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. These benefits keep customers happy and coming back for more. Read on to learn how subscription models work and how to build them into your e-Commerce plan.
Why? Because they demand commitment.
Commitment from customers to sign up and buy regularly. And commitment from you to keep those customers happy and loyal.
Commitment’s hard, but it’s what you need for a strong ongoing relationship.
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 in it for customers?
Regular one-off purchases are simple, right? Choose what you want. Pay the money. Move on. They’re like a purchasing one-night stand.
But subscription models make it complex. You exchange details. You agree to connect again. For customers to agree to this, they need some extra benefit that makes it worth it. They’re customers “with benefits”.
There’s 3 main ones :-
- Value for money.
Value for money subscription model
The first model gives a value for money benefit. Customers commit to a regular purchase, in return for which, they get a price discount.
This model works best for essential and regularly bought products.
For example, Amazon highlight pet food and paper towels on their Subscribe and Save page. Essential regularly bought products.
This approach is also commonly used in publishing and entertainment.
For example, newspapers and magazines regularly offer price discounts to customers who sign up for a year’s worth of content.
Customers get cheaper prices, guaranteed and convenient delivery and the promise to never miss an issue. Businesses get locked in future sales.
The key to a winning e-Commerce positioning on value for money is to focus on price and cost.
Offer a better price than competitors. Aim for scale and keep your costs low. It’s a simple but highly effective model.
Convenience subscription model
When you ask customers what they want from e-Commerce, convenience always scores highly.
Shopping online is more convenient than visiting a store. This applies to subscription models too.
The customer gets products automatically delivered just when they’re needed, and doesn’t have to remember to re-purchase them.
Convenience also works well for awkward or heavy products. Easier for the customer to get a delivery rather than go to the store.
Example convenience led categories include razors, tampons, nappies and toilet paper.
The key to convenience is products that need regular replenishment at predictable intervals. you look for a competitive point of difference– usually either price or customer experience.
Examples include :-
Discovery subscription model
The final subscription model benefit to consider is discovery.
You offer products or services for customers to discover based on a theme they like. For example, these could be hobbies – e.g. fishing or gaming, or interests – e.g. beauty or fashion.
You supply relevant products and experiences around that theme. That’s what customers “discover” when they buy. There’s a mystery / surprise element, as the customer doesn’t know what they’ll get.
Discovery works best when it introduces customers to new, interesting or hard to find items. You have to offer something customers can’t easily find elsewhere.
It’s also a great way to send out samples. Customers get to try a simple and avoid the risk of paying full price for an unknown product. If they like the sample, then they feel safer to buy the full price product.
Examples include :-
The benefit is part of your positioning
Whichever of the 3 benefits you choose, it then goes into 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).
Value, convenience and discovery are mainly functional benefits. They focus on what the features provide or deliver.
But subscription models can also have emotional benefits. How the customer feels about the benefits.
For example, customers feel proud they’re not wasting money (value). They feel relieved they’re using time wisely (convenience). And they feel joyful they’ve got a mystery box to open every month (discovery).
The stronger and more relevant the benefit, the better the customer experience.
What's in it for your brand?
Subscription models depend heavily on loyalty.
They only really work when you can keep customers signed up for regular purchases.
The financial model that sits behind it is driven by how many customers you attract, and how many you retain.
When you “lose” customers, it’s called your churn rate. This is the number of customers who drop out from the subscription (cancel it early or don’t renew).
It varies by category. The lower the churn, the better. Typically 10% would be good. Over 30%, not so much.
For the financial model, you forecast your sales like this :-
ARRty – Churn + NBR = ARRny
ARR is your Annual Recurring Revenue. You work out how much money you’ll earn from the subscribers you have at the start of the year.
But obviously, you’ll lose some of those – your churn. Plus, you’ll win new customers and may sell more premium offers to existing customers. This gives you your New Business Revenue or NBR.
The losses and wins drive the difference between sales this year (ty) and next year (ny).
The more accurate your ARR, Churn and NBR forecasts, the more accurately you can plan your profit and loss.
For example, you can get a better price on raw materials as you can buy at scale.
You can manage staffing rates better with a predictable usage rates on your services. There’s less worry about peaks and troughs in demand.
Plus, you know who your customers are when they sign up.
This means you can track individual buying behaviours and long-term value. This Lifetime Customer Value (LTCV) is a critical measure in subscription models. 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 budget decisions on media channels and brand activation. You know which customers see which activities. So you can measure the impact of those activities by changes in spending.
This is important because you often have to spend more to acquire customers (your CPA) with subscription models. Getting their commitment will cost you more than getting a one-off purchase. But, the extra spend’s offset by the higher long-term value. You keep customers loyal. They keep buying. You make more money.
All, seems simple, right? But what is it that makes for a good subscription model? There’s a number of factors to consider.
Deliver outstanding customer experience
Customer experience is always important, but it’s especially important with subscription models.
You’re asking for a commitment from customers. Their experience needs to reward that commitment.
You need to look at every interaction the customers when they sign up. Work out how to make each of them as simple, relevant and enjoyable as you can.
Don’t settle for meeting customer expectations. Go out of your way to exceed them.
Delight your customers and they’ll tell their friends about you. Many subscription models pick up new customers by getting positive word of mouth recommendations.
Delight customers with unexpected gifts. Thank them when they recommend you. (e.g. on social media or product review sites). Make sure you deal with issues quickly. Small acts like this have a big impact on your brand’s reputation.
Plan for churn
Churn is inevitable with subscription models. No customer buys forever. All you can do is try to plan for it and try to keep it as low as you can.
For example, if you target 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. Aim to pull “in” new younger customers as older customers move “out” to reduce the impact of churn.
To predict churn rate, you can look at your customer sales history if your model’s already up and running. If not, look at what happens in other businesses by looking at online forums or industry standard churn rates.
Use customer data to analyse your activity
Track how and when customers sign up. Look at which channels drove those sign-ups. When you run a new advert, look at how many new customers sign up. That helps you measure advertising impact.
This measurement matters because as we said earlier the cost per acquisition (CPA) can be high. With the right data, you can work where you need invest to grow the business.
Find customers most likely to stay loyal
All categories have some shoppers who love finding a good deal. (see our article on price discounting for more on this).
But deal-focussed shoppers aren’t loyal to brands. They shop around. That lack of loyalty is bad for subscription models.
You need to make sure your offer doesn’t attract these deal hunters. They’ll sign up, but then quickly drop out.
Remember, if they don’t make a commitment to a regular purchase, that could cost you.
For example, consider setting minimum sign-up periods with better discounts for longer commitments. Add cancellation or drop-out fees to discourage deal hunters.
You need to look for the balance between being attractive to more loyal customers, but also putting off the deal hunters. Finding this balance helps you drive 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 for more on priming).
Other planning factors to consider
Category demand level and competitiveness
Research any subscription models which already exist in your category. It’s easier to persuade customers your model’s better than an existing one, than to persuade them to try a whole new way to buy.
If nobody currently offers a subscription, it can take longer to persuade customers of the benefits of buying through that model. But if you succeed, there’s a competitive advantage benefit to being first mover.
If however you need to compete against existing models, you need to work out your subscription competitive positioning. Identify your unique appeal to customers. Many categories like food and drink, beauty, hobbies, fashion or household/homeware goods categories already have many competing subscription models.
You need to work out how your offer will be better.
Exclusivity and scarcity
A key decision is whether to make your offer subscription only, or let customers also buy as one-off purchases (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.
If you offer a range of products and services, you can some widely available and some exclusive. For example, let’s say you offer advice as part of the subscription (as you might with a B2B CRM program for example). You might send out generic advice to all customers, but offer access to bespoke expert advice for subscribers. (for example, access to a financial or health advisor).
(See our article on advanced e-Commerce techniques for more on exclusives and scarcity).
The main place customers interact with you will be your online store website. This is where they manage their orders and account. But think through all the other interaction points too.
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?
Or if you offer a service, how do you make accessing that service more enjoyable?
When customers interact with your customer service team, how do you make that conversation a pleasure for the customer? (and not the standard “call centre” approach many businesses offer).
Making sure your customer service teams have the right equipment, easy access to data and systems and the power to fix customer problems helps them keep customers happy.
Think too about offering related cross-sells – related items that complement what they buy and upsells – more advanced versions of what they buy. Both these help grow the LTCV in your model.
Pricing for subscription models can be tricky within the 4Ps of your marketing plan.
If the price is too high, customers will see it as too much of a risk.
But price it too low, and you won’t get enough per customer to cover your costs and make a profit. You need to find the balance between customer appeal and making a profit.
You should benchmark your price against similar subscription models in your category.
Most subscriptions work on a monthly basis. Typically, they charge between $10 and $50 per month.
Decide early how you’ll communicate shipping and handling costs. Customers hate hidden costs. It’s better to make all costs clear up front.
However, avoid lumping extra costs into the headline price. This makes the overall price appear higher. (more learning from behavioural science). Customers anchor their thinking about price on the first price they hear. Use the lowest version of the price first, and then make any extras clear afterwards.
A price of $25 plus $10 shipping sounds better value than $35 including shipping. Even though it’s the same price, customers feel the $25 version sounds cheaper.
(the same effect applies in charm pricing – see our sales copy guide for more on this).
Your financial plan also needs to cover the costs of the order to delivery process.
The more complex the order, the higher the handling costs. A regular order of toilet paper or razors for example is cheap to manage.
The same product goes out to every customer. You standardise the process and get economies of scale in purchasing and operations.
There’s also less chance of sending out the wrong thing and having it returned.
But if you allow customers to customise their order, then you have to assemble a bundle of different products. That takes more time and effort, and costs more. You need to source more products, and cover the extra cost of bespoke filling of the boxes.
There’s also more chance of an order being wrong and being returned. That also increases costs.
Offer enough choice, but not too much
However, the challenge is that customisation appeals to customers. It gives them more choice, and more control. It draws in more subscribers.
So you have to find a balance 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 anyway. Recent research shows that four is about the optimal number when it comes to choices. This is how many information “chunks” most people can hold in their short term memory.
Of course, it’s not always possible to just offer four options. But be careful not to make it too hard to choose.
Many sites – alcohol or fashion for example – clearly offer more than four choices. But if so, you should use progressive disclosure (also in our article on design psychology)to help make choosing easier. So, let customers choose the category first (wine), then the type of product (Shiraz) and finally help them narrow down the options (e.g. filter by price or region). Break the choices into a series of smaller choices makes it much easier for customers.
Frequency and length of subscription
Finally, think about how often you send out products and how long the customer has to sign up for.
Monthly deliveries are the most common, but don’t apply to all categories.
This frequency works well because it’s regular enough to stay in touch, but not so frequent that it feels intrusive.
Most, though not all subscriptions models work on an annual renewal basis. They rarely go beyond a year, but usually offer an easy option to renew.
Subscription models - success factors
So far we’ve covered the benefits subscription models offer customers. And we’ve covered how to create them through your e-Commerce planning process. But once you launch your model, how do you make sure it does what it needs to? What are the key success factors?
Solve customer needs
Sounds simple, doesn’t it?
But subscription models only work if they give the customer something they need.
The benefit – value, convenience or discovery – needs to be worth it for the customer. Your model has to offer more benefit than a one-off purchase. It has to be better than what’s already out there.
Remember, customers make a commitment to buy on subscription. Your offer needs to make the commitment worth it.
Competitive strategy and position
Go beyond optimising the transaction. Anyone can do that. Aim to connect with customers in a way that goes beyond the transaction.
Does your brand have a clear purpose customers can buy into, for example? An experience they can’t find anywhere else?
Does the content in you customer experience educate or entertain? (see for example our article on digital services). So expert videos on how to use your products, for example. Or fun bonus items you add into delivery boxes.
These sorts of activities set you apart from competitors. Customers see your store as more than just a place to buy. They see a brand that shares their values and interests.
Build amazing customer experiences
Once your plan’s done, next comes the exciting bit where you put it into action.
Look at every interaction with the customer. Work out how to make each step better for the customer.
Do market research to find out what “better” means to the customer.
Experiment with different brand activations. See what customers love.
See what they hate.
You know who these customers are. Analyse your marketing data. Track their interactions and purchase history. Build customer profiles of your best customer types. Use these to build your marketing plan.
Customer service matters a lot with subscription models. It needs to feel personal, authentic and efficient. Set up your people, systems and processes to deliver that level of service for your customers.
Consider how to keep customer loyalty going for existing subscribers. Give them a positive experience and they’ll tell their friends about it. Good word of mouth works better 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 you and for your customers. But they’re not easy to do.
Be clear on the customer need. Subscription models must solve needs better than what’s currently available. If they don’t, customers will never sign up.
Check every step of the customer journey. Do everything you can to make every interaction a great experience that keeps customers happy.
That’s a business model we can all subscribe to.
Check out our guide to e-Commerce planning to look at more e-Commerce business approaches. See also our article on competitive strategy which has more on the benefits that drive e-Commerce. Or contact us, if you’d like specific advice on how to set up subscription models for your business.