Erik Huberman is an eCommerce expert who has worked with large brands such as Bally Total Fitness, Eddie Bauer and TheLimited as well as founded, run and sold several ecommerce sites of his own.
Over the past few years, we have seen a tremendous amount of subscription product ecommerce sites launch. From razors, to shoes, to condoms, if you’ve bought it, you can subscribe to get it monthly. Many businesses have launched with this model, but few have seen high levels of profitability because of the many misconceptions with running a subscription based business. It is important to consider the effects your choice to go with a subscription business model will have on your customer lifetime value, your customer experience, and your brand positioning.
The justification most businesses make for a subscription based business is because they believe it will increase the Lifetime Value (LTV) of their customers.
In the short run, you definitely see a higher LTV (which makes these types of startups look great – at first). This is because it is usually not natural for someone to buy a product every month, on the month. Initially you will get a boost in sales which makes your business perform better in the short term. However, after a few months people cancel. Your customers are receiving way, way more of your product than they would have ordered otherwise.
While running marketing for a subscription active wear company, we sent a full outfit to our customers every month. As amazing as it sounded, women don’t want an active wear outfit every month for the most part. A few might, but the average woman does not.
They would subscribe for 4 months on average and then cancel. This is where the issue arises. Once someone cancels a subscription, chances are they are never coming back. The time variable in our LTV calculation was only 4 months, and that was it.
In retail, customers may only buy a couple outfits initially, but they will continue to come back at periodically for years (assuming you have a good product and good service). Amazon.com has customers that may purchase infrequently, but they do come back, and therefore, overtime, their LTV is actually higher.
Poor Customer Experience
What makes you think people enjoy being auto billed every month? My experience with real customers shows it actually causes more stress in most products. People are less likely to even make the initial purchase when they are aware that they are going to be auto billed, even when they can cancel at any time.
This alone shows that people are turned off by being auto billed. It feels like a commitment, because most assume they will forget to cancel or that cancelling will be a hassle (and they don’t care if you tell them it won’t be).
If your goal is to build a great brand that people talk about, customer experience is everything. You are creating a foundation for your company. The last thing you want to do is base a company around a model that causes your customer stress and unhappiness. A subscription is supposed to make things easy, not stressful, and that is not always the case.
This has become a huge problem with going subscription on a product. A lot of brands decide to focus their positioning and marketing around the fact they are subscription. This immediately turns your brand from product based to service based. It takes the attention off of what might be an amazing product and you become the “XYZ” of subscriptions.
Shoedazzle is a great example of this. They focused on the fact they are a shoe subscription and less on just making great shoes. This has hurt their growth in the later years as the flash of being a “subscription shoe company” has gone away. Their pain is evidenced by their attempted shift away from subscription and then reintroduction of a "membership club" that wasn't actually a shoe subscription anymore.
Shoedazzle's former CEO, Bill Strauss, further said "not all consumers want to shop that way (in a monthly subscription). A lot of them want to buy once every three or six months. This (having single purchase options) opens up another whole universe of customers and will allow us to be bigger."
The bottom line is, before you decide to go into the subscription business, really think through if it is the best thing to do for your company. Don’t fool yourself with modeling out LTV or thinking that your customer will love “not thinking about it.” Make sure it actually makes sense.
If you have any more comments or questions please feel free to tweet me at @erikhuberman.