February 10, 2021
A subscription business model is one that charges consumers, typically monthly or annually, a recurring fee for access to a product or service in its basic form.
The recurring revenue of a subscription model is an important new alternative lifeline for businesses, through the ups and downs of the economy and the retail cycle, as well as through the pandemic of COVID-19. These steady, stable revenues enable more effective purchasing and inventory management. And knowing a customer's lifetime value in a subscription company will help brands invest wisely in acquisitions during low-revenue seasons. With a specific and closer relationship with their customers, successful subscription businesses enjoy the advantage of reduced churn rates. The overall churn rate for B2C companies is 7.05 percent as a benchmark.
With subscription-based businesses, pricing often appears to be much more transparent, as merchants focus on aggregate tier pricing rather than individual pricing for a variety of items.
E-commerce subscriptions also help marketers drive recurring revenue because once you have a solid, subscribed customer base, you don't have to capture the market on an ad hoc basis every time. The chance of selling to existing buyers is estimated at 60-70% while selling to a new potential buyer is only associated with a 5-20% chance.
Moreover, should you decide to sell your business to another company or investor, the ongoing revenue ultimately makes it more valuable and attractive for such acquisition.
With subscription-based business models, companies can take a very data-driven approach to customer outreach and acquisition and pass on the cost savings around delivery, marketing, and personalization to their customers. The prospects that subscription-based businesses have on their customer base create increased opportunities for cross-selling and marketing that are certainly not feasible for traditional retailers.
Recent estimates show that the global e-commerce subscription industry will be worth $478 billion by 2025 growing at a CAGR of 68%.
The global e-commerce subscription industry will be worth $478 billion by 2025 growing at a CAGR of 68%.
Over the past three years, e-commerce subscription companies have raised nearly $2.5 billion in venture capital funding, including $400 million in the first eight months of 2019. And when we remember the benefits of the subscription model for customers, it's easy to see why this market is booming.
In many ways, it boils down to convenience. Subscriptions are the perfect example of "set it and forget it." When they sign up for service, consumers make the decision once, and then, like clockwork, they access their products or services without having to worry about things such as maintenance and repairs and similar issues again. On top, it comes with the added benefit of low-cost or free delivery in case of some bundle products such as a coffee machine subscription incl. monthly packages of coffee beans, or a washing machine in a bundle with detergent - which is a huge advantage right now during pandemic lockdowns and restrictions.
Customer satisfaction and customer lifetime value (LTV) are important to subscription companies. Therefore, if you run a subscription business, churn rate, customer acquisition rate, and the cost of acquiring new customers are critical metrics.
It is important to understand the reasons why brands integrate subscriptions into their current products before packaging their products in a subscription offer.
1. Stability: you can predict inventory levels more reliably, minimize waste, and cultivate recurring revenue as subscriptions become established.
2. Segmentation: with more subscription customer data than a standard checkout, upsells or cross-sells are more likely.
3. Differentiation: a subscription offering sets your brand apart from others and makes you a curator or influencer in your industry.
1. Exploration: many consumers see subscriptions as a convenient way to "try something new," which is highly tailored to their individual needs given the wide variety available online.
3. Value: the total price is not the main factor here, but rather the value for money; it is important to control the expectations of your buyers.
3. Customization: improved personalization over time is one of the main factors in subscription longevity, something to keep in mind to minimize churn. In the case of baby products, this can be the option to switch to bigger strollers every few months as the baby grows.
If this article was some good food for thought for you, I am happy to continue brainstorming together with you. I am passionate about subscription e-commerce and I am convinced that the access over ownership model will continue striving in the future.
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