Few companies get everything right every time, though Amazon is certainly giving it a shot. With their latest venture, Amazon Fresh, they’ve jumped on the latest ecommerce bandwagon: subscription services. While subscription-based ecommerce companies definitely aren’t new, they are still an emerging trend in the online shopping world. We’re all familiar with some of the most popular companies—BirchBox and Yumvelope to name two—but new versions of the same thing pop up every day.
So, what makes the subscription model work? Why are buyers signing up for multiple subscriptions services each month? And how can you translate the obvious benefits of a subscription service to your ecommerce business? Let’s take a look.
1. Easy LTV Calculation
When customers sign up for a subscription service, the price is laid out for all to see. Even if several different levels of service are involved, the buyer chooses one to commit to for the duration of the subscription. Determining that customer’s value is easier than ever, because subscription services now know how much the buyer will spend each month and how long that buyer will be a customer.
In a transactional ecommerce model with non-standard repeat purchase patterns, you have to smooth out your numbers by averaging the number of repeat purchases per time period per customer cohort. It's a lot of denominators to keep track of. With a recurring revenue model, the repeat business period is standard which makes the math (and revenue growth) easily forecastable and stable. To calculate customer life time value, you'll usually just divide your average subscription value by your monthly revenue churn rate percentage.
For example, if your subscription is $100/month (and it's all pure profit, in a real scenario you'd factor out costs of goods and services and retention etc.) and 1% of your customers cancel each month, your customer life time value (CLTV or just LTV) is $100/1% (100/0.01) which is $10,000. This isn't an economics class, and there are other variables your CFO may want to factor in there, but it's a pretty easy job to calculate and control/predict your cash flow and optimize your most important ecommerce marketing metric.
With the LTV pretty much calculated for you, you can move right on to calculating how much you need to spend to get those customers to the next level. Taking more math out of the equation is always a good thing.
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2. Easy Revenue Forecasting
Part of making good decisions for your company involves knowing how much revenue you can expect from month to month. A subscription service goes into each month with a clear idea of how much profit they can expect. Of course, as customers are added, that monthly revenue stream goes up.
Nothing is ever set in stone. Even the most loyal customer will stop a subscription for no apparent reason. Companies have to be prepared for this possibility, but for the most part, forecasting is easier with this model than any other.
3. Capitalizing on Anticipation
We’ve discussed before how buyers really want things NOW, but they enjoy the products more when they have to wait. The subscription model takes care of both sides of the coin here. Members can get first crack at new products when their box arrives, making them feel special. Still, even though the products are released just as soon as they’re available, subscribers have to wait the designated time before the box arrives.
4. Easy Shipping Plans
When your product is the same every month, shipping is a breeze. Even those companies with various subscription levels can count on a particular number of packages each month. According to the services purchased, the size and weight of those packages can also be pre-determined. The ability to forecast revenue and shipping costs makes this one of the easiest business models to maintain.
5. Choices Kept to a Minimum
One thing we now know about buyers is that too many choices can essentially paralyze them. With a subscription service, consumers simply get what they get. Of course, some services offer choices to make sure buyers will get something that at least interests them every time. For instance, BirchBox provides men’s boxes and women’s, as well as the ability to subscribe to various levels and different prices. These are easy decisions to make, however: big, little, male, or female. The buyer still trusts the subscription service to make the important choices, like what to include in the box.
6. Easiest Possible Process
The beauty of a subscription is that the process is entirely automated for the buyer. After the first purchase, whether paying in full or setting automatic payments, the products simply arrive with no further work needed. Buyers love when most of the work is taken out of the buying process, and nothing makes it easier than a subscription box.
7. Easily Identified Buyers
Most subscription services can easily identify their core buyer personas. BirchBox caters to men and women in their twenties and thirties—those buyers who like to have and hold the hottest products on the market. BarkBox caters to pet owners of all ages with higher incomes. Plated targets young professionals who place high value on healthy food but don’t have the time to deal with it. Each subscription service knows exactly what they hope to accomplish for each and every buyer.
Using Similar Tactics
So, now that we know why the subscription model is so wildly successful, the next thing is to figure out how you can use some of the more powerful processes for your ecommerce site. First, there’s the easy LTV calculation. Planning for your buyers to spend a certain amount of money each month is downright impossible, even if you’ve noticed patterns in their spending. Without a monthly commitment from buyers, you can’t really count on a certain revenue amount. If, however, you could tie buyers down with some form of commitment, calculating LTV and predicting monthly revenue would be easier.
Capitalize on Anticipation
What if you instituted your own form of subscription box? If you debut several different products each month, maybe subscribers could get first look at the products the month before. Rather than calling them subscribers, you could call them members, or founders, or any other name that gives some weight to their commitment without confirming their suspicions that they’re subscribers.
By doing so, you could help build that sweet sense of anticipation, especially for buyers who don’t receive the first look at your products. With your review pages filling up with reviews from members, other buyers won’t be able to wait to get their hands on the new items.
Do the Work for Your Buyers
You can also streamline your payment process by doing most of the work for your buyers. With a subscription system, their financial information is stored for use each month. You can use the same secure system to hold information for use any time a buyers visits your page. With the work taken out of making a purchase, they’re more likely to hit that “add to cart” button.
Finally, remember that too many choices can harm your company more than help. If you do offer a wide variety of options on your site, be sure to categorize them for easy searches. Separate products for men, women, children, adults, and so on. Clothing stores may separate by styles, while music sites can narrow down genres. Whatever you do, make sure the buyers aren’t overwhelmed by the sheer amount of options.
The more work you do for your buyers, from making the decisions for them to taking care of the payment information, the more likely they’ll be to continue purchasing from you. That’s the greatest lesson the subscription services can teach.
Originally published May 9, 2014 2:00:00 PM, updated February 01 2017