The Challenges of Operating eCommerce Subscription Businesses
Subscription programs can strengthen customer loyalty, reduce inventory risk, increase the lifetime value of each customer and boost ROI. And consumers have learned to love them. The growth of subscription box services has been exponential over the past four years.
But what does it really take to seamlessly grow and manage an eCommerce subscription business at scale?
Whether you’re running an SaaS company or selling physical merchandise, subscription service offerings can lead to unexpected obstacles that aren’t applicable to traditional direct-to-consumer business models.
These hurdles include changes in payment processing and cyber security, managing customized orders and varying membership levels, packaging and shipping complexities, timing deliveries, customer churn, rapid growth, and integrating rewards and loyalty programs. What’s more, scaling up requires dynamic fulfillment capabilities. It’s simple enough to manage 50 subscription orders each month, but what about 50,000?
Let’s take a more detailed look at some of the challenges businesses face when operating an eCommerce subscription at scale.
Payment security and alterations
Traditional eCommerce companies often receive credit card information each time a customer checks out. Subscription businesses, on the other hand, benefit from storing credit card data, which makes it easier to facilitate a seamless user experience and increases the probability that customers will continue their subscription. When you start storing thousands or millions of credit card numbers you become a target for credit card fraud and must invest in highly reliable security to protect your customers’ data and your bottom line.
If you are going to maintain a credit card number database in the United States, you must register with the Payment Card Industry Data Security Standards, which requires risk assessments and action plans as well as other time-consuming paperwork.
You should also be prepared for expired credit cards, subscription cancellations, and order alterations, all of which add complexity to managing the digital infrastructure of your website and backend accounting.
Custom orders and varying membership levels
Some of the most successful subscription services allow consumers to customize their monthly orders, which can add enormous complexity to inventory management and fulfillment. For example, the hugely successful subscription service Dollar Shave Club encourages its customers to add extra products to their monthly shipments. It also offers various levels of membership for its razor service, from basic to premium. Shipments go out at various times of the month. All of these options create a lot of backend complexity that needs to managed seamlessly for hundreds of thousands of customers each month.
Another commonly used subscription model is the curated box package. In this model, brands such as Love With Food and Birchbox select different items each month to surprise and delight their customers. A big part of the appeal of these subscription box services is the variety of products that members receive month in and month out.
Whether you allow customers to change their box contents or you’re mixing up the selection each month as part of your business model, it’s important that your eCommerce solution is agile enough handle these monthly changes, and be able to scale up as necessary.
Enabling affiliate marketing and management
A big source of income for many subscription businesses is working with affiliate partners and resellers to bring in additional customers. However, this requires an eCommerce solution that can keep track of affiliate/reseller sales, what commission is owed on each sale, and for how long these commissions should be paid out. You may also want the ability to offer different commission levels, depending on the volume or the quality of each affiliate’s customer leads.
More robust solutions can also create microsites specifically for your affiliate partners and resellers where they can track their sales and commissions with handy dashboards, download marketing materials such as social media content and display ads, and create coupon codes and tracking links.
Wrapping and packaging
Every time a customer receives a package she or he is physically interacting with your brand. The unwrapping experience is essential to brand identity and the presentation must be handled with care.
This is especially true for beauty or skin care companies like Glossybox, which ties a ribbon around each package.
“Doing the bow 500,000 times is not easy. Some people just cannot do this,” Britta Fleck, president of Glossybox U.S.A, told the Wall Street Journal. “It sounds ridiculous, but if the box is open and it’s not a nice bow, the experience is already lower.”
Essentially, presentation is important and you want to be sure to have the labor force to wrap your products in a timely and visually appealing fashion.
Also, keep in mind that if you offer customization options, you want to ensure that the items will be physically placed in each box to optimize space and aesthetic.
While some eCommerce subscription businesses fulfill orders in accordance to each customer’s scheduling preferences, many companies like LootCrate send all orders at the same time of the month. Setting a uniform arrival date can build anticipation, generate social media buzz and strengthening your consumer loyalty.
To facilitate the surprise element consumers love, it’s essential that all subscribers receive their goods as close to the same time as possible. To ensure uniform delivery, it’s crucial to account for how location-based variability impacts shipping time and consider adding additional storage facilities to efficiently serve select regions.
Uncertainties of rapid growth and customer churn
Demand can ebb and flow as fads change and trending subscriptions can quickly becomes old news. Online retailer’s that ramp up storage, staff and other fixed costs can suffer from the expenses of maintaining idle space, stagnant inventory, and underworked staff.
“The biggest challenge for these companies is that they have huge churn,” Sucharita Mulpuru, of Forrester Research, told the Business Insider.
So, it’s important to be prepared for rapid fluctuations in demand volume. It’s crucial that your eCommerce solution can provide a convenient way for you to track and report out monthly recurring revenue, known as MRR. You’ll want to see key metrics such as the number of new subscriptions, canceled subscriptions, downgrades and upgrades, customer churn rate, profitability, etc.
A great example of an eCommerce company that experienced the wave of rapid growth and unexpected drop in business is Birchbox. The eCommerce posterchild grew by more than 1,777 percent from 45,000 members in 2011 to a whopping 800,000 members two and a half years later.
However, the brand was forced to lay off 15 percent of employees in 2016 due to changing consumer demands.
By establishing flexible arrangements with carriers, storage facilities, and labor teams you can simultaneously reduce vulnerability associated with fluctuations in demand and minimize overhead expenditure.
The key takeaway here is that dynamic logistics teams are essential to managing the risks of demand variability.
Incorporating rewards and loyalty programs
While you can run a subscription service as a stand alone operation, implementing rewards and loyalty programs is a proven way to boost customer retention and increase sales.
A great example of a subscription box that incorporates a rewards program is Bulu Box. The natural health and wellness product delivery service offers customers redeemable points if they fill out surveys or review products. By giving bonuses for customer feedback, the brand not only strengthens connections with customers, but also gains valuable insights on what their target consumers want.
To smoothly incorporate rewards and loyalty programs into your subscription service, make sure your consumer facing interface is supported by your backend analytics and logistics processes. For example, you’ll likely want the ability to create discount rules for renewing customers, free trial offers, and promo codes for sales campaigns and seasonal events.
Although they’re is a lot of upside potential, eCommerce subscription services can be unpredictable and complicated to run. That’s why working with a fulfillment partner is a surefire way to save you time, money and headaches in the long run.
Scalefast manages subscription logistics, provides software solutions to automate large numbers of customized orders and generates easy-to-use analytics, so you can spend more time focusing on your core business. Contact us today to learn more about how Scalefast can help your company grow through subscription customers.