Trends Analysis: Subscription Services and DTC eCommerce
Subscription services make up a particular niche within the eCommerce world. From big names like Dollar Shave Club and HelloFresh to smaller, niche services like Expack, subscription boxes have been growing in popularity in recent years.
McKinsey researchers Tony Chen, Ken Fenyo, Sylvia Yang and Jessica Zhang report that the subscription eCommerce market has grown by more than 100 percent annually since 2013. Nearly one in six online shoppers have signed up for at least one subscription service at some point, they write. And it’s not all startups and small shops. Giants like Walmart and Unilever are cashing in, with the former’s launch of Beauty Box and the latter’s $1 billion acquisition of Dollar Shave Club.
The model has its pros and cons, the authors say. On one hand, subscription services offer an exciting, convenient option for consumers. But the subscription model for eCommerce is not without its challenges. “Churn rates are high, however, and consumers quickly cancel services that don’t deliver superior end-to-end experiences,” the authors conclude.
Given all this, subscription services warrant a closer look for any eCommerce brand. In this post, we dive into the opportunity of subscription services for direct-to-consumer brands and what superior end-to-end experience looks like with this model.
Subscription Services: An Opportunity for DTC Brands?
The boom of subscription boxes (and subscription eCommerce on the whole) is relatively new, and those in the industry are still figuring out what it will look like in the future. Many in the industry focus on the opportunity subscription boxes hold for both digitally native eCommerce brands and larger retailers.
Much of the opportunity lies in the way the subscription model has responded to consumer interests. “The most important reason for subscription companies’ growth is that retail tastes have changed,” writes Forbes contributor Richard Kestenbaum.
“It’s not enough anymore just to give consumers what they’re looking for, if they know what they want they can get it with a click any time. To get a consumer excited, you have to offer something they’re not expecting.”
Subscription models offer a prime avenue for bringing these new offerings to the consumer, particularly when personalization in the form of curation is involved.
And many think this growth will only continue. Georg Richter, CEO of subscription technologies company OceanX, writes that this new form of delighting customers is what will continue to drive retailers to bring subscription boxes into their omnichannel offerings. Doing so can help them remain competitive with Amazon and niche, digital-first brands while creating a new form of customer engagement.
“Subscription-based business model revolves around cultivating long-term customer relationships with a focus on lifetime value,” Richter says. This is its value, both for small brands and large retailers looking to pivot.
Of course, not all in the industry think that the opportunity offered by subscription services will be sound moving forward. Ashwin Ramasamy, CMO of eCommerce market intelligence firm PipeCandy, predicts that the model will remain niche at best. The reason? It’s fun for consumers, but not necessarily sustainable.
“The customers are going to be fickle with discretionary purchases and the spending is more closely tied to economic cycles than categories like general merchandise,” Ramasamy writes. In other words, subscription services could be the first to go if the economy takes a dive.
At the same time, Daniel McCarthy and Peter Fader, co-founders of customer predictive analytics company Zodiac, call the growth of the subscription box industry both rapid and highly volatile.
Neither of these perspectives negate the fact that developing a subscription model presents an opportunity for new business. But with this volatile growth, it’s critical to understand and address the challenges of subscription services if brands are to take advantage of the opportunity.
Subscription Model Challenges: Market Differentiation and Customer Churn
Utilizing the subscription model comes with a host of challenges. Most are unique to larger operations (such as Blue Apron needing to take on an omnichannel approach) or smaller startups (like finding customers for a highly specialized subscription box in the first place).
But there are two major challenges to eCommerce subscription model that remain true regardless of niche or size.
First of all, it can be difficult to stand out in a market swimming with competitors.
Writing at Smart Insights, Laura Gayle points out that specialization is key on this front. “It’s important to have a clear niche and a very specific audience,” Gayle writes. “A strong concept will be very specific – ex. gluten-free food, clothing and accessories for pug dogs, cruelty-free cosmetics for people with dry skin. It helps if your niche is not already saturated with rivals.”
Second, the subscription model introduces a unique challenge for eCommerce: retention. Software strategist Louis Columbus points out that just more than half of online shoppers who consider a subscription service end up subscribing — but 40 percent of eCommerce subscribers end up cancelling their subscriptions. This means it can be relatively easy to get a niche audience to sign up for the service; the real challenge is keeping them on board for the long term.
“Despite the hype surrounding subscription business models and the cloud apps and platforms supporting them, making a subscription-based business work is more difficult than it looks,” Columbus writes. He says these stats underscore just how important customer experience is with the subscription model.
Consultant Dan Barker attributes the higher rates of attrition to something he calls subscription fatigue. “Some customers love subscription buying; some don’t like it at all, for most it’s somewhere in the middle. If they don’t love what you sell, or they already buy from their max number of retailers on a subscription basis, you’re not going to sell to them.”
This is where bringing a winning user experience to your subscription service comes in.
Speaking to Your Audience: The Right Customer Experience for Subscription Sales
Subscription eCommerce is more focused on retention than acquisition. The “basic premise of the subscription model means that customers are not just seen as one-off sales, but a long-term investment,” Nikki Gilliland writes at Econsultancy. Part of ensuring retention is working on your customer experience.
From the start, focusing on customer experience ensures sustainability and can help differentiate a brand.
David Zheng, founder of WiseMerchant, says getting this focused creates several advantages: “The subscription model allows you to have a simple and singular customer retention goal, which is to reduce churn. It’s a lot easier to keep people from unsubscribe than to pull out their credit card to pay for something else especially when you already have their credit card on file.”
Adrianne Pasquarelli at AdAge says brands looking to enter the subscription model should specialize and personalize. It’s the personalization — of both offerings and messaging — that should prove most beneficial to retention.
“The same tools used to bring customers to a subscription model in the first place need to be deployed across the customer’s lifetime,” writes Marina Cheal writes at Econsultancy. “Emotional marketing has a huge influence on how subscription models stay relevant to customers’ lives.” In other words, speaking to your existing customers is almost more important than marketing to a new audience. It’s all part of their experience.
Sarah Steimer at the American Marketing Association doubles down on the importance of personalized, emotional messaging in retaining customers once fatigue hits, from unboxing to personal messages. “Marketers must find a way to keep the warm and fuzzy feelings alive when customers outgrow the initial excitement of personalized packages — and that requires thinking of boxes as a marketing device, rather than the core product.”Read more about the challenges and opportunities of the subscription services business model here.
Doubling Down on Customer Relationships
All of these efforts should be to serve the audience you already know.
Established brands looking to foray into subscription services should consider it a means of improving conversion value rather than a means of attracting new sales. You’re building relationships and delighting customers, not driving loads of traffic to your site.
Puori, a subscription-based supplements brand, embraces that very mindset. Puori relies on Scalefast to manage customer subscriptions, which it offers to customers as a checkout option in addition to one-time purchase options. Puori also uses Scalefast’s capabilities to manage its affiliate programs and loyalty programs, all natively on the platform. That frees up time for Puori’s team, which can focus on strengthening the brand’s customer relationships rather than managing several plugins.
Bear in mind, however, that subscription purchase options compel customers to change the way they consider and buy products, Mitch Duckler, a managing partner at brand consultancy FullSurge, tells Scalefast. “Brands need a prevailing brand voice because the conversation with consumers is continuous and provides a unique opportunity for ongoing dialog with customers,” he advises.
More than anything, then, the popularity of subscription eCommerce highlights the continued importance of fostering strong customer relationships. 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.