The world of ecommerce is changing. The evolution of technology and consumer behavior has shifted the way businesses operate and compete.
Today, there’s a stark contrast between the present ecommerce landscape and the one from just a few years back. And a big cause for this dramatic transformation is thanks to the growth of the subscription model—which isn’t just being embraced by startups and small shops. As McKinsey notes, giants like Walmart and Unilever are also cashing in, with Walmart's launch of Beauty Box and Unilever’s $1 billion acquisition of Dollar Shave Club.
Seeing as this boom of subscription boxes—and subscription ecommerce as a whole—is still in its fledgling state, there’s plenty of opportunity for new entrants. But if you wish to thrive in this competitive environment, you must carefully plan a strategy and then adhere to it.
What's Driving Ecommerce Subscription Growth?
Over the last decade, the subscription ecommerce market has experienced meteoric growth. According to Forbes, there’s been 890% expansion since 2014.
But what was the cause of this? There are a host of contributing factors, including but not limited to:
- Consumers (especially millennials) value access and usage of a product over ownership.
- Companies like Netflix have raised expectations about customization and personalization.
- The convenience offered through an automated subscription plan prevents choice paralysis—a common issue with shoppers faced with an overwhelming number of buying options.
- Constant exposure of new products and new content on media platforms have conditioned consumers to always expect something new.
The final point speaks to consumer psychology and behavior. The sense of “newness” that comes with the subscription model seems to activate the reward center of the brain. Studies have long shown us that receiving a new package and then unboxing it—even when it's a consumer ordering for themselves—triggers a dopamine rush, which creates a sense of joy and excitement. Over time, that becomes a hard habit to break.
Who is Driving Ecommerce Subscription Growth?
Currently, there are 18.5 million subscription box shoppers in the U.S. and 35% of these active shoppers subscribe to three or more services, with a median number of subscriptions per active subscriber being two. Interestingly, these subscribers share many characteristics. According to Hitwise, the average demographics of this consumer base looks as follows:
- A younger millennial
- Have a college degree
- Live in a college town or hipster enclave
- Have a household income of more than $100,000
- A regular contributor to and reader of online reviews
- More likely to buy online than in-store generally
- Amazon shopper
Millennials are largely to thank for the growth of this model, seeing as they make up the bulk of subscribers at the global level. Millennials love convenience, new trends, and doing things differently than previous generations. As their attention shifts from products to the lifestyles or social media buzz surrounding them, ownership seems to have lost its importance.
For many, signing up for a subscription is like signing up for a lifestyle.
Types of Ecommerce Subscription
According to McKinsey, there are three broad types of subscriptions:
Replenishment subscriptions (32% of subscriptions)
Allow consumers to automate the purchase of commodity items, such as razors or diapers. For example, Hawaii Volcanic Waters originally sold its cases of 24 bottles as a one-time purchase. But, by embracing a subscription option that automated subscriptions and created membership renewals, that small change helped improve the company’s YOY conversion rate by 40% and increased its YOY subscription rate by 50%.
Curation subscriptions (55% of subscriptions)
Seek to surprise and delight by providing new items or highly personalized experiences in categories such as apparel, beauty, and food. Examples of this model include Birchbox, StitchFix, or Blue Apron. With 55% of total subscriptions, curation subscriptions are by far the most popular, suggesting a strong desire for personalized services.
Access subscriptions (13% of subscriptions)
Pay a monthly fee to obtain lower prices or members-only perks, primarily in the apparel and food categories. Successful examples of this type of subscription service include Thrive Market and JustFab.
Curation services, with 55% of total subscriptions, are by far the most popular, suggesting a strong desire for personalized services.
Challenges to Thriving in the Subscription Ecommerce Economy
So, is an ecommerce subscription model right for your business?
There’s little doubt that a subscription service can provide a competitive advantage to even the most common of items sold through an online store. Additional upsides for a merchant include greater predictability—both in what kind of stock is needed and the associated shipping costs, as well as a predictable monthly revenue stream.
However, with a fairly low barrier to entry, competition is stiff, and the model can be difficult to scale. These factors increase the cost of customer acquisition, thereby stunting the growth of many would-be subscription services.
While growth has been rapid, it’s also highly volatile. Customers can be fickle with this type of discretionary spending, which is contingent on economic cycles. In other words, subscriptions could be the first spending habits to get cut should the economy take a nosedive.
Finally, it can be relatively easy to get a niche audience to sign up for the service, but the real challenge is keeping them subscribed for the long term. Churn is a real challenge, with nearly 40% of ecommerce subscribers canceling their subscriptions. These rates are similar across replenishment, curation, and access subscription services
8 Tips to Thrive in the Ecommerce Subscription Economy
Many of the challenges discussed above underscore the importance of customer experience and fostering strong customer relationships. Put simply, a strong brand-customer relationship is the basis of a subscription sales model, which functions more like an ongoing conversation than a series of siloed customer journeys.
Instead of treating subscription as something that’s simply “bolted on” to an existing ecommerce offering, treat it as a first-class customer experience covering everything from the initial sign up to the notifications to fulfillment. While developing an ecommerce subscription model presents an opportunity for growth, it’s critical to understand and address the challenges before diving in head-first.
1. Assess your current business model
The shift from a one-off purchase model to a recurring model shouldn’t happen overnight. It should be installed gradually in increments.
For example, Kate Sommerville—a science-based skincare line—slowly began embracing this framework by creating an auto-replenishment program. Many of Kate’s devoted fans were already repurchasing products regularly. This update made it, so they only had to order once, and from there, they could opt to receive monthly (or a cadence of their choosing) renewals at their doorstep.
This slight shift toward a set-and-forget ethos was perfect for her customer base and helped build a profitable recurring revenue source, saving both parties time and effort.
2. Mine your customer data
Savvy ecommerce subscription service providers dig into their customer data to get to the heart of what customers really value. In doing so, they can predict what monthly subscription product and services their customers may enjoy. Over time, this allows you to continually gain a better understanding of each customer’s tastes and preferences.
3. Choose a sector that isn’t too crowded
By researching the major (and minor) players in the vertical you are exploring, you can identify a clear niche. Providing boxes of niche-specific items that surprise and inspire will go a long way. Companies like LootCrate have found success catering to “geeks” and always wowing them with things they haven’t seen before.
Remember, over 50% of subscribers do so for curation.
4. Adopt a test and learn approach
You may not design a perfect subscription offering right out of the gates. Even Amazon Prime had its doubters in its infancy.
While 2018 saw the most amount of capital ever invested into subscription box businesses, the number of venture capital deals peaked back in 2016. In spite of a growing overall market, most of the leading subscription sites had fewer visitors in April of this year than they had in April of 2017. This overall slowing down of growth can be interpreted in one of two ways.
Either, this young industry is already maturing, allowing the bigger fish to flourish while the smaller ones die out. Of the subscription boxes tracked by industry website My Subscription Addiction, an estimated 13% had ceased production as of 2018, according to Fast Company.
Or, the leadership is still in flux. Across product categories, the leaders keep changing, and the long-term leading market share positions are still up for grabs. For example, in the subscription categories of food, beauty, and pet, the number one market leader had fewer site visits in the last year than in the year before. This suggests that consumers are not acting in traditional customer loyalty patterns.
5. Consider customer pain points
One of the reasons why subscription models are popular is that they eliminate the hassle of having to reorder the same thing repeatedly. But this isn’t the only pain point to consider.
For instance, Drybar Products realized that many models make it extremely difficult to make changes to existing saved credit cards. Most solutions do not have an out-of-the-box capability to update or change payment methods. To counter this, Drybar—with the help of Guidance—extended the vaulted payment methods to allow customers to easily update or change their payment method, which ensures zero interruption in recurring revenue for Drybar.
6. Offer Ongoing Value
For the ecommerce subscription based model to work long-term, customer loyalty will need to take precedence over lead generation. Shift the focus from driving larger singular transactions to ensuring customer satisfaction, personalization, and customer retention. What customers really value goes beyond the monetary worth of the products; in the case of curation, it’s largely about the feeling associated with the ecommerce brand membership.
7. “Rundle” up
The concept of bundling is not new in retail. But adopting this tactic in an ecommerce subscription model will give you a recurring revenue bundle, or “rundle,” as NYU professor Scott Galloway calls it. Galloway believes that in the near future, many brands will partner with others to create bundles by combining different services and charging a recurring subscription.
For smaller, less recognizable brands, creating strategic partnerships amongst themselves allows them to rival bigger and more established ecommerce companies.
8. Master the art of the upsell
One way to increase ARPU (Average Revenue Per User) is to upsell to your subscriber base. If you know your loyal customers love your products, keep them engaged and excited to receive new products from your catalog.
For example, Dollar Shave Club offers everything from hair care products to toothpaste, along with their namesake—razors. If razors are an annoying thing to remember to replace on a monthly basis, maybe so is shaving cream, soap, toothpaste, shampoo, etc.
Guidance—Helping You Thrive
The subscription business continues to have limitless potential to influence how consumers shop. The key is to view the subscription-based business model as the driver for the type of subscription product you want to sell and the type of customer experience you seek to create, not just an extension of the online store.
With more than 25 years of experience in B2B and B2C ecommerce development, Guidance has helped countless businesses embrace a subscription based model or strategically incorporate aspects that optimize their existing sales method.
Want to give your business a competitive edge? Don’t hesitate to contact us today!