Subscriptions are big business. In fact, Entrepreneur magazine will name the booming ecommerce model one of the top business trends for 2014.
In simple terms, a subscription is a single purchase set to a recurring schedule. While any product can be turned into a subscription, certain products naturally lend themselves to this model. The best subscription products typically have three major characteristics: they are consumable, they have a relatively short product cycle, and they are used on a regular basis.
This is one of the most important characteristics for subscription products. The product needs to be consumed (i.e. “used up.”) For instance, a piece of wall art is not consumable, therefore it does not make much sense to offer a subscription for wall art. On the other hand, coffee beans are an excellent product to offer subscriptions for because coffee drinkers looking for their daily fix go through a bag of coffee beans relatively quickly.
Short Product Life Cycle
If the product has a long product cycle, it is difficult for customers to anticipate when the product will need to be replenished. In our experience, customers are reluctant to subscribe to products with a life cycle longer than 3 months. For example, you probably use salt or sugar often, but you don’t need to buy salt or sugar packages on a regular basis. On the other hand, a shaving razor is an ideal subscription candidate because the blades dull and need to be replaced every one or two weeks.
Used on a Regular Basis
Sporadically used products also make it difficult for customers to predict when they will finish the product – or even whether they will need to restock the same product once they finish. For example, liquid clog remover is consumable and has a short product life cycle. One bottle of regular liquid clog remover is intended for only one or two uses. However, it’s hard to predict when you’ll need a new bottle, so you probably wouldn’t subscribe to this product. On the other hand, cosmetic and grooming products that are used daily are excellent candidates for subscription, as successful subscription businesses Birchbox and Dollar Shave Club will attest.
Subscription Model Benefits
Compared to a one-time purchase, subscriptions offer ecommerce merchants three major advantages.
High Life Time Value
Subscription customers represent higher long term value due to the fact that they are expected to make multiple purchases in the future. Signing up for subscription is like a self-selecting process for VIPs: subscribers are telling you that they are going to continue buying your product. VIPs typically spend more on products and interact more with companies. They are also more likely to spread positive word of mouth about your brand because they are exhibiting a high degree of satisfaction with your brand, product or service. According to an Amazon survey, Amazon Prime members spent almost twice as much as non-Prime members, largely because they’re more likely to set up subscriptions. Clearly, subscribers are high value customers, and smart brands target this group with special marketing and engagement incentives.
Compared to a one-time sales event, revenue from subscription customers is predictable. Notwithstanding cancellations, brands know exactly what kind of products the subscription customers will order and when they will order. Brands can forecast product and delivery demand with incredible accuracy, which leads to reduced costs in manufacturing and carrying inventory at the warehouse – which flows directly to your bottom line.
Subscriptions also provide an easier shopping experience for customers by eliminating repetitive tasks. Think about shaving razors or pet food. You never really think about re-purchasing these items until you’ve already run out, which means an emergency trip to the store to get Fluffy’s dinner or a new blades. Today’s customers are increasingly willing to spend a little extra money for the convenience of having regularly consumed products (coffee, cosmetics, grooming, beverages, pet food) delivered to their door. Dollar Shave Club solves this practical problem by replenishing shaving razors by mail every month; PetFoodDirect solves the same problem for pet owners.
Subscription Model Risks
The risks of a subscription business can be as great as the appeal. Incorrect billings, inability to cancel easily, unrecognized charges, etc. can all add up to big customer chargebacks. Without the proper controls in place, brands end up having provided a service for free. Clearly, managing customer expectations and having a robust customer service plan in place can help preserve your resources and ensure that your subscriptions are a source of income and revenue; not headaches and losses.
Managing Your Subscription Business
To understand your subscription business, the most important metrics to look at are retention rate and churn rate. Churn rate is a measure of the number of individuals who move out of your business over a specific period of time. A high churn rate means that subscribers are not staying around for multiple purchases. Consequently, the business impact of a high churn rate is lower lifetime value per subscription customer and lower overall revenue.
Symphony conducted an analysis of subscription retention and churn rates across our portfolio of brands. In order to make sense of subscription trends over time, we used cohort analysis to look at data that share similar discreet characteristics (groups) instead of analyzing the entire data set as a single output. For our analysis, cohort groups were based on the time the customer joined the subscription service.
Graph 1 is an illustration of how we structured the analysis. Each row represents a cohort group by the week a customer joined the program. For instance, the first row indicates every subscription customer that joined in Week 1. Each column represents the week into their subscription. The first column, “1” indicates the first week of a new subscription. Afterwards, we calculated the average cancellation rate across all rows. In other words, we have an average cancellation rate for each week of ‘membership length’.
We plotted the average cancellation rate to get Graph 2. For confidentiality reasons, we have removed the actual cancellation percentage from our graphs.
Finally, we ran the analysis for three different customer segments: “non-VIP”, “VIP+1”, and “VIP+2”.
Non-VIPs are new customers who have not made any prior purchases from the brand. VIP+1 are customers who made at least 1 purchase before, and VIP+2 are customers who made at least 2 or more purchases before signing up for a subscription. We plotted each segment to get Graph 3, which illustrates the retention rate, or the percentage of subscription customers who remain engaged in the service.
Results and Insights
There are two key takeaways from our analysis.
Repeat Customers Make Better Subscribers
We see from the Graph 3 that non-VIP customers behave quite differently from both VIP+1 and VIP+2 customers. Non-VIP customers are much more volatile than VIP customers. Non-VIP cancellation rates are much higher than VIPs across different stages of their subscription cycle. This makes intuitive sense because VIP customers have additional experience upon which to base their subscription decision: VIPs already tried your product and returned for a follow up purchase.
Cancellations Spike at Delivery Time
Cancellation does not happen linearly. In fact, based on our data, we see a large spike for cancellations around the time of delivery. In our data, the default delivery cycle was 4 weeks. We see relatively flat cancellation rates leading up to week 4, 8, and 12. However, during the week that the delivery is scheduled, the largest groups of people defect.
How to Improve Your Subscription Business
Based on our analysis, here are four ways that ecommerce merchants can improve subscriptions and boost recurring revenue.
Market Subscriptions to Your Best Customers (VIPs)
Clearly, we can see how customers behave differently based on their prior purchasing history. Before pitching a subscription offer, it is critical to have a thorough understanding of your customer profiles to run a successful subscription campaign. Don’t waste your efforts pitching subscriptions to first time buyers; instead target repeat purchasers for subscription offers.
Target Retention Efforts during Peak Cancellation Periods
Based on our analysis, cancellation rates spike around delivery dates. Thus, it is important to target retention offers at those times – especially during the first three deliveries. One effective technique used by our clients is to include bonus coupons with the subscription delivery. Coupons can be applied to future subscriptions or additional orders, with the rationale to keep customers around for their next delivery.
Give Your Customers Control
A good subscription business allows customers to modify their subscription orders to fit their unique needs. At a minimum, customers should be able to change their delivery frequency or pause their subscription if they go on vacation. Customers who want to make modifications, but are unable to easily change their subscription products or delivery dates, will simply cancel the existing subscription. Whenever there is cancellation, there is a very high risk of losing that subscription forever.
Let Your Subscribers Know You Care About Them
Brands realize subscription customers are important, but may not take the extra step of creating separate engagement campaigns. Treat your subscribers like the VIPs they are. For example, offering test products, early purchasing for new products, special discounts like free shipping, or other unique membership “perks” can be the difference between an engaged subscriber and one who cancels.
Subscriptions are one of the hottest ecommerce trends for three reasons: high customer lifetime value, revenue predictability, and customer convenience. But managing your subscription business requires a different mindset from one-off acquisition marketing. First, not all subscription customers behave the same. Customers who have made at least one prior purchase from your brand tend to be more stable and continue subscribing longer than first time buyers. Second, customers tend to cancel their subscription service around the delivery time. Savvy brands proactively try to reverse this trend by providing extra attention or promotional coupons along with the subscription deliveries.
The key to analyzing your subscription business lies in cohort analysis. This techniques provides the granular insights to understand your customer behavior and develop intelligent marketing and engagement strategies to produce long term success including predictable, recurring revenue.