out.
Keeping these customers happy now, brings you more sales in the future.
Conclusion – Subscription models
When they work well, subscription models deliver many benefits for customers and businesses. But they’re not easy to do.
Be clear on the customer need. To work, subscription models must solve that need better than what the customer already does.
Check every step of the customer journey. Do everything you can to make every interaction a great experience that keeps customers happy and loyal.
That’s a business model we can all subscribe to.