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Subscription Models: A successful way of customer retention
6 November 2020 10:37am
Customer acquisition is the constant challenge facing many businesses, especially those operating online. However, retaining customers and locking in repeat business can prove to be a worthwhile challenge as it can increase the long-term value of your product and guarantee a long retention of interest in it.
A successful way of long-term customer retention for many businesses has been through a subscription model. This can guarantee a steady stream of revenue while also allowing companies to showcase new or exclusive products.
It’s a method that is not without its challenges, however, and there are many aspects to consider before embarking on a subscription service. For a start, not all online businesses are suited to this approach, while others will find certain barriers and restrictions along the way.
The existing structure of some businesses may not lend themselves seamlessly to the adoption of a subscription model, which introduced marketing and technological challenges including maintaining product stock levels, deciding on a marketing approach and the effect on margins.
Although subscription models do have their benefits, not all businesses are suited to them. Even those companies which have ample experience in eCommerce find that their existing ERP system or payment gateway may not support the introduction of features required for a subscription model. This may then require a top-to-bottom overhaul of their technological approach.
Types of subscription models
It’s important firstly to decide what type of subscription you will be most able to provide for your customers.
Broadly, the type of subscription model you opt for will be driven by your business. The replenishment model works best for companies which supply the same product to a customer on a regular basis. This has proved a great route to market for many successful start-ups such as suppliers of shaving and skincare products. Items such as nutritional supplements or contact lenses which people require on a regular basis are ideal to offer as part of a subscription plan and also ensure a steady stream of custom and revenue.
A more curated approach will require some work but can help divert customers to other products they have not discovered yet. Examples of this include craft beer boxes, with a curated case of beers, sent out each month, allowing customers to discover new products, styles and brewers. The follow-up to this can be to direct them to a standalone shop where they can select the products they liked most.
You can also consider an exclusive, VIP-style model which grants subscribers access to exclusive products or services. Adding this to an already-curated model can bring an extra level of work and this may have to be offset by charging a premium for exclusive access.
Whatever model you select, it’s vital to start off by deciding what you want to achieve from a subscription approach. Is it simply to boost sales and lock in revenue or do you also want to use it as a marketing platform for your product or service?
Of course, your goals with a subscription model may be largely dictated by your brand and the market, so defining who you are firstly can help steer you into the right type of subscription type. Important points to consider are:
- Luxury brands and those which promote a VIP service will find it difficult to promote a subscription service which offers discount and promotes saving as its top attraction.
- Are you pushing the right product for a subscription? Will there be widespread interest in it?
- If you are considering a curated approach, you need to factor in that this will be more time-consuming. However, it can be a quick way to hook in new customers
- Your good idea for subscription may soon be at risk from rivals who will offer reduced rates for a similar service. Note the proliferation of craft beer and razor blade subscription at present. Can you strike the right balance between quality and value to stay afloat?
What to consider when launching a subscription model
As well as the logistical aspect of a subscription model, such as packing and shipping, there are other aspects which require consideration. One important area is that of maintaining stock levels. If you are offering a regular replenishment subscription service, you need answers to these questions:
- Can you afford to ring-fence stock which is also sold directly to customers on your website?
- What do you do when there is a run on certain products which you have also included in a replenishment subscription service?
- For subscriptions which are billed as offering long-term discounts, can you maintain that indefinitely?
- If too many customers take up the offer, does that have an impact on the products that are available for other customers who may be prepared to pay a higher price?
Messaging to your subscription customers also needs to be a key consideration. Do you see them solely as subscription customers or do you see that as a gateway to the rest of your business? Considerations include:
- How do you market other products and services to them?
- Are they likely to buy other products and services outside their subscription?
- How do you re-engage with a customer who has cancelled their subscription?
- If your loyal customer base takes up the subscription offer, how do you replace their regular, day-to-day custom?
Another area to look at is how cost-effective it will be in the long run and how much your margins will be impacted by it. You can hook in many subscribers with an attractive introductory offer, but how long can you afford to sustain that? Even if you offer 50% off the first delivery, the regular subscription price for subsequent deliveries can still undervalue your stock or service and not take into account price rises or supply issues.
This also brings issues of scale into play because you may be faced with a scenario whereby the number of subscriptions you can offer will depend on your supply and margins. However, there may be an opportunity to strike a deal with a courier. If you are going to send a high volume of business their way, you can negotiate a favourable rate.
The subscription approach itself raises questions for your marketing wing as well. Deciding in advance what you want from a subscription model is crucial because it will inform marketing choices further down the line. Once you have subscribers signed up, you will have to take a new marketing approach to them than new customers. Can you cross-sell into other areas of your brand or offer regular incentives for them to retain or renew their subscription?
A challenge worth taking
New customer acquisition is a challenge to all businesses. Understanding how a subscription model and the promotion of the service needs to be understood in relation to the existing product offering. Many customers may be "distracted" by the new subscription option, which may have a negative impact on other products that they would traditionally be expected to purchase.
Based on experience, calculating the true margin for items is difficult. When items are included in a subscription offering, this can complicate things further – even more so when they are sent out with other items in a curated selection. Understanding this and planning for it to happen could help prevent some stressful Monday Trading Meetings where colleagues are looking for answers about how certain lines have experienced unexplained margin drops!
You can also use subscriptions to promote new products by including testers or tasters in deliveries and inviting customers to find out more about them. This can also be done by partnering with other companies where there is a mutual benefit. An added benefit of tasters and testers is that it can be used for product development, you can test options with your subscription base and work on feedback to hone new ideas.
Subscriptions have proved popular with customers due to their convenience and competitive pricing. For companies, hitting that sweet spot can require hard work and investment, but the payoff can be worth it.
Edward Lewis is the Head of Ecommerce at Superb Media. With a background in traditional marketing, technical SEO and Ecommerce he supports clients with a wide range of problem-solving, consultancy, roadmap development and strategic planning.