The advent of eCommerce has redefined business—and shopping—in this age. Technology has allowed us to be more global, reaching more people and stores in the comfort of our own homes. It has also opened opportunities for innovations and trends in the eCommerce industry itself. The subscription business model for eCommerce is one such innovation that has seen tremendous growth in the past few years.
A 2016 study from Hitwise Retail 500 noted that visits to subscription box websites grew almost 3,000% from 2013 to 2016, representing tremendous opportunity for both brick-and-mortar retailers and traditional eCommerce.
In contrast to a traditional eCommerce business model where consumers make one-time purchases, the subscription business model offers customers the option to subscribe to a plan to receive regular deliveries of products. The value propositions of the subscription business model are savings and convenience for the customers: you just order once, and the products are delivered straight to you regularly, usually once a month.
Customers get discounts for subscribing; the more packages they subscribe to or the longer they set their subscription, the more savings they get.
Many businesses have cast a wary eye on the subscription business model, but its growth in the industry and the advantages it has over traditional eCommerce make it an attractive option for a lot of businesses. In fact, even companies like Starbucks and Sephora, while primarily brick-and-mortar businesses, have subscription packages available.
When it comes to deciding if your business will stick to the traditional one-time purchase eCommerce model or adopt a subscription business model, there are many factors to consider. One type of eCommerce is not necessarily better than the other. It all depends on your business, your products, and a host of other factors. It’s also not a case of “all or nothing,” as there are many businesses that employ a hybrid of these two models.
Advantages of a Subscription Business Model
Not all business models are created equal, and not all businesses fit the mold of the subscription model. To determine if your business might benefit from offering subscription packages, let’s take a look at what makes subscription business models effective.
Since the orders are on a recurring basis, your product deliveries are more regular and predictable. You know exactly how many subscribers you have, what kinds of products they need at what time of the month. This lets you manage your inventory better and avoid waste.
Better financial control
Because orders are recurring, you also have a better idea of your costs and income, allowing you to plan ahead with more stability. Your customers are more long-term, which means a higher margin for you. This is also good news for your marketing, because you spend less per customer. Instead of spending marketing dollars to entice them every time they need to buy a product, you just need to get them to subscribe once, and they automatically buy from you regularly.
Regular interaction with your customers means that you cultivate a good relationship with them. You receive their feedback, learn their needs and wants, and act on them more quickly. You can market new products to them easily via their subscriptions, saving you time and money. Customers will depend on you for their monthly needs, developing loyalty.
Limitations of a Subscription Business Model
More work packaging products
Instead of simply packing the product in a shipping box and delivering it to the customer, many subscription products are marketed as a monthly care package of sorts, so presentation is more considered. You’ll notice the product photos of subscription websites look like gift baskets as a way of enticing customers to subscribe. So when someone purchases a subscription package, they expect to receive what they see on your website. This means more work and more costs to package the products.
Product availability issues
Set orders are more prone to product availability issues. Say you have 100 orders to fulfill this month, but one of your suppliers fell through. This setback would have a much bigger impact on subscription retailers than traditional online retailers. With traditional eCommerce, they could simply announce that that particular product is out of stock, so no one will be able to order it. But with subscription business models, customers have already pre-ordered, which is an implied promise of availability.
Just as online shopping is not for everyone, so is subscription buying. Most customers will be interested in new subscription packages, but once the novelty has worn off or if they don’t like your products, they may cancel. A high churn rate is something subscription businesses must work hard to avoid to ensure long term viability.
Conversion might be more difficult
Because customers will make a bigger commitment to your business, you might have to work harder to convert them. They will, after all, essentially buy in bulk, as opposed to traditional eCommerce where they can easily buy a product just once to try it out. There are some exceptions for specialty products, but again, that depends on what you are offering. Some retailers selling subscription products will offer a free trial or sample pack to new subscribers to give them a low risk way to try things out before making a bigger financial commitment.
Taking all of these into account, what kinds of products are better suited to the subscription business model?
Businesses in the food, health, fashion, and beauty industry in particular have enjoyed the benefits of subscriptions. These are businesses with products that people tend to buy regularly, such as groceries, or specialty products that are difficult to source elsewhere. They also tend to be needs, rather than wants. You can check out this article for a more in-depth look at the industries best suited for the subscription model.
If you believe that your business will benefit from subscription packages, you have the option to test the waters first by combining both eCommerce models. Many online retailers using traditional eCommerce have begun to experiment with this model by offering some of their products via subscription. Going with a hybrid model is a relatively safe way to see if your business will be able to sustain a subscription model.
LemonStand’s platform offers a variety of eCommerce models so you can choose the best option for your business. These include a fully subscription-based model, a hybrid, or a traditional one-time purchase model. It all depends on your needs and preferences.
Traditional Retail with Subscription Options
There are many online retailers that have successfully implemented a hybrid of traditional and subscription business models. Below are a few great examples of what is possible.
3fe is a gourmet coffee company that uses a hybrid of traditional and subscription eCommerce and is powered by LemonStand. Customers can buy single packs of coffee through their online store, but they also offer several subscription packages.
Play! by Sephora is the beauty company’s subscription box option. Subscribers get a box each month filled with makeup samples from the Sephora collection.
Retail giant Baby Gap offers the OutfitBox, a subscription package that delivers six articles of baby clothing every three months. This is an example of a niche market that works well with subscriptions; because everyone knows new parents just do not have time to shop.
Michael’s is a scrapbooking store, so it doesn’t fall under the industries best suited for subscriptions. However, they are a specialty store. Their customers return to them over and over again because of their love for scrapbooking, so adding a subscription box option was logical for them. Their subscription package Scrapbooking Store delivers a themed scrapbook every month, complete with stickers and embellishments.
If these examples aren’t enough to convince you of the effectiveness of the subscription model, then check out this list of million-dollar subscription-based companies.
Though not necessarily better than a one-time purchase, the subscription business model presents untapped opportunities for both startups and established retailers. Depending on your product and target market, offering subscription products can be a lucrative decision for a business.
And the great thing is, you don’t have to switch to a purely subscription-based model if you’re already running a traditional eCommerce business. You can start offering a selection of products on subscription to your loyal customers. With the right strategy, you can be a subscription success story too.