On Jan. 1, 1962, as the story goes, the then-unknown Beatles auditioned for Decca Records. The legendary rockers didn’t impress the A&R representative Dick Rowe, who ultimately rejected them, saying “guitar groups were on their way out.” As history tells us, guitar groups were most certainly not on their way out; Decca Records just didn’t know how to read market trends.
We’re not saying that subscription eCommerce is the same level of genius as the Beatles (…well, maybe Ringo…). Our point is that sometimes regret is worse than risk. And that paying attention to what’s happening in your industry can help you make the right decisions at the right time.
At this time, the decision is about subscription-based eCommerce. In our previous article, we explained the meteoric rise of eCommerce subscription services. Subscription box sites grew 3,000% since 2013, compared to only 168% growth for other online retailers, represented by an aggregation of the top 500 eCommerce sites. In July 2016, Forbes reported that the subscription business had a gross margin of 36%.
Rather than considering eCommerce subscription services as a threat, in-the-know online retailers are looking at it as an opportunity. Can you adopt the subscription model into your existing eCommerce site? In this article, we’ll explore whether or not it’s viable for you, and the best strategies for moving forward if it is.
Alternatively, if you’re an entrepreneur looking to break into the business, we’ll go take a fine comb through everything that you need to know before going forward.
A New Set of Rules
As Loretta Chao pointed out for the Wall Street Journal, the subscription business model does not follow the same rules as traditional eCommerce. While her article focused only on “beauty boxes,” her points remain valid across the industry as a whole.
First, for traditional eCommerce, a portion of profits are determined by how well they manage their warehouse (if they’re selling their own products, which we discuss below). These concerns tend to be more about efficiency and automation. Subscription services, however, tend to be more manual and require a more hands-on touch.
Subscription deliveries demand more attention. These boxes are supposed to feel like a monthly “gift,” and to achieve that effect, should be presented with a little flair and decoration to set them apart from other, duller eCommerce deliveries. This flair often means extra effects: the arrangement of the items, wrapping paper, ribbons, stickers, and “sizzle,” the industry term for crinkled tissue paper that keeps the items in place.
Of course these effects means more effort from the packers, i.e., they can’t just throw the needed items in a cardboard box, tape it up, and ship it out as with other eCommerce deliveries. Simply put, subscription deliveries require more work than those of traditional eCommerce.
On the bright side, the shipping schedules are more predictable. Because the same or similar shipments are sent out on a regular and set schedule, stores can more efficiently preplan their inventories and delivery methods to meet their needs. This circumvents some of the problems that conventional eCommerce sites run into with “surprise” orders.
The Best Industries for Subscription eCommerce
While eCommerce subscription services are broad and applicable almost anywhere, some areas are better than others. Early research indicates which markets have a higher conversion rate, and which types of customer are more likely to sign up. If you find your current eCommerce store within these areas, chances are a subscription model will work for you. If not, you can still consider putting feelers out in these areas.
01. Grocery and Food
Products that need regular replenishing naturally work well with the subscription model, as do perishables. Add to that the fact that everyone needs food, and it’s clear why the grocery industry is a hot market subscription eCommerce.
It’s not exactly that simple, though. eCommerce has been having difficulty breaking into the grocery industry for normal, everyday food shopping. Food isn’t always the kind of thing you want to wait day to be delivered, and while eCommerce offers a greater range of products, shoppers traditionally enjoy selecting the foods they can see in-person.
Source: Vegan Cuts
For these reasons, subscription eCommerce works best for specialty and niche food industries. Markets like organic, vegan, gluten-free, etc. are able to offer their specialized and sometimes hard-to-find product range in group packages, incentivizing their target customers with the convenience of not having to hunt them down, plus eliminates the distrust in standard, store-bought products.
Likewise, gourmet industries work well. Chococurb offers specialty chocolates from around the world, and a major selling point is that these products are difficult to find elsewhere, let alone all together in one package. Subscription wine clubs work well, too — historically, wine has been a favorite of connoisseurs, so a model delivering surprise recommendations periodically satisfies a need, as long as the source is credible as an expert.
Basically, subscription-based services do wonders for food categories with devoted enthusiasts, but lose their effectiveness as they get into more general, everyday grocery shopping. Shoppers are more likely to pay for a local, farm-to-table selection of ingredients to cook, rather than a weekly delivery of coffee cream. Check out fuud.ca, built with LemonStand, for their specific model:
While high-end fashion scoffs at the idea of mail-order clothes, the pret-a-porter industries can leverage a subscription-based model in a variety of ways:
- discount prices or deals like free shipping for subscription members, for shopping online (ShoeDazzle)
- personalized recommendations and professional styling choices, to suit the customer’s own unique tastes (JustFab)
- subscription box with new/surprise products (Le Tote)
- allowing customers to temporarily wear items then send them back (Rocksbox)
For subscription-based eCommerce, fashion works a little differently than other industries. For starters, there’s the price; fashion items tend to have higher price tags than other industries, especially the most in-demand items. One of the key advantages of subscription eCommerce in fashion is undercutting the cost of other eCommerce and brick-and-mortar competitors.
The financial advantages of subscription eCommerce that we mentioned in a previous article mean that companies can give some of these savings back to the shoppers. For paying a regular subscription fee, customers receive the same products for cheaper, with companies leveraging the steady recurring revenue to balance their bottom line.
Source: Le Tote
Another issue with fashion is customer satisfaction, both matching the shopper’s stylistic tastes (for curated and surprise boxes) as well as the apparel actually fitting them. The clearest solution to both of these issues is an expected return policy. Similar to renting the items on a trial basis, it’s fairly common in fashion subscription eCommerce for companies to send customers multiple items and request that they return the ones they don’t like.
Not only is this a great safeguard to ensure customer satisfaction, it also generates more income through shoppers keeping items they otherwise wouldn’t have.
03. Pet Goodies
For all the reasons subscription services benefit the human grocery industry, they also benefit the pet industry. The pet industry, though, has extra advantages in offering toys and accessories. Pet products on their own are expanding almost on par with the subscription eCommerce industry, which creates a lucrative opportunity to get two birds with one stone.
A recent trend shows pet consumables for holistic/organic/all-natural sensibilities, opening them up for specialized niche subscription services. Standard products like flea repellent and cat litter have all-natural variants, as well as toys made from natural materials.
If subscription box giant Birchbox is any indicator, the subscription model is made for beauty products. On the surface, the pieces fit. Beauty products are diverse, small enough to be packaged easily, consumable to require a refill, and diverse enough to encourage experimenting with new products and brands. They also fit well into the model of a surprise gift, as its an enjoyable product that gets customers excited to see what’s inside.
But Hayley Wilbur of Style.Mic claims it goes deeper than that, and that beauty subscription boxes play directly into millennials’ innate shopping habits. Millennials reportedly enjoy self-indulgence, which is inherent in both beauty products and the subscription box business. Beauty products themselves are meant to make the user look or feel better, and when they come as a gift that just accentuates this aspect.
On top of that, millennials are especially partial to convenience, so part of the appeal is not having to go out and buy these consumable products over and over again. For curated boxes, customers don’t even have to bother with choosing what to buy — everything is handled beforehand and delivered to their doorstep. All they have to do is open their present and enjoy it… for a monthly fee.
Selling Your Own Products vs. Partnerships
When determining if subscription eCommerce will work for you, you need to consider where your products come from. You’re either selling your own products, or partnering with other companies — both have their own advantages and disadvantages in subscription-based eCommerce.
Selling Your Own Products
Selling your own products lets you customize exactly what your subscription eCommerce service offers. You and you alone decide the parameters of what you’re offering, the price of the subscription service itself, and also the amount for any bonuses and discounts involved. If you’re selling a subscription box, you also decide exactly which products you put into it. This makes the whole endeavour feel more like yours.
These advantages and the control come at a cost, quite literally. The downside of selling your own products with subscription-based eCommerce is financial. First, you’re in charge of all the up-front costs, including management, advertising, and keeping your initial inventory stocked. Sure, you can get some income from early subscribers and maybe teaser launches (see below), but for the most part you may not be turning a profit for around a year.
If you already have an established and profitable eCommerce store, though, these costs may be negligible, and your patience may pay off ten-fold if the subscription eCommerce trend continues to rise as it is now.
Don’t have your own products? Sell someone else’s! Initiating partnerships with on-board companies can undercut the startup costs of eCommerce subscription services. It can also allow you get the business up-and-running sooner, even immediately, depending on your negotiation skills.
With the lower margins, you’re less reliant on the customers, and can better navigate the ups-and-downs of the business. This is especially useful to those inexperienced in subscription eCommerce, as kind of a safety net while you learn the ropes.
Diluting the risks among other partners also means diluting the gains. While selling your own products means spending more at the beginning, partnerships mean receiving less at the end.
Moreover, you have a lot less control over the details. You’ll have to factor in your partners demands in the vital decisions about cost and shipping specifics. If you’re work with subscription boxes, a partnership will restrict the choices you have in which and how many products you put into it. You may even have no choice at all, being limited to whatever items your partners offer as part of the deal.
For well-established eCommerce stores, selling your own products is the best choice. Assuming you have the capital to pay the upfront costs, your existing revenue will let you live comfortably until the subscription services start turning a profit. And when they do, you’ll be glad you kept the operation in-house because that’s exactly where those profits will stay.
If, however, your current eCommerce store is not so secure — or if you’re an entrepreneur trying to break into subscription-based eCommerce without enough investment — some degree of partnerships can help you get started, even if just a stepping stone. The less risk provides a more forgiving atmosphere if you make a mistake, which is all but inevitable if you’re new to the subscription business. And if your overheads are low, you won’t mind sharing the profits with your partners.
The success of subscription services is simply a reflection of eCommerce’s natural predilection towards convenience and personalization. Don’t think of this model as a trend, think of it as the next evolutionary branch of eCommerce. Even aside from the specifications we mentioned above, all companies could learn a thing or two from the subscription business model.
Keep checking back for more articles in our Subscription eCommerce series. Next we’ll compile a preliminary checklist of everything you should hammer out before you get started. After that, we’ll start diving into the best practices of actually managing a subscription eCommerce business.