The subscription (R)evolution

bevh of January 21, 2020: The Subscription Economy is more than the further development of existing business models. It is revolutionizing entire industries. Others make it redundant. In the past, you could find video stores on every third street corner, but today you can hardly find any. Customers want to stream from their sofa and prefer to take out a subscription for this.

Like the industrial revolution, the digital revolution will continue to reshape our global society. The proliferation of high-tech innovations has raised buyers’ expectations. Companies are forced to further develop their business models. Led by Generation Y, today’s consumers prefer experience-based services. The decision is often made for the benefit and against the possession. Subscription is preferred over one-time purchase. But it also means that consumers form a lasting relationship with your brand or product. So, as a company, you need to invest in customer retention to prevent subscriber churn.

“The subscription economy is a game-changer and is increasingly becoming a strategic success factor for companies. In a few years, it will be normal to have a subscription for almost all products and services. I’m sure anything that can be billed as a subscription will be offered as a subscription.”

Lars Heucke, Managing Director nexnet GmbH

To survive in this new customer-driven economy, agility is required. Customers want immediate, lasting value and frictionless experiences. And they don’t care how complex the implementation is for your company in the background.

Away from Possession,

to the subscription

Just a few years ago, the subscription services on offer were limited to print media such as books, newspapers and magazines. Later, the music industry followed. As digitization grew, the subscription model exploded. Driven by customers’ desire for greater convenience, there are now countless products available by subscription.

Netflix
The world’s leading streaming provider with over 158 million paid memberships in over 190 countries. Members can watch as many series and movies as they want on any online-enabled screen at any time, without commercial interruption.

Dollar Shave Club
At freely selectable intervals, Dollar Shave Club delivers razor blades and grooming products to its members’ homes. Started 7 years ago in the USA, several imitators have since been found around the world.

Amazon Savings Subscription
For a number of groceries, household products and drugstore items, Amazon enables subscription ordering. Items on subscription are usually offered at a lower price than the same product on a one-time order. The buyer himself decides on the desired delivery cycle and no longer has to worry about reordering his consumables.

Box subscriptions
A popular subscription form is the delivery of product boxes at preset intervals. Weekly, monthly or quarterly, subscribers receive a box of goods conveniently delivered to their homes. Well-known examples are providers of beauty products (Birchbox), pet food (BarkBox), toys (Hoppi Box) or food (Hello Fresh). Curated shopping service providers are a special feature. So those vendors who put together clothing boxes (Outfittery) for their subscribers. The delivered box contains a selection of clothes. The customer keeps what he likes. The rest will be returned.

The subscription model has evolved and is now an integral part of marketing products and services. What all can be subscribed to has evolved significantly over time. The way subscriptions work has also changed. They have become much more flexible and customer-oriented. The focus moves away from the product to the customer. And he is of course pleased about the increased interest in him.

Status Quo

the Subscription Economy

The subscription economy is booming. And not only in the pioneering US market. Start-ups in particular are increasingly targeting long-term customer loyalty through a subscription model. Customer acquisition costs can be reduced and revenues better predicted. But even companies that are established on the market have to deal with the issue of the subscription model.

A study by McKinsey shows that 15% of online shoppers have taken out at least one subscription to receive products on a regular basis. Subscription services offer consumers a convenient, personalized and often less expensive way to buy things. However, churn rates are high. Consumers are quick to cancel services that don’t offer better customer experiences. So it’s more than just price or convenience that drives consumers to subscribe.

Possibilities

and challenges

At first glance, implementing a subscription model seems simple: develop a monthly price for usage, repackage the product or service, and get a software tool to bill customers and process payments at regular intervals. However, the reality is different even for companies with low complexity. Companies that are successful with subscription models know the impact that moving to a subscription model can have on the entire business and financial infrastructure. However, many companies underestimate this influence.

To be successful in the subscription environment, the new subscription-focused strategy must be adopted by the entire company. This is also about understanding that long-term customer relationships require more work and attention. The primary challenge is a smooth transition to the subscription model. The following factors should be considered:

1. Subscriptions are relationships. The longer a customer is willing to pay for your services, the higher their lifetime value and the higher your profits. To keep customers satisfied as a subscriber, you need to find the right balance of price and performance. You will succeed as long as you deliver lasting value and maintain an ongoing relationship with your customers.
   
2. Adaptability is critical as subscriptions dissolve the boundaries between products and services. Innovative companies are developing subscription-based, experience-driven service models for everything. In principle, there are no boundaries between what you can offer in a rental model or as a one-time payment.
   
3. Subscriptions are supposed to make life easier. Your subscription must therefore offer lasting value with consistent and enjoyable experiences.
   
4. The impact of moving from one-time payments to recurring billing cycles should not be underestimated. New technologies, business processes and revenue management practices are needed to support such a shift.
   
5. If you want to optimize your profitability by reducing churn rates and increasing customer retention, you need to learn what customers want from you.

Which is the right subscription model

for your target group?

You have a lot of decisions to make before implementing a subscription model. Which subscription model will best appeal to the target group? Which subscription model suits the product? And which subscription model best fits your business goals? In general, there are 3 types of subscriptions:

• Replenishment subscriptions provide consumables and offer your subscribers a convenient way to ensure that certain items never run out. Dollar Shave Club or Amazon Savings Subscription are well-known examples of replenishment subscriptions. At set intervals, the subscribed product is sent directly, without the need to ask again. The advantage for your customer is that he does not have to search for the product every time. For you it has the advantage that the customer receives goods from you regularly until he cancels the subscription.
  
• Curated subscriptions aim to surprise and delight by offering new items or personalized products such as apparel, grooming products or food. Examples are Hello Fresh for food, Outfittery for clothing or Glossybox for beauty products. Your customer makes a few adjustments or answers questions. You define the content of the boxes based on these parameters.
  
• With Club Membership, users pay a monthly fee to receive discounts or access to exclusive offers. This subscription form is particularly popular in the clothing and food categories. Well-known examples of this are JustFab, NatureBox or Thrive Market. Paid access to selected products for a limited target group conveys exclusivity.

The individual beauty or fashion boxes from the curation services are by far the most popular, accounting for 55% of total subscriptions. This indicates a strong desire for personalized services. Today’s customers want to have products delivered that are tailored to their needs. With still 32% of all subscriptions, the replenishment subscription is in second place. This is due to the convenience of customers who do not want to keep searching for a product and the best provider for it. Club access accounts for the smallest share of the overall subscription services market at 13%.