The Future of eCommerce: Subscription Models and How These 3 Businesses are Transforming with Subscriptions
“We’re going to see subscriptions in pretty much everything.” — The Atlantic
According to data from McKinsey, eCommerce subscriptions have been growing over 100% each year for the past five years. A decade ago, less than 1% of eCommerce shoppers had a single subscription. Today that number is over 15%. Not only that, but these customers talk about their product experience, promote products more and have a CLTV (Customer Lifetime Value) that is on average 38% above typical customers.
The reality is that consumer behavior is changing drastically. Two decades ago the idea of SaaS (Software as a Service) was rare, and people paid for software and hardware with a one time fee. Now nearly all software is purchased on a recurring monthly or annual basis.
Movies used to be something you picked up from Blockbuster or a local movie store. Now you stream them on Netflix or Amazon Prime.
Apps and video games used to be one time purchases. Now most of them are month-to-month subscriptions or freemium models.
The takeaway is that consumers are changing the way they buy products and it presents a huge opportunity. While reports from eMarketer have eCommerce outperforming 2020 projections by 18% (likely due to the increase in demand due to COVID-19), this industry momentum will not crown everyone as winners. Instead, companies that invest in ways to get loyal and repeat customers, will thrive long after the pandemic passes, while the others will fall behind.
What Are The Most Effective Subscription Models For Business?
There are a handful of reasons for this paradigm shift in how we buy. First off, consumers today are looking to automate their buying routines. Need toilet paper twice a month? Add an Amazon subscription. Drink the same boutique coffee each week? Add it to a subscription. For the consumer it creates ease and convenience, and for the company it creates more stable revenue. McKinsey calls the category of eCommerce subscriptions where you are automating out a normal buying pattern a replenishment subscription.
For these consumers the name of the game is convenience. The key to keeping customers buying is making the process simple (Amazon employs the classic one-click subscription option) and provides savings.
Nearly all replenishment model subscription plans hook buyers by offering an average 5–15% discount on their plans. Some companies, like O-Joe’s coffee, use a staggered approach of 15% upfront for their first order, and then 5% thereafter.
Another type of subscription option for eCommerce companies is what McKinsey calls a curation subscription. Some of the world’s largest eCommerce subscription companies like Stitch Fix, Birchbox, Blue Apron and Me Undies use this model. Here the focus is less on convenience and more on novelty. Companies that win in the category of curation are those that get personal, leverage the emotional impact of surprise and offer exclusivity. If you look at the spread of types of businesses in the curation space, you will notice what was once heavily focused around apparel and food has now expanded to beauty products, health, lifestyle merchandise and even books!
Let’s take a look at some rising star eCommerce brands that are leveraging subscriptions in remarkable ways. So keep on reading 👇👀
Hubble Subscription Model
Hubble is a subscription contact lens service that promises to provide quality, name brand contact lenses at a fraction of the cost through their distribution.
Hubble draws customers in with a cheap upfront offer ($1 for your first 15 pairs!) and then relies on the quality of their product and convenience of it all to keep you buying. Hubble is a mix between a curation and replenishment subscription. On the curation end, Hubble includes ample amounts of personalization, including a quiz to find the perfect contacts for you and personalization along the customer lifecycle. They also are delivering a commodity that is needed on a consistent, recurring basis, so they clearly fall into the replenishment category as well.
Their overall buying experience is simple and yet there are a few key things they do that have propelled them to over $30 million dollars a year in recurring annual revenue.
- Simple process to get started: When it comes to subscriptions, people want to be able to see the value and savings clearly. Hubble does a great job of visually laying out exactly how to move forward and the steps needed to make it happen. If you click to get started, it takes you through a quick quiz, helps you get connected with an optometrist if needed, and then allows you to quickly buy. It’s all a fine-tuned and frictionless experience.
- Flexibility is King: The most surefire way you can piss off customers and gain bad PR is to force people into contracts or force people to pay for a subscription when they are not around (like on a vacation). Instead make not only cancelling easy, but also pausing and delaying. By giving your customers easy control they will stick around longer and your CLTV will be far higher.
- Speak to a pain point: For subscription services like Hubble, they are trying to speak to a problem. In this case it’s the time intensive, repetitive process of constantly having to buy contacts coupled with the fact that not having contacts can be a disaster. If you notice on their website, they do a great job of educating people on why Hubble is going to solve their problems and make their life simple.
Overall, Hubble excels because they are simple, personalized and add convenience to their customers in significant ways.
O-Joes Coffee Subscription Model
A few years back, O-Joes Coffee, a small 2-person coffee roastery out of Canada, did nearly all of their business via wholesale or direct to consumer one-time sales. Then they started to dabble in subscriptions, and once they found some missing puzzle pieces, they catapulted from $35,000/month in recurring subscription revenues to $75,000/month in just 14 weeks! What was their secret?
They got personal! They showcased the product that a customer was about to receive and instead of pushing the subscription option, they merely mentioned it, as if it wasn’t the focus of their thank you video, but merely a courtesy notification. The above video is a masterclass in how to deliver a compelling personal video.
Although O-Joe’s subscription is also a hybrid between curation and replenishment, it leans more towards curation. Between unexpected gifts and welcome messages, Joe is constantly seeking to keep his customers engaged with personalization.
Here are some of the unique ways O-Joe’s Coffee is scaling their subscription business:
- Personal Videos: Whenever a customer buys a one-time bag of coffee directly from O-Joes, Joe (the owner), records a personal thank you video to show them the roast they are about to receive and educate them on the subscription option. In an interview with Joe, he informed me that they have converted 50% of their 1-time buyers to subscriptions with this simple strategy. Pretty remarkable. The reason I think these work so well is they show customer care and investment. They are personal and relatable. They don’t pitch or sell, and yet still get across the intimate, small business roastery vibe. They also showcase the product, which is a unique and compelling touch. Iconic marketer Seth Godin talks about a phenomenon called the “Purple Cow”. Essentially he notes that if people see a cow in a pasture by the street they wouldn’t think anything of it. But if they saw a bright purple cow, they would be stunned and stop and take pictures and tell their friends. I think this is much of the same reason why Joe has been so successful with personal video. It’s unique and sticks in your mind. Joe also noted that an added effect of these video welcomes was customers being more communicative. Joe told me, “Customers who got one of my Bonjoros were 2–3 times as likely to reach out to me with questions or contact me before cancelling and that has allowed me to deal with problems a lot more proactively”.
- Surprise: Subscriptions add a level of convenience, but they also can get stale after a while. Joe combats this by tapping into the psychology of surprise. Joe rewards his customers with unexpected additions to their orders including things like custom merchandise (think a branded mug), new sampler bags of coffee free of charge or special discounts for them to use for themselves or a friend. The idea is it’s always things that add value to the customer and they weren’t expecting to get them. Harvard Business Review discusses this topic at length, noting in regards to the brain’s reward pathways, “The region lights up like a Christmas tree on the MRI,” said Dr. Read Montague, an associate professor of neuroscience at Baylor. “That suggests people are designed to crave the unexpected.”
Although Joe does not run a huge business, his dedication to his customers’ happiness and his efforts to leverage personalization have propelled him to some astonishing numbers for a 2 person company. The takeaways from Joe are to make your customers feel like a part of a community and constantly seek to delight them at every turn. All of us love to support brands that exceed our expectations and make us feel like insiders.
Kopari Subscription Model
Kopari, like O-Joes, is another example of a standard eCommerce style company that transitioned to subscriptions and benefited big. Kopari is a coconut based skincare line that seeks to create raving fans through their experience as a brand.
Kopari falls firmly in the category of curation subscription, with each month its boxes delivering custom and unique offerings.
Kopari’s transition to a subscription model has increased their revenues per customer by over 20% and has led to a transformation in the business over the last few years.
How did they knock it out of the park?
- They got the customers involved: Instead of just launching a new subscription line and seeing if their customers wanted it, they started by asking! Lanie DePasquale, eCommerce Manager at Kopari, said the following after gathering information from their customers on the decision,
“Everything we do is for our customers, and so we wanted to be able to offer the subscription option to them if that was what they wanted,”
Letting their customers drive this decision meant that they had buy-in from day 1 and wouldn’t have to invest in inventory and design without testing demand. Furthermore, it allows Kopari to gather information about what their customers want in a subscription, which is key to its success. Besides asking your customers with an email blast, you could also try posting questions on social media or even giving your customers a call. When they realize the outreach is purely to help you best support them and that you aren’t selling anything, the dynamic immediately changes.
- They used a subscription management platform: As subscriptions start to scale, dealing with missed payments, chargebacks, pauses and other issues can be a huge time suck (and lead to lots of lost revenue). Thankfully, there are awesome tools like ReCharge that make management of your subscription ecosystem seamless. This will save your business time and make things manageable with volume. Make sure to look into tools like this if you are considering branching out into eCommerce subscriptions and make sure it integrates easily with your existing payment capturing infrastructure.
- They used a rewards program: Customers like to feel like their loyalty is valued and has a direct impact back to them. When they accrue credits or points that allow them to get discounts, more product or other additional benefits, it keeps them connected to your brand and increases their buying frequency.
Kopari is transforming their business in a customer-centric way, rewarding their subscribers and making them feel like they are part of a community. At the same time, they are putting scalable systems in place to manage volume and save time, so they can grow quickly. This combination will no doubt lead to sustained business growth for years to come.
The Future of Subscription Models
Every few decades we see a massive shift in consumer behavior. The early 2000’s saw the explosion of eCommerce as an industry and people were getting comfortable buying online.
Then you saw Netflix gaining major momentum around their streaming options and taking things global around 2010. The idea that people would pay for things on a recurring basis starts to become popular.
Now, in 2020, you see the meteoric rise of subscriptions for consumer goods, with eCom giants like Amazon paving the way. Ecommerce businesses that embrace this new subscription option for customers will likely see a healthy transformation in their revenue models, much like software companies experienced when they made a similar leap.
It is important to note, however, that subscriptions, like any other business model, have pitfalls. Some key things to be aware of are:
- Inventory/Margins can get tricky: One of the rookie mistakes companies often make when switching to subscriptions (or starting a subscription business) is misjudging how much inventory to buy or miscalculating their margins. When consumers buy a subscription they are looking for a fixed, final amount, like “$30/month”, which is distinct from the normal buying process where shipping would be applied at the end. This means you will have to absorb that cut into your margins and adjust the final price accordingly. Also, following the example of Kopari, communicating with your customers and getting buy-in before you order inventory, is a great way to not be stuck with products you can’t sell.
- Be authentic with novelty: Many businesses start out with good intentions around exclusivity. They think “I will offer this only to my paying members!”. Then they can’t sell all their exclusive products and they are forced to either lie to their members (and sell exclusive products behind their backs) or sit on inventory they aren’t selling. To avoid, make sure you have customers buy in, you order inventory conservatively and you always communicate transparently.
- Automate processes, not relationships: As you grow, it will become key to have systems in place that help you scale. This will involve automating certain processes out and this is a natural progression of business. What you want to avoid, is taking the human element out of interaction with the brand entirely. Ever noticed how big successful eCommerce brands almost always have active social media channels where they are answering customer questions and engaging? Remember how Joe from OJoe’s Coffee sent personal videos to welcome every new customer, even after he was getting hundreds? Investing your time and resources into your customers is one of the most surefire ways you can create a growth engine for your business.
The key to remember is, especially if the business is more geared towards curation subscriptions, you need to sell not just a commodity but an experience. By delivering an experience, in everything from the unboxing to the follow-up, you will build loyal customers that will keep coming back for years to come. The future is here. Are you ready?
Guest post by Casey Hill
Casey is the Head of Growth for a company called Bonjoro, that helps eCommerce companies deliver personalized video emails, and whose goal is to empower every company to build real and lasting relationships with their customers no matter where they live or work. Casey also is the founder of HGC, an eCommerce company that sells tabletop/card games.