After a hard day at work and long commute home, you finally arrive at your front door, tired and worn out. Another countless day crossed off the calendar of life. Except for today, there’s something different. Today, there’s a package waiting for you on your doorstep, yet you don’t remember ordering anything. Then, like a bolt of lightning you remember: today is the day your subscription box arrives! Like a mini Christmas morning, your face lights up as you hurry inside to rip open the packaging, eager to see what new and exciting goodies were sent to you this month.
With that level of customer excitement, it’s easy to see why there’s been a drastic shift from pay-per-product/service to subscription-based box services. In the past few years, more than 3,000 services have popped up, from Blue Apron meals in a box to the nerdy knickknacks Loot Crate offers, there’s practically a subscription box for anything and anyone.
Subscription services aren’t anything new, but when it comes to incorporating a subscription service into your eCommerce store, things start to look a bit different. Red Rokk can help you make the leap, but first, consider if this type of service is right for your business.
Are subscriptions right for you?
Before introducing a subscription service into your business model, first, you need to figure out whether or not it’s the right decision for your business.
There are two popular forms of products/services that convert well into subscriptions: necessities and niches.
Necessities are everyday items, like vitamins, laundry detergent, toilet paper, and garbage bags. These are commonplace products that can be easily overlooked until you run out of them. Amazon’s “Subscribe&Save” program is a great example of this type of subscription. Customers no longer have to worry about getting lost in the aisles at Walmart, and can instead focus on more important tasks. Like watching cat videos… or finding that perfect meme.
The other type of service fills a specific niche. These niches are wide ranging, but all have a target audience they’re actively courting. Birchbox, for example, saw an opportunity in the cosmetic industry that was going ignored by the major industry leaders. The “discerning multitaskers” as they call them, are a group of women who have a more casual interest in beauty. So Birchbox focused on helping this group of women by providing a box service that offers beauty products samples to try before they buy.
Once you figure out what type of subscription works best with your eCommerce store, you need to consider the challenges that come with running a subscription service.
Challenges facing subscription businesses
1. Competition is everywhere
As mentioned earlier, subscription services have exploded over the last few years. With this increase in popularity, comes new companies that make it easier than ever to offer subscriptions, like Cratejoy. As a result, the barrier to entry has been lowered and there is now more competition and the possibility of over-saturation in your field.
On the flip side, these new third-party tools can help get your subscription business up-and-running, with an extremely low overhead cost. They also typically include account and management tools, analytics to help you scale, and shipping tools and integrations to simplify order fulfillment.
2. Fear of commitment (it’s not you, it’s me)
Recently, my roommate signed up for a free trial of Blue Apron, where she was required to provide her credit card information and sign up for a monthly plan, with the option to cancel at any time. Fast forward a few months, and we now have enough Blue Apron boxes in the house to build an elaborate box fort, and my roommate has yet to cancel her subscription because “it would take too much effort.”
While this is great news for Blue Apron, it’s one of the leading obstacles standing in the way of customers deciding to sign up in the first place. Lots of people steer clear of any sort of business that charges monthly fees. Customers are afraid that if they don’t like or care about the product they’ve signed up for, they’ll forget or procrastinate in canceling their subscription, therefore wasting their money.
Additionally, these types of customers can put a strain on your customer service department, who have to deal with people who want refunds for things they don’t like or because they forgot to cancel.
However, this can be overcome by offering tiered subscription plans. Ankle Swagger, for example, offers subscribers delivery options of twice per year, four times, or as an ongoing plan. With this, they offer progressively lower costs for longer-term agreements.
Similarly, with the Amazon model we talked about earlier, they let the customer select the delivery frequency, give them an option to skip or cancel a delivery at any time, and send an email in advance of their order, listing the price of items, any discounts, and a direct link to allow customers easy cancellation. This added control is a great way to overcome the customer’s fear of commitment.
3. Sustaining value (keeping things spicy)
Losing subscribers is, of course, a huge issue for subscription services, since they’re what makes subscriptions work, after all. For this business model to be successful, services must focus on maintaining value and continuously coming up with new products to include.
To achieve this and maintain the “wow” factor needed, sending quality products is a must. The quality of the experience you create for them and the selection of products you include will be the major ingredient in customer retention.
To keep things interesting, you have to listen to your customers. Ask them through social media what they want more/less off, allow them to fill out an interest profile, and/or survey your customers to gauge their interests, then tailor your products to them.
4. Pricing and profit issues
With a new subscription service, comes a new Cost of Goods Sold (COGS) issue, which is the direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. One reason subscription businesses fail is because they didn’t take the time to map these new costs and build enough profit margin.
Don’t just assume what your competition is doing is right and copy them. Instead, here’s a handy calculator you can use that helps calculate a suggested sales price based on your COGS, profit margin, and anticipated subscribers.
Once you’ve weighed the risks and considered the challenges of starting a subscription, it’s time to look at the benefits that come with adopting a subscription model.
Benefits of subscription businesses
1. Continuous income stream
Want to keep your finance department happy? Offer them a recurring source of revenue. With less fluctuation in finances, your business will be able to make cost-related decisions with relative ease.
Instead of sporadic purchases, customers will pay you a set amount every month, so your finances become a bajillion times more predictable. Money that used to be spent on obtaining and retaining customers can now be projected for months on end, saving thousands of dollars. This also makes calculating the lifetime value (LTV) of customers a breeze.
The basic LTV for subscriptions is calculated by taking your Average Monthly Revenue per ÷ Customer Monthly Churn Rate. To find the expected lifetime of that customer, you take your LTV Monthly ÷ Churn Rate.
For example, let’s say you charge $500 per month and 5% of your customers cancel each month–the LTV for a new customer is (500/0.05) or $10,000, meaning your customer’s expected ‘lifetime’ is 20 months (10,000/500). This makes it easier to control/predict your cash flow and lets you move onto calculating how much you need to spend to get those customers to the next level.
2. Stay in touch with loyal customers
Customer satisfaction is one of the best indicators of your business’s health. Any wise business owner would tell you that the best way to learn how your business is doing is to talk to your customers. With subscriptions, customers remain customers for months on end, keeping your brand top-of-mind. This gives you ample time to build relationships and really get to know your customer base.
These subscribers are more likely to become fans and super fans of your business, especially since they’re receiving monthly packages from you. In turn, these fans will be more inclined to follow you on social media and will participate in representing you online.
They’ll also be more likely to give you critical and valuable feedback on any issues they’re having or products that didn’t quite work for them. By listening and responding to this feedback, you’ll improve your business and make your core customers feel appreciated and listened to.
3. Boost goodwill and word-of-mouth promotion
Starting a subscription service gives you the opportunity to start an exclusive group of brand ambassadors. Instead of launching your new service and offering it to everyone, give your existing customers early access. Rather than calling them subscribers, give them an exclusive name, like members, VIPs, elite contributors, or any other name that gives some weight to their commitment. By doing this, your elite contributors, help build hype around your new products through word-of-mouth and social sharing. Add to that customer reviews of products that haven’t even launched yet, and new buyers won’t be able to wait to get their hands on your products and join this special group.
4. Predictable shipping
HOW WE TRIPLED ECOMMERCE REVENUE IN 18 MONTHS
By capitalizing on conversion-centric email marketing, social media, online giveaways, and abandoned cart emails, we significantly increased brand loyalty, awareness, and most importantly—eCommerce sales.
With subscription options, shipping costs are easier to forecast, since the customers expect to receive their order on a schedule and at the same address. Packages, in turn, are chosen based on what works best for your company, letting you select a slower and less expensive form of shipping. Size and weight can be easily calculated since each package is the same, making it easy to predict and plan for the cost.
5. Reduce the paradox of choice
When buyers have too many choices they can feel anxious and paralyzed. Using a subscription service can eliminate those fears. Customers simply get what they get. You can, of course, provide options to choose or switch out products, so customers get something they’re at least interested in. NatureBox, for example, lets you choose a snack you always want, or exclude one you definitely don’t want. They also give you the option to choose every snack in a box if you want. These are easy decisions to make, and help customers feel like they still have control. Of course, they still trust your service to make the important choices on what to include in the box.
Buyers really want instant gratification, but they enjoy the products more when they have to wait. Subscriptions services kill both birds with one stone, so to speak. Members can get first dibs on new products when their box arrives, adding a sense of exclusivity. But they still have to wait for the designated subscription time before their box arrives.
So, are subscription services right for your eCommerce store? If you’re still unsure leave us a comment below or schedule a free consultation with a member of our team.