Subscriptions are a rapidly growing trend in ecommerce. Consumers are opting for the convenience they provide, from movie streaming to recurring orders for everyday supplies to curated boxes.
But that doesn’t mean launching a subscription will automatically bring you success. The best subscription merchants know what drives customers to sign up — and what gets them to stay subscribed.
What’s been going on with subscriptions lately anyway?
Bold launched one of the first ever Subscription apps for Shopify back in 2014 and it’s been one of the most popular subscription apps on Shopify ever since. Through our subscription platform, we’ve helped tens of thousands of stores launch and grow successful subscription businesses. Today, Bold Subscriptions is available on multiple platforms including BigCommerce.
Since launching the app six years ago, we’ve seen massive changes in ecommerce subscriptions. Everything from the way subscriptions are marketed and sold, to the tools merchants use to run subscription businesses.
In this article we’ll share some of thing we’ve learned over the years to help you set up or improve your service.
- The unprecedented growth of subscriptions
- Subscriptions of all shapes and sizes
- Why people subscribe
- Why people stay subscribed
- Why people cancel
Subscription growth is 5 time higher than regular ecommerce growth.
Hands down, one of the most notable things is the remarkable growth that subscription businesses have seen since 2011.
According to a recent McKinsey report, Subscription ecommerce has grown by a whopping 100% each year since 2011! Let’s be honest, there are very few other sectors of industries like that.
And yes, you may be thinking “isn’t ecommerce in general is just growing YoY?” It is, but only around 19% and some reports show it slowing down. Although with what’s happened lately with COVID-19, that it changing slightly, but needless to say, the subscription segment of ecommerce is worth paying attention to so you can get in on the action.
Investors LOVE subscription businesses.
Investors of any size, and lately even banks when issuing loans, value recurring revenue much higher than one-time.
The maximum valuation of ecommerce businesses doing one-time sales with decent growth is one or two times their top-line revenue. That means if you’re doing $1 million in annual sales, your maximum valuation would be between $1 million and $2 million.
But that’s the best case scenario, let’s also look at it conservatively: Most ecommerce businesses get valued at two to three times their EBIDTA (earnings before interest, taxes, depreciation, and amortization). Typically ecommerce companies run an EBIDTA around 10% to 30%, so more realistically, that store would be valued $300,000 thousand to $900,000. There are a few other ways to value an ecommerce business, those are just a couple.
Now let’s look at subscription ecommerce businesses.
Imagine if that same store was making all its revenue from subscriptions. If that was they case, their value would be up to ten times top line revenue, meaning they’d have a business worth up to $10,000,000 — a far cry from $900,000.
Let’s take a look at the real-life ecommerce valuation that shook peoples opinions and showed the potential of subscriptions. In 2016, Unilever acquired Dollar Shave Club for 1 Billion Dollars. At the time, Dollar Share Club was hitting roughly $100 million in ARR (Annual Recurring Revenue), so that acquisition put their value at exactly a 10X multiplier of their top-line revenue. Not to shabby for an ecommerce product based business! Most people think only SaaS software companies see that kind of valuation. Not true!
There are of course a ton of other factors that play into a valuation. Growth, momentum, a defensible business model, a strong brand, leadership staff… But all being equal, subscription businesses fetch a significantly higher valuation than a traditional one-time purchase only ecommerce store.
A few big numbers
If the inflated valuation and huge year over year growth still don’t have you convinced to buy into subscriptions, here are a few numbers you might find interesting:
|178%||The percent higher LTV (LifeTime Value) of subscription customers vs one-time customers.|
|41%||The percentage of all online retail in the United States that comes from repeat customers|
|8%||The percent of customers that are repeat customers. Yet they make up 41% of all sales!|
|125 Days||The overall average length of a eCommerce product based subscription|
|5 – 25X||It’s roughly 5-25 times more expensive to market to new vs existing customers|
|8 – 10X||The average valuation of a company doing recurring revenue vs 1-2X for one-time|
Plus, everyone and their dog is offering subscriptions
Here are just a few logos you might recognize. It’s no longer just “subscription businesses,” mainstream brands are getting in on subscription ecommerce in a big way. What’s interesting is that for most of these companies, just a few years ago they weren’t doing subscriptions at all!
These days you can subscribe (or offer subscriptions) to just about anything! Sunglasses of the month, phone cases, fishing tackle — there are even doggie litter grass and golf club subscriptions. We’ve seen it all: water delivered straight from springs, PMS relief gummies, canned water with seriously murderous branding, and even a subscription box for witches.
Subscriptions come in all shapes and sizes
After years of helping power subscriptions on Shopify, we’ve seen almost every type of subscription offering you can imagine. We literally wrote the book on it, “7 Subscription Models to Master“. Check it out to learn how the successful businesses do it.
These models can come in all shapes and sizes:
Whether it’s a simple clean setup like this:
Try it live on nomz
Or one with a unique custom sign up flows like this:
Try it live on Sock Fancy
Or a totally custom build-a-box style subscription like this:
Try it live on Evive
And then there’s not just one-time or subscriptions, but one-time product alongside a subscription in the same order with multiple subscriptions frequencies too!
There are stores with no subscription options on products but rather you subscribe to the whole cart. Notice on the product page there’s no subscription option, shoppers add multiple products and subscribe to the whole cart.
Try it live on Brummell
There are too many to list. However, no matter what model they employ, the most successful subscriptions stores ALWAYS have a few key things in common that allow them to scale.
The most successful subscriptions stores know it boils down to understanding four key factors.
– Who their customers are.
– Why they buy.
– Why they stay stay subscribed.
– Why the stop.
The average subscription box customer is 24-44 years old, they live in large cities, they make salaries of 50K to 100K and 60% of them are women.
Interestingly though, while men make up a smaller percentage, on average they tend to subscribe to more businesses per capita. 42% of male subscribers have 3 or more subscriptions while only 28% of women do.
If we look deeper at the actual business models, there are many different ways subscriptions can be offered. Ultimately though, subscriptions can be put into three broad categories: Replenishment, Curation, and Access. Replenishment making up 32%, Curation 55% and Access 13%.
It’s important to understand the differences, as the value a subscription provides customer can change completely from each category to category. Replenishment provides convenience, curation provides discovery, and access provides exclusivity.
One of the most common things we see successful subscription stores do is combine elements of every category.
Hold that thought for a minute, it’s going to come into play when we talk about the “why” of Why customers stay subscribed.
Start, Stop, Continue. Why, Why, Why.
Three of the key things you need to very clearly understand to be successful in the subscription space is why customers start a subscription, why they continue, and why they cancel.
A recent McKinsey study found there are a lot of reasons for each “why.” However for all three, only a couple reasons make up the vast majority for each. Here they are:
Boiled down to just the biggest reasons, it looks like this:
Let’s break down each of these factors and give a few examples of merchants using Bold Subscriptions that are doing a great job addressing each one.
They know why people subscribe – “Recommended by a friend”
Subscriptions are unique. Average conversion rate for subscription purchases is much lower than for one-time purchases. Even if subscribers can easily pause, skip, or cancel orders, there’s still a much larger resistance to signing up versus buying just buying it like a regular product.
The main reason subscriptions have a lower conversion than one-time products is because you’re not just buying the product. To customers, subscribing in perpetuity — or even just for a few weeks — is a big commitment. With one-time orders, they don’t need to think as much about the decision. They’re just buying a product, not committing to a brand.
Because of the extra mental barrier to subscribing, social proof plays a bigger role in assuaging any worries they have about subscribing.
Social proof and recommendations from friends are good for any online store, but for an online subscription store, they are key.
This is one of those things the most successful subscription companies know.
Below are three great examples of Bold Subscription merchants using social proof well. I’d encourage you to visit their store and explore their stores. These are three good businesses to use as inspiration.
Of course, the best kind of referrals are the ones that come directly from a friend. All that amazing social proof in those examples are important, but they’re almost becoming so common that they’ve lost their efficacy these days.
The brands successfully scaling their subscription businesses have learned how to turn their customers into their most valuable marketing asset.
A few ways you can turn your customers into a marketing channel are:
- Leverage social media through with challenges, photo challenges, competitions, and so on. User generated content is key!
- Support a cause or charity with the subscription that make consumers feel good about their purchase and a reason to share it with their friends. Great examples include 4Ocean’s mission to remove plastic from the ocean, PuraVida Bracelets’ charity bracelets and employment of 400 artisans in developing countries, or John’s Crazy Socks’ donations to the various causes.
- Probably the most obvious way is to give them an incentive or reward for sharing it with their friends. There are various Referral and Affiliate marketing tools that can help you do this.
If you’re not familiar with referral or affiliate marketing tools, essentially they’re ways to give your customers rewards for spreading the word about your store.
Referral marketing is generally when your existing customers share your product and you give them some kind of incentive, like a discount, credit, free products, and so on.
Affiliate marketing is when content creators (not necessarily customers) create content to drive traffic your store in exchange for a commission on all sales they generate. They’ll usually create content like blogs, YouTube videos, and social media posts.
They know why people stay subscribed – “Personalized Experience”
Curation style subscriptions currently make up 55% of subscription boxes sold online, and that segment is growing. The important thing to know is it’s not just “Box of the Month” subscription boxes that have an aspect of curation. Almost any subscription box can be curated to some degree.
There are so many ways to add value with some level of customization. If you sell makeup, offer a curated new lip gloss. If you sell coffee, include a new blend sample in every box. If you sell candles, include a decor “glam shot” of how people use them in various spaces.
If you give it just a little bit of thought, for any type of subscription you sell, I guarantee there is something you could include or do to personalize the experience.
Beyond that, one of the easiest ways to make your customers feel that extra touch of personalization is with your packaging. A little goes a long way and it’s another one of those things we see our biggest Bold Subscriptions customers doing well. Here are a few examples:
Those are a few things we see our scaling subscription merchants to to keep customers, now let’s dive into the last WHY.
They know why people cancel – “Value for the Cost”
This last why is near and dear to my heart. Value is — well — an undervalued value.
Jokes aside, this is something many subscription stores get wrong.
It’s important you put serious thought into how you price your subscription. Don’t just set a number that’s twice the cost of the product. Customers don’t care if something costs you $1 or $100. The amount they’re willing to pay is the amount of value they perceive your product or service to be worth. They need to feel they’re paying a fair price for what they’re getting.
Fossil watches and Michael Kors watches are both made in the same factory and look almost identical aside from the color and logo — but one sells for around $100 and the other for around $300. Why? Because customers feel like one brand is more valuable than the other, either because of they make better products or that it’s just more prestigious. That value comes in the form of peer recognition and compliments.
I use the word “perceived value” on purpose. Your product or subscription can have the most value in the world. If your customers don’t perceive and understand that value, it’s worthless.
So how does this tie into subscriptions?
If you run a subscription business there’s a word you should hate — churn. Churn is simply when a customer cancels their subscription. There are a million reasons why we think customers cancel, but in the end there is only one true reason. They’ll say it was because the couldn’t afford it anymore, no longer needed it, or found something else.
There is only one reason a customer cancels a subscription. They churn when the perceived value is no longer greater than the cost. That’s it.
Think about it. If you don’t watch Netflix for a couple months what starts going through your head? “Do I really need this? Maybe I should cancel it.”
Nothing about Netflix fundamentally changed in the last two months, you just no longer perceived the value, so you cancelled. Here’s what that means and how some of the biggest subscription brands have learnt to avoid it.
Your subscription product should NEVER be the only value you deliver each month.
No matter what you sell, at some point the vast majority of your customers will no longer perceive its value. That’s why you need to think of the three subscription categories (replenishment, curation, and access) not as separate, but rather as three legs your subscription business needs to stand on.
Replenishment, curation, and access are not just the three categories subscription businesses fall into, they are three qualities every subscription should offer some aspect of.
No matter what you sell, there should be some aspect of replenishment, some aspect of curation, and some aspect of exclusive access. For every store it will be different things, but the concept holds true across verticals.
Here are few ideas to get the gears turning in your head.
- Offer exclusive VIP pricing to subscribers. Automatically 5% off as long as they’re a subscriber. Maybe 10% off after a year!
- You can easily do this with our VIP & Wholesale Pricing app called Customer Pricing. It automatically changes the prices for customers when they login based off the customers tag so you can offer tiers like VIP, Gold, or Wholesale pricing.
- Every month, send a special offer to subscribers for a product they can add to their next order at 50% off! That alone is a huge reason to continue, and who knows, you might even get them to subscribe to an additional product.
- Give subscribers exclusive content or digital downloads.
- Put your subscribers in a premium loyalty tier that earns points faster than regular customers. Think Costco and their standard and executive memberships.
- Do you host any kind of event or retail pop-ups? Give your subscribers early access, VIP admission, or some kind of other perk.
The list goes on and on and I’m sure you can think of even better ideas. The point is, even if you don’t sell a traditional “access” style of membership, there are many access-like features you can add to your subscription offering.
My final words…
Since we launched Bold subscriptions in 2014 we have helped over to 50,000 merchants start subscription businesses or add a subscription offering to their store. We have seen stores fail, and others succeed beyond their wildest dreams.
The subscription industry has never been more ripe for the picking. Today, all the tools and software you need are easily accessible. Anyone can add a subscription offering to their store on Shopify, BigCommerce, WooCommerce, or just about any platform!
Years ago, winning was all about the subscription tech. You could win by having a really slick subscription site with great UI/UX. Just like 10 years ago you could win by having a great looking and functioning ecommerce store. Today, the tech is becoming more and more table-stakes and your brand and the completeness of your offering are what matter most.
If you truly want to win at subscriptions, deliver more value every month than your customers perceive they are paying for. It’s that simple.
This article originally appeared in the Bold Commerce blog and has been published here with permission.