The eCommerce subscription based business model is on the rise. In fact, the global market size for subscriptions reached $117 billion in 2022 and is expected to reach $2.5 trillion by 2028.
But why are subscriptions taking off like a rocket ship? It’s because they’re a win-win for customers and businesses. Customers love the convenience and value subscriptions offer, while businesses love the recurring revenue model and the increased customer loyalty subscriptions foster.
If you have a replenishable product and don’t offer a subscription business model, you’re missing out on the premier way to increase customer retention.
What is a subscription based business model?
A subscription business model automatically charges customers on a recurring basis for a product or service. It differs from the transactional model, which charges customers for one-off purchases.
An example of a subscription based business model in action is Netflix. The streaming service is one of the most dominant subscription companies ever. Consumers have an insatiable demand for fresh entertainment content, so they’ve opted into a monthly fee to access Netflix’s shows and movies.
While subscriptions for physical products such as magazines and newspapers pre-date digital subscriptions, it was companies like Netflix and Amazon that helped increase consumer demand for subscriptions outside the digital realm. Today, consumers can subscribe to all sorts of products, including make-up, coffee, and even paper towels.
Subscriptions are a key aspect of Relationship Commerce, a business strategy in which brands seek to develop deeper relationships with consumers — moving them from one-and-done transactions to ongoing, frictionless relationships — that results in predictable recurring revenue and higher customer lifetime value.
No discussion of subscription based business models is complete without understanding how brands implement it. The subscription business model can take multiple forms, depending on the merchant. But for simplicity, merchants tend to either be subscription-first or subscription-second. Before we get into how to start a subscription business, let’s take a look at the different models.
Subscription-first model
Subscription-first businesses generate at least 51% of their revenue from subscriptions. For instance, while pet food brand Chewy allows one-time purchases, the bulk of their revenue comes from subscriptions. Typically, subscription-first businesses use a direct-to-consumer model.
Benefits
A key benefit of the subscription-first revenue model is its high profitability. Subscribers tend to have higher lifetime value than one-off buyers since they’ve entered a longer-term relationship with your brand. They’ll provide monthly recurring revenue (MRR) as long as they find continuous value in your products or services.
Another benefit is better inventory forecasting and predictable revenue. Say you have 5,000 subscribers, an average monthly acquisition rate of 5%, and an average monthly churn rate of 1%. This data helps you predict how much inventory to have on hand to satisfy monthly orders. Excess inventory means spending more on storage. A lack of inventory means some customers won’t get what they want.
Challenges
Subscription-first models also have their share of challenges, especially if you’re a new player in a crowded field.
According to Forbes, the average consumer had five retail subscriptions at the start of 2023. With such fierce competition in the space — and the chance of subscribers losing interest in maintaining subscriptions across multiple brands — it can take longer to get a successful subscription-first business up and running, and you can’t afford to neglect any detail.
For example, say you’ve created a new brand of organic dog food. Just because dog owners need to buy healthy food each month doesn’t mean they’ll flock to you from Chewy. Can you add more value than Chewy, either through promotions or experiences?
Successful subscription-first businesses offer a thoughtful and world-class customer experience, from the initial subscription enrollment, to the ability to manage subscription orders, to the delivery of every product.
The other challenge is that subscribers are raising their standards in a volatile economy. Recent studies show that 43% of subscribers are on the fence about staying enrolled in their existing subscriptions, and 22% say they’re likely to cancel one or more subscription in the interest of saving money. And according to a recent consumer survey, the biggest causes of subscriber churn are billing problems and subpar customer experience.
So, unless you can deliver value alongside a smooth customer experience over the long term, subscribers will give their recurring payments to someone else.
Subscription-second model
Subscription-second businesses use subscriptions to drive a portion of their revenue, but they predominantly rely on one-off product sales. These businesses typically have a brick-and-mortar presence, as well as an online store. For example, a coffee brand might sell their product in stores and allow shoppers to subscribe to select flavors through their website.
Benefits
If you’re an established transaction-based business with products suitable for a subscription offering, a key benefit is the ability to ease into the subscription business model.
Start with a few subscription products. Then test and iterate the experience until you get it right. Include more products and start promoting subscriptions heavily in your customer acquisition campaigns. The goal is to acquire more up-front subscribers rather than one-time buyers.
Challenges
One of the pitfalls of adding a subscription experience is thinking it can be managed with the same strategy as a transaction business. In reality, you need a strategy for each business model. For example, you’ll want to create different email welcome sequences for new subscribers and new customers who don’t subscribe.
Given the increased subscription revenue potential, you’ll want to be thorough in explaining how the subscription works, including cancellation policies and whether the subscriber can customize shipments. For non-subscribers, you might follow up with a thank-you email that highlights the benefit of subscriptions.
Another challenge is deciding how to allocate your marketing resources between subscribers and nonsubscribers. Do you use more budget trying to acquire one-off customers — who will likely be less profitable — or shift some of those customer acquisition costs to retaining subscribers? This split attention can slow the growth of your subscription experience.
Types of subscription based business models
Subscription based businesses, whether first or second, take three main forms. They can be adopted by industries ranging from food to wellness, and everything in between.
Subscribe and save
Subscribe and save, also known as replenishment, provides regular, recurring delivery of the same product to consumers at a discount.
Bonafide is a health supplement brand that aims to optimize women’s health by providing a safe, effective, naturally derived alternative to drugs. They started out offering subscribers a discount on monthly recurring orders, but saw even greater success when they introduced a three-month subscription offering designed to deliver more value for their money.
To sweeten the deal even further, they use dynamic bundle incentives to offer subscribers even more savings when they add more products to their subscription. Best of all, their bundle incentives are dynamically applied to subscriber orders based on a combination of pricing thresholds and the exact products the customer has already subscribed to — so subscribers can fall in love with new products, get relief for new symptoms, and do it easily.
Curation
Unlike subscribe and save, a business that uses curation varies the products in its subscription. Ideally, the subscriber chooses the products, but the business can as well.
Peet’s Coffee has mastered subscription curation to keep customers buying directly from their brand.
They appeal to less adventurous coffee drinkers — and keep evergreen SKUs moving — with a rotating curation of their more traditional coffee products. And for those who prefer to shake things up, Peets offers a seasonal rotation with new seasonal varieties each spring, summer, fall, and winter.
While Peet’s Coffee makes it look easy, one of the biggest challenges of a curated subscription is maintaining a steady stream of new products.
Membership
Memberships provide access to a company’s products or services for a recurring fee. They can encompass an entire product line or a subset of products that only subscribers can access.
Sam’s Club enhances its subscription pricing structure by offering two membership tiers.
The more expensive Plus tier offers free shipping and savings in optical and pharmacy departments.
How to decide if a subscription based business model is right for you
With so much competition in the subscription space, you need to consider the marketplace and your own capabilities before launching your own subscription based business model.
Analyze the market
As you survey the competition prior to launching your subscription offering, make sure there is space both for your product and the experience you hope to build around it.
Take The Honest Company for an example of how this can look in practice. They weren’t the first to offer a diaper subscription, and there are less expensive subscriptions available to consumers. Yet they thrive. Why? After analyzing the market, they made the following strategic decisions.
- They believed they had a better, safer diaper because of its sustainability. As a result, with a higher price point.
- They made their diapers fashionable. They have multiple designs from which to choose.
- They made their diapers flexible, both in terms of size and the children’s needs (infant, training, overnight).
- Parents can quickly switch from one type of diaper to the next, skip shipments, and get early access to new designs.
Whichever subscription product or subscription business model you choose, it’s unlikely you’ll succeed if you compete on price alone. The subscriber experience can have as much of an
Audit your technology stack
If there’s friction in your subscriber experience, your technology providers might be responsible.
Make sure you audit them before you launch your subscription experience.
- Some eCommerce platforms come with a subscription solution, but the technology is often limited. If you want a flexible subscription experience, for both yourself and your subscribers, you’ll need to partner with a subscription platform.
- Your payment provider must be able to handle automatic renewals and protect your customers’ information.
- Real-time inventory management software is also vital. You don’t want to disappoint your customer base with out-of-stock merchandise or have too much on hand. The latter can increase your warehousing costs.
- Subscription platforms must also integrate with your marketing automation software. This will allow you to easily update your subscribers about their order so they can easily adjust it to fit their needs.
Once you optimize your technology stack, you’ll be able to collect data about your subscribers. Use this data to improve their experience with personalized recommendations, offers, or discounts.
Subscription based businesses increase customer loyalty
The convenience and value of a properly executed subscription based business model gives customers valuable time back in their day to focus on what matters most. In return, they will reward you with long-term relationships and share of wallet. All made possible when you use a loyalty program for eCommerce.
If you’re interested in learning more about subscription services and the specific type that would work best for your business, check out our next article, The eCommerce Subscription Model: Understanding Its 3 Types.
