You’ve likely encountered subscriptions in your eCommerce shopping. From Amazon’s “Subscribe and Save” to food services like Blue Apron, subscriptions promise customers more efficient buying. For the sellers, it’s a major source of revenue - with a calculated over $10 billion in sales from subscription services.
Why Do Subscriptions Matter?
Subscriptions are an increasingly common way to buy products and services online.
According to McKinsey research:
- 46% of online shoppers currently subscribe to media (ie Netflix, Spotify);
- 15% of online shoppers have signed up for one or more eCommerce subscription products at some point;
- The subscription eCommerce market has grown by more than 100% annually since 2013.
Yet it’s important to note that not all consumers have adopted this new way of purchasing. It’s often much harder to get customers, even loyal ones, to convert to a subscription than to a one-off purchase. Customers considering a subscription are hesitant due to the perceived long-term commitment, and more significantly, ongoing financial commitment.
Even so, subscriptions can offer convenience, cost-savings, and increased personalization. These benefits are often quite convincing, and customers find themselves overcoming their hesitations.
Main eCommerce Subscription Models
According to McKinsey, we can classify subscription into 3 main models:
Replenishment is when consumers replace items they typically, consistently use. This model allows consumers to automate purchases of everyday commodities, like razors and diapers. It saves them time and money. Prior to COVID, replenishment made up 32% of all subscriptions, and it’s only increased since the onset of the pandemic. Amazon’s “Subscribe & Save” demonstrates the replenishment model in action.
Another model, curation, seeks to surprise and delight by providing new items or highly personalized experiences in categories such as apparel, beauty, and food. Out of all subscription services, 55% are curated. Brands like Birchbox and Blue Apron offer curated subscription models. With curation, customers set parameters and preferences, and receive products customized to their expectations and desires.
This third model is all about gaining exclusive access to something, whether it’s members-only perks, a first pass at products, special sales, free shipping, or other perks. Access subscribers pay a fee to obtain lower prices or another benefit, primarily in the apparel and food categories. From the overall total of subscriptions, 13% are from the access type. LinkedIn Learning is an example of an access subscription.
Key Terms and Considerations for Subscriptions
If you’re considering implementing subscriptions, it’s helpful to have an understanding of key terms and approaches that are frequently used in the subscription market.
Charges & Fees
Subscriptions rely on a variety of charges and fees, depending on what’s most effective for the brand and the customer.
A one time charge is the cost the user pays only at the time they are placing the subscription order. For example, a registration fee.
Recurring charges are the costs the user pays to keep enjoying the subscription. It can be set into different billing cycles or time periods. Many subscriptions, like Netflix or Amazon Prime, have recurring monthly charges. Others, like a meal delivery service may only be charged as utilized.
If a customer chooses to cancel their subscription before the agreed end date, it may result in a termination fee.
Subscriptions also utilize different payment structures.
The duration, or term, of the subscription is its start to end date. For example, a 1 year subscription, or a 3 month term.
Then there is the billing cycle or billing period. Some subscription services bill customers monthly, others may charge a once-a-year fee. Often, brands will offer a discount to customers if they pay for a year upfront. This ensures that the customer will subscribe to at least a year’s worth of services, rather than trying a service for a few months and then cancelling.
Co-termination is when customers owning two or more active subscriptions for different products synchronize their expiration or renewal dates. This makes it easier for both the brand and the customer to manage their subscriptions.
Sometimes when co-termination occurs, a brand may prorate the recurring fees for the customer, and re-calculate them based upon the new duration.
Finally, advance payments and arrears payments indicate if the subscription will be paid upfront (in advance), or after it is used (arrears).
In today’s convenience-and-speed-driven markets, customers often want the ease of self-service. Many subscriptions provide online portals from which customers can make changes to their subscription. They may be able to edit delivery dates, select specific products, upgrade or downgrade their services, “pause” the subscription for a period of time, or even cancel altogether.
If a customer subscribes to a service but has not yet activated it, that’s called provisioning, as the subscription has been provisioned to the customer.
Along the same vein, some brands may restrict customer actions via a paywall. Paywalls limit access to users who have subscribed. This is typically seen on newspaper or magazine websites, where non-subscribed users encounter a paywall on specific articles, and subscribers can login to view all content.
Then there’s customer churn, which as internal term brands use to represent users that have cancelled their subscriptions over a period of time. Customer churn is an important metric to measure.
Impact of Implementation
Additionally, before implementing subscriptions, it’s critical that a brand consider all the ways in which offering this service will impact them:
So for example, users are impacted. Your user journey may shift. Channels will need to be modified to accommodate for this new format of placing orders. Apps and call centers will need to be updated, too. Product teams need to know about new offers, ordering systems could be impacted, and all of this affects the backend.
Subscription is quite complex, and can have significant effects on numerous areas of your business. It’s important to consider how each layer comes into play.
Subscriptions are an ever-growing trend that smart eCommerce brands can utilize to generate loyal customers and predictable income.
Whether customers are replenishing commodities, looking for curated products, or willing to pay for exclusive access, there are subscription models and solutions suited to these needs.
For more information on implementing subscriptions, market-leading products to streamline the process, and other expert recommendations, reach out to the team of experts at Object Edge today.