Why read this? : The benefits of subscription models aren’t always obvious. We look at how different models offer different benefits like value, convenience and discovery. Learn what delivering these benefits means for your brand and your customers. Read this to learn how subscription models help you recruit, retain and reward your most loyal customers.
To succeed, it’s all about 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 to build a strong lasting relationship.
Subscription models - definition
With subscription models, customers pay a fee to access your product or service on a regular ongoing basis for a fixed time period. Customers commit to buying repeatedly rather than just a one-off purchase. Customers expect some sort of benefit in return for this repeat buying.
What's in it for customers?
One-off purchases are simple, right? Choose what you want. Pay the money. Move on. They’re like the one-night stand of buying.
But subscription models are more like a relationship. You exchange details. You agree to connect again. Customers need some extra benefit to make this worth it. They’re usually looking for :-
- Value for money.
Value for money subscription model
With a value for money model, you focus on pricing. Customers get a discount as they commit to buying regularly. This is the simplest form of subscription model. It works best for essential products customers have to buy regularly.
For example, Amazon highlight pet food and paper towels on their Subscribe and Save page. Essential, regularly bought products.
It’s also very common in selling publishing and entertainment products.
For example, newspapers and magazines offer 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. There’s no risk of forgetting to re-order.
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 which customers have to replenish at predictable intervals. You need a relevant point of difference to succeed, usually price or customer experience.
Examples include :-
Discovery subscription model
With the discovery model, you help customers access new products or services.
These are based on the customer’s likes and motivations. For example, their hobbies – e.g. fishing or gaming, or interests – e.g. beauty or fashion.
You supply relevant products and experiences around this 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 something while avoiding the risk of paying full price for an unknown product. If they like the sample, they feel safer buying the full-price product.
Examples include :-
The benefit is part of your positioning
The benefit you choose for your model then goes into your e-Commerce positioning statement. This sums up your customer (target audience), your category (frame of reference), your offer (benefit) and your rationale (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 work when you can keep customers signed up for regular purchases.
Subscription finances are driven by how many customers you attract and retain.
Losing customers is called your churn rate. This is the number of customers who drop out (cancel early or don’t renew). It varies by category. The lower, the better. Under 10% is good. Over 30% is a worry.
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. That’s 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 as you can predict how much your services will be used. You worry less 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 acquisition (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. However, the extra spend is offset by the higher long-term value. You keep customers loyal. They keep buying. You make more money.
Seems simple, right? But building loyalty usually means a lot of work on :-
- customer experience.
- customer data.
- customer behaviours.
Deliver great customer experience
Customer experience is always important. But it’s especially important with subscription models.
You’re asking customers to commit. Their experience has to reward that commitment.
You should look at every interaction you have with these customers. Work out how to make each one 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. Many subscription models get new customers from this positive word of mouth.
For example, send them unexpected gifts. Thank them for recommending you. (e.g. on social media or product review sites). Deal with any issues quickly. Such small acts can have a big impact on customers.
Plan for churn
Churn is inevitable with subscription models. No customer buys forever. All you can do is plan for it and try to keep it as low as you can.
For example, if you target a specific age group (young children or teenagers, for example) and you know customers stop buying after a certain age, you can predict your 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 sales history if you’re 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
This measurement matters because the cost per acquisition (CPA) on subscription models 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
But deal-focused shoppers aren’t loyal to brands. They shop around. That lack of loyalty is bad for subscription models.
Try 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 commit to buying regularly, it’ll cost you.
For example, set minimum sign-up periods with better discounts for longer commitments. Or add cancellation fees to discourage deal hunters.
You should look to balance being attractive to more loyal customers, but also putting off the deal hunters. The right 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 behavioural science article for more on priming).
Building your business plan
It’s easier if customers are already used to subscription models so look at what currently happens in your category. For example, they’re common in categories like food and drink, beauty, hobbies, fashion and household/homeware goods. You’ll need a clear competitive positioning to take on existing players. You have to identify your unique appeal to customers and convince them your offer is better than competitors.
If no one currently offers subscriptions, it’ll take longer to persuade customers of the benefits of buying via subscription models. But if you manage it, you’ll get the competitive advantage of being the first mover.
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.
For example, this offer only lasts until Friday. Or, only 100 of these left.
If you offer a range of products and services, you can have some widely available and some exclusive. For example, say you offer advice as part of the subscription (such as with a B2B CRM program, for example). You could send out generic advice to all customers but offer bespoke expert advice for subscribers only. (For example, access to a financial or health advisor).
The main place customers interact with you will be your online store website. This is where they manage their orders and account. But don’t overlook 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 a pleasant 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 the conversation feel natural? (and not the scripted “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 selling offers to boost your LTCV, such as :-
- cross-sells – related items which complement what they buy.
- upsells – more advanced versions of what they buy.
If the price is too high, customers will see it as too much of a risk.
But if it’s too low, you won’t get enough per customer to cover your costs and make a profit. You have 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 $10-$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 upfront.
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 to charm pricing – see our sales copy guide for more on this).
Your financial plan also has to cover the costs of the order to delivery process.
The more complex the order, the higher the handling costs. For example, a regular order of toilet paper or razors is cheap to manage.
It’s the same product for 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 orders, then you have to manage bundles of different products. That takes more time, effort, and money. You have to source more products and cover the extra cost of bespoke orders.
There’s also more chance of sending out wrong orders, which increases refunds and returns costs.
Offer enough choice, but not too much
However, the challenge is that customisation appeals to customers. It gives them more choice. 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 design psychology article, too much choice puts people off anyway. Recent research shows that 4 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 4 options. But be careful not to make it too hard to choose.
Many categories – alcohol or fashion, for example – clearly offer more than 4 choices. So they use progressive disclosure (also in our design psychology article) to make choosing easier. So, first customers choose the category first (e.g. wine). Then the type of product (e.g. Shiraz). And finally, they narrow down the options (e.g. filter by price or region). Breaking it into smaller choices makes choosing easier.
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 subscription 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
Solving customer needs sounds obvious, right?
But subscription models only work if they give the customer something they need.
The benefit – value, convenience or discovery – has to be worth it for the customer. Your model has to offer more benefits than a one-off purchase. It has to be better than what’s already out there.
Remember, customers commit to buying on subscription. Your offer must make that commitment worth it.
Competitive strategy and position
Go beyond optimising the transaction. Anyone can do that. Connect with customers in a way which goes beyond the transaction.
For example, does your brand have a clear purpose customers can buy into? An experience they can’t find anywhere else?
Does your customer experience educate or entertain? Expert videos on how to use your products, for example. Or fun bonus items added to delivery boxes. (See our digital services article for more examples).
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 which shares their values and interests. That creates stronger customer relationships and longer-term loyalty.
Build amazing customer experiences
Once your plan’s done, next comes the exciting bit. This is when you put it into action.
Look at every customer interaction. Work out how to make each step work better.
Do market research to find out what “better” means to the customer.
Experiment with different brand activations.
See what customers love. 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 should feel personal, authentic and efficient. Set up your people, systems and processes to deliver a great experience for 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 your customers. But they’re not easy to do.
Be clear on the customer’s need. Subscription models must solve needs better than what’s currently available. If they don’t, customers will never sign up. Build your competitive strategy and positioning. Create a relevant and engaging brand identity and customer experience that makes customers happy to subscribe. Check every step of the customer journey. Do everything you can to make every interaction a great experience which keeps customers happy.
That’s a business model we can all subscribe to.
Check out our e-Commerce planning guide for more e-Commerce business approaches. See also our competitive strategy article for more on e-Commerce benefits. Or get in touch, if you’d like specific advice on how to set up subscription models for your business.