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.
Anyone who runs a business knows that there are two key drivers for additional revenue: either increase conversions or increase customer engagement. Put another way, sell more to your existing customers and/or sell to new customers.
If your marketing efforts are bringing sufficient traffic to your web store, then conversion rate optimization is the key to unlock additional revenue. Are site navigation, searching, and filtering features helping customers find the right product? Are cross sells effective at showcasing more products to customers? Is your checkout flow encouraging or discouraging purchases?
But once you’ve solved these major problems, the next step is to identify small tweaks that can cause big changes in customer behavior. By testing what works for your customers, you can gain an edge over competitors and deliver a more enjoyable checkout process to every customer.
This is where the concept of the conversion funnel comes in. You’ve probably thought about this already. How many site visitors are coming from my marketing efforts? How many people completed checkout?
Once you get the results and see the drop off in numbers between the users coming into your site and the users actually buying from your site, you’ll see that many potential customers drop out at various stages of the conversion funnel.
In order to maximize the effectiveness of the conversion funnel, Symphony Commerce breaks it down into ten steps. This allows us to set granular goals and accurately gauge performance against them. For example, improving engagement doesn’t directly impact conversion. If the only thing we track is conversion, we’ll miss any engagement improvement. Likewise, if we only track conversion rate between the first and last steps, then any improvements at earlier steps of the funnel will be diluted at the end. A visitor to shopper ratio of 100% will only result in approximately 1% increase in revenue, because of the attrition throughout the rest of the funnel.
With mobile commerce comprising more and more of our clients’ revenue, we noticed a gap between mobile traffic and mobile conversions. Some clients were already accruing more than 50% of their traffic from mobile and tablets, yet the conversion rates on these devices was less than 30%. Specifically, mobile shoppers were 50% less likely than desktop shoppers to start the checkout process.
Conventional wisdom suggests that shoppers are using their phones to look up information with the intention of purchasing the item later on a computer or in person at the store. According to Google, 90% of smartphone shoppers use their phone for pre-shopping activities.
But we wondered: could we nudge some of those mobile shoppers to actually start (and complete) their order on their phone?
Our hypothesis is that visual prompts will encourage checkout engagement. Symphony’s “Sticky Cart Split Test” was designed to see if we could increase sales and enhance the shopping experience by changing just one aspect of our standard checkout flow. Specifically, will consumers be more likely to start the checkout process if the shopping cart is more visible?
We designed an experiment to show some customers a stickier shopping cart banner after they added a product to the cart. The experiment was conducted across several client sites where we could accrue enough traffic in a short amount of time to achieve statistically significant results.
To eliminate any effects of seasonality, we created an A/B test where 50% of site visitors were our control group, and would experience the original checkout flow. In this flow, when a shopper adds an item to the cart, the shopping cart drops down and then rolls back up after 5 seconds.
Here’s what the sticky cart looks like on a desktop or tablet browser. The cart does not roll up after 5 seconds; it stays visible until the customer clicks away.
Here’s the smaller version of the sticky cart that is seen on mobile.
The remaining 50% of visitors were shown an altered flow. When the shopper adds an item to the cart, the same shopping cart drops down. However, it remains static until the customer takes an action (such as tapping elsewhere on the page).
We ran the test for 20 days in early June with 134K visitors.
- Tablet N = 7,188
- Mobile N = 51,630
- Desktop N = 75,076
Because the customer experience is dramatically different across web, tablet, and mobile, we tracked results separately to see how each group performed.
- Mobile users who were shown the new sticky cart drop down were 92% more likely to start the checkout process: a HUGE change resulting from a small UI change.
- Tablets users also were 85.6% more likely to start the checkout process.
- Desktop users were 8.1% more likely to start the checkout process.
Overall, the consumers who were exposed to the extended shopping cart were 35% more likely to initiate check out.
CONCLUSION AND NEXT STEPS
Sticky carts, it seems, really do provide a visual nudge that gets customers to make the transition from shopping to buying.
There were two additional considerations for further down the conversion funnel. First, if we made it easier to check out quickly, will it prevent people from browsing and adding more products to their cart? Second, if we dramatically increased the number of checkouts started, would we observe an increase in abandoned checkouts because some of the new shoppers were less qualified?
Our concerns were unfounded. Expected revenue for the test group and the baseline group were almost identical, so we did not encounter any erosion in AOV. Likewise, there was no statistically significant difference for conversion rates. Thus, by encouraging more shoppers to initiate checkout (with the same AOV and the same conversion rate), the sticky shopping cart increased our clients’ revenue.
Thanks to our cloud-based infrastructure and agile ecommerce platform, Symphony Commerce implemented Sticky Shopping Carts across our entire network with minimal friction. Clients did not have to manually upgrade, opt-in to a program, or pay extra for this feature. Symphony – a company dedicated to democratizing commerce – implemented this newly confirmed best practice to every client. When we get the data in hand, Symphony will continue to innovate and experiment in order to deliver the best shopping experience and induce greater ROI.
Switching or upgrading your ecommerce platform can be a daunting process with unforeseen costs and delays. There are many moving pieces to your commerce infrastructure, making it difficult to prepare an apples-to-apples cost comparison for different solutions – let alone your legacy system. So why change? Chances are that growth is the culprit, and your current system is not able to keep up with demand or is preventing your brand from reaching its full potential.
As brands grow, the cost and complexity of consistently delivering positive customer experiences increases exponentially.
There is no limit to the number of sales that your ecommerce store can process, but there is a limit to the number of orders and transactions your team can realistically manage. A sudden spike in demand not only wreaks havoc on your resources, but also can result in a wave of negative customer sentiment if orders aren’t fulfilled accurately and on time.
For sub-million dollar brands, typical transaction volume is low enough (around 100 orders at an average order value (AOV) of $25 per day) that a small team can perform everything from the sourcing and marketing to fulfillment and customer service. Many successful entrepreneurs claim that the hardest part of growing a business is going from $1MM to $5MM. Costs escalate more quickly than revenues, transaction volume is more volatile, and increasingly sophisticated technology is required for ecommerce and online marketing. Investing in staffing and technology before achieving revenues puts pressure on finances by tying up cash flow in infrastructure instead of products and marketing. On the other hand, an ecommerce solution that doesn’t allow the business to scale will result in unfulfilled orders and revenue, and potentially damage an emerging brand.
In our new strategy guide, “How to calculate the total cost of your ecommerce system,” we look at 7 different cost centers: ecommerce technology, financial transactions, server and hosting fees, inventory, fulfillment, shipping and management. Savvy business owners monitor their time investment to execute brilliantly, so the final section explores the opportunity cost of managing all of the moving pieces of your ecommerce ecosystem.
Investing in an upgrade to your ecommerce system is a critical step toward achieving scalable growth for your brand. Taking a disciplined approach to mapping costs allows you to maintain control of the process and avoid “hidden costs” while building a successful and robust ecommerce solution.
Technology and consumer expectations are evolving rapidly in the ecommerce space. How do you avoid analysis paralysis and focus on core metrics that can truly help you gauge your brand’s health? Here are five metrics we use to monitor our portfolio of brands.
Like “feet in the door” for a brick and mortar, site traffic is the top of the funnel for an online brand. So how your traffic is trending is critical to downstream sales. Savvy business owners dive deeper into their traffic numbers by analyzing:
1) New vs. returning visitors,
2) Organic vs. paid visitors, and
3) Visitors by device (computer, tablet, mobile).
There are several formulas for calculating conversion rates. We look at sales completed vs. the carts started (note: this is different than pay-per-click or display advertising conversion rates). By looking at carts started instead of total traffic, we can eliminate the impact of new marketing campaigns or other activities that may cause increases in untargeted traffic to the site. If, after removing these influencers, conversion rates are trending downward for consumers who have started the purchase process, it may be time to re-evaluate your checkout process.
#3—Daily Transaction Volume
Sudden sales increases put pressure on hosting and servers as well as inventory, fulfillment, and shipping. And if your customer doesn’t receive a purchase on time, satisfaction with your brand can be damaged forever. Look for a commerce infrastructure that efficiently supports everything between your lowest and highest transaction volume days—think holidays vs. off-seasons.
Winning a purchase from a repeat customer costs a fraction of what it costs to attract a new customer—4-10 times more, according to the Chartered Institute of Marketing. Whether you re-invest those savings into your marketing budget or divert them straight to your bottom line, fostering customer loyalty and repeat purchases is a winning growth strategy.
#5—Revenue per Employee
How productive is your team? Can you increase revenue and profit with the same number of employees? For many business owners, management efficiency is a key growth driver. Tracking your revenue per employee measures your team’s productivity and the ability of your ecommerce platform to scale to meet your growth goals.
What are the metrics that matter most to your brand?