If you still haven’t looked into how your business could benefit from the booming recurring payments model, the time is right to give it some deliberate thought.
According to an extensive McKinsey study, the subscription-based e-commerce market in the US alone grew from $57 million in 2011 to $2.6 billion in 2016. Yes, that’s an increase of more than 4,000 percent (!) in just five years, and nothing is indicating that market growth is slowing.
Consumers are getting used to subscribing to everything from Netflix, Spotify and phone apps to physical products that can be conveniently delivered on a regular basis straight to their doorstep: food, video games, contact lenses, cosmetics, razors, vitamins … if there is a product, there is a subscription for it – or there will be in the near future.
Why customers love subscriptions
Once people have tried one e-commerce subscription service, they are likely to sign up for more of them. The McKinsey study reveals that 58 percent of subscribers have multiple active subscriptions.
Why are people so into this trend? There are many reasons, of course. Here are just a few:
- The convenience. For example, imagine you are the parent of a 1-year-old, would you rather traipse up and down the baby shelves in the grocery store every week to get new diapers, baby food and baby wipes – or subscribe to those supplies and have them conveniently delivered to your doorstep every week? If you don’t know the answer, you certainly haven’t cared for a baby recently.
- The savings. Signing up for a subscription often means saving money compared to buying each product individually.
- The affordability. A few years ago, you would have had to pay a few hundred bucks up-front to use a digital app like Photoshop. Nowadays you pay a much smaller subscription fee every month you use it, and this model for expensive purchases is now available for physical products as well.
- The joy of surprise. Many subscriptions are based on the idea that the subscribers don’t know exactly what they will receive every month. They experience the delight of a little gift at regular intervals throughout the year.
Why recurring payments are great for your business
Besides the fact that consumers are getting used to buying this way, and embracing it in many cases, subscriptions also bring many benefits to your business:
- The lifetime value of your customers goes up. If you are like most online businesses, you know it’s a constant struggle to get customers to buy more than once. With subscription packages, that is taken care of automatically.
- The predictability. If you have a base of 1,000 subscribers for a particular product every month, you diminish the pains that come from big fluctuations in order volumes. You can plan for your fulfilment, and you know how much money is coming in each month (or every other month, or every week, or every second week… however the subscription model is set up). You can also make better deals with suppliers if you can confidently order in bulk, plus you benefit from the efficiency of not having to store the items on your shelves for weeks.
- The top-of-mind factor. Every time a package from your store is delivered, customers experience your brand. That keeps hammering in the value you bring, and the more experiential touchpoints they get with your brand, the more likely they are to mention you to friends.
- Decision fatigue works in your favour once you have them signed up. In short, decision fatigue means it’s easier to just keep doing what you are doing than to think about making a change. It’s true that conversions are sometimes lower for subscription-based offers, but once someone has made the decision to become a subscriber, it takes a new decision to cancel – which is emotionally pretty hard once they are on board with your brand.
- The customer connection. Since subscribers are signing up for a recurring relationship with your brand, they are much more likely to tell you what they like and don’t like, what they desire, and what they care about. If you listen, you can improve your offer to make it more appealing for other customers like them. They will tell their friends about how well you serve them, and will stay subscribed for a long time. If you don’t listen, they are likely to cancel and go somewhere else.
Choosing the right subscription model for your online store
There are three categories of subscription model:
1. Curation. This is the most popular category, accounting for 55 percent of total subscriptions, according to McKinsey. The brand handpicks the items for each delivery in order to delight customers with new experiences; in many cases with personalised selections based on their preferences.
2. Replenishment. This is the second most popular category, with 32 percent of total subscriptions. The idea here is to make sure the customer never runs out of the specific products they need or want.
3. Access. This category has 13 percent of total subscriptions. Consumers pay to get access to member-only things and experiences which are not available to the public.
Which category fits your business the best? To spark your imagination, here are ten examples of subscription models, based on the three categories.
The Anticipated Samples subscription model
When you use this curation model you put together samples in a way that appeals your market. One example of a brand that does this is Glossybox.
Subscribers in Germany, Austria, Switzerland, France, the UK, Ireland, Sweden, Norway, the USA and Canada sign up for the anticipation of a pretty box containing five new beauty product samples arriving every month on their doorstep for about €10 per month.
This subscription model works really well as a marketing machine for the included products. 32 percent of subscribers go on to buy full-size products after receiving the samples.
The Use-For-A-Month subscription model
This is a curation model that allows your customers to use a new product for a month and then send it back and get another one. One example of this is Snowbox.
After subscribers sign up they get a new selection of jewellery to suit their tastes each month. The customer benefit in this model is the joy of variety, being able to go to parties and dinners with new jewellery every time.
This Use-For-A-Month subscription model is good for the environment too, building on the idea that products are being circulated between many different people.
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The Personalisation subscription model
This is a curation model where subscribers are regularly sent a package that is likely to fit their tastes. Every customer is taken through a sophisticated preference process in order to help you – as a merchant – be successful in your selection for them every time.
One example of a company that uses this model is TrunkClub, a personalised clothing service of the Nordstrom family.
The personalization begins with a style survey in which customers answer questions about their personal style. To remove any hesitation about signing up, the brand practices a try-then-buy philosophy so that customers can try products and return them within ten days if they are not happy with them – without any extra cost for return shipping.
The Monthly Gift subscription model
This curation model allows your customers to buy gifts that are delivered in stages over time. For example, name one kid who wouldn’t love to get a birthday gift that stretches over a year, with a new delivery each month? One store offering this model is Lekogram.
A new LEGO set is sent every month to subscribers. Customers can choose between different themes, categories and sizes.
The Hobby Excitement subscription model
If you sell anything related to a hobby or lifestyle, this curation model could be for you. Knitters need knitting materials, for example:
This subscription box is from Darn Good Yarn. The possibilities of this model are endless. Budding young magicians probably want new tricks to try out every month, puzzle fanatics want new puzzles to solve, and so on. Boxes might include intriguing challenges, while inspirational or instructional videos can be delivered online.
The Favourite Products subscription model
The idea behind this replenishment model is simple and brilliant. Just think about it. There is a reason why Amazon’s Subscribe & Save is the most popular subscription service in the US. It’s easy for people to choose what they want to have sent to them regularly – so they never run out of the products they enjoy consuming.
A (much) smaller brand using this subscription model, with more personality than the giant, is this one:
If you care about your coffee at home being delicious and fresh, this company makes sure you’ll get just that – fresh coffee of your choice, sent regularly to your home. Other very niche brands pop up all the time, for example delivering local eco farmer’s meat on subscription.
The Changing Needs subscription model
This replenishment model is perfect if your customers experience different phases of shopping behaviour. One example is the brand Hyber, which offers subscriptions for parents:
Hyber takes advantage of the fact that kids grow up one size at a time. Their customers sign up for a clothing subscription for €10-30 per month that delivers new clothes to use every month. Parents send the clothes back as they get too small, and everything is washed before being made available for other subscribers. “Together we extend the lifetime of children’s products and share the price tag”, the company explains on its website.
The Success Support subscription model
The value of this replenishment model, from the customer’s point of view, is not only in the products themselves, but also in the commitment structure it provides for the achievement of goals.
If your customers are doing something that is related to achieving a specific goal – learning to play an instrument, getting in shape for the summer, running a marathon, finding a partner – how can you frame your subscription to give the necessary support to help them succeed?
Gainzbox sells supplements under the tagline “Fitness delivered”.
The Discounted Passion subscription model
This access subscription model might be for you if your customers have a strong passion for a certain type of product.
A company that makes use of this model is Watchgang, where watch lovers can go and subscribe to receive new watches:
The watches are sent to their door regularly. The appeal is getting their hands on new watches that are “guaranteed to be worth up to 5x more than you pay”. They also get access to a large community where they can buy, trade, and sell their watches.
The VIP Club subscription model
This access subscription model is about creating a club/membership that offers unique value to its members.
The most world-famous example of this model is Amazon’s Prime membership. Customers pay $12.99/month and get fast, free delivery on items they order from Amazon, new editors’ picks of Kindle books, Prime music, and Prime Original video.
It’s pretty tough to measure up to Amazon.
But who says you need to?
VIP club memberships are for any online business that is able to provide member-only products and services that people are willing to pay to access.
Go ahead and start making plans for how to implement this plan. Ask your customers what they want. Test your ideas on them.
Start small. Learn fast. Iterate. Scale what works.
The opportunities are greatest if you are targeting younger, affluent adults in urban areas. They are the main users of subscription solutions with recurring payments, according to McKinsey. 60 percent of subscriber buyers are women, so that can be good to know too. On the other hand, men are much more likely to sign up for further subscriptions once they have tried this way of buying online. 18 percent of male subscribers claim to have at least six subscriptions, compared to 7 percent of female subscribers.