2020 was a super busy year for subscription ecommerce businesses! Sales have skyrocketed. Shopify introduced its new subscriptions API. Covid-19 contributed for sure but this is a trend that started back in 2010!
In this article we take a look at how subscription ecommerce is evolving.
Ecommerce store owners all over the globe are swiftly transitioning to subscription services, and it’s easy to see why.
Subscription ecommerce represents a more stable business model, and it holds an undeniable attraction for store owners who are weary of fluctuating end-of-month reports.
Compared to the unpredictable cycles you often get from a standard storefront, subscription ecommerce provides a reliable baseline income that your one-off sales can supplement.
The idea of consistent, predictable monthly revenue is enough to make any ecommerce business-owners eyes twinkle like a star.
And if you look at the success that subscription ecommerce model leaders like The Dollar Shave Club and Birchbox have had with monthly recurring revenue, it’s easy to understand why practically everyone in ecommerce is thinking about subscriptions.
But it’s more than just predictable revenue that’s driving so many companies to jump into the subscription ecommerce fray.
- Make it easier to target a specific niche
- Facilitate calculation of customer lifetime value
- Are sticky – customers come back without any extra effort on your end
- Work very well with loyalty / rewards systems
- Facilitate inventory management since you’ll know exactly what you need
- Streamline shipping needs by timing all orders on the same date(s) and in the same packaging
There’s a ton for business owners to like about the subscription ecommerce business model.
However, it’s critical that you go in with eyes wide open.
Customer acquisition can be a higher hurdle to jump, since you’re asking for a bigger commitment, and keeping customers engaged can be a constant battle of staying fresh-new-hot-trendy.
But you are up for this challenge, right?
Also, with open subscription policies that allow customers to cancel anytime, revenue forecasting can be misleading, churn can become a significant challenge and customer support tickets will mushroom unless carefully handled.
At Gobot, we have seen our customers offering subscriptions do exceptionally well.
Let’s take a peak behind the curtain and figure out all the hype behind subscription ecommerce.
When I say growth, I mean growth!
Consistently, as reported by Referral Candy, the subscription ecommerce based business model has exploded by over 350% since 2012, growing 5 times faster than S&P 500 company revenues and U.S. retail sales.
According to McKinsey, 15% of Americans have signed up for one or more subscriptions to receive products on a recurring basis.
In fact, the latest projections suggest that by 2025 the global subscription ecommerce market will be worth $246.6 billion, up from $15 billion in 2019—which makes it a super interesting opportunity for existing and aspiring business owners.
There are many possible explanations for this phenomenal growth but an obvious one is that businesses have come to fully realize that acquiring a new customer can cost 5–10 times more than retaining an existing customer.
The subscription category of subscription boxes alone represents a $5B industry!
Subscription directory Hello Subscription currently lists over 4000 boxes, though the total number is much larger. Leading the pack of consumables delivered by mail is, unsurprisingly, beauty.
The widely-accepted founder of the subscription ecommerce model, Birchbox, launched in 2010. We’re less than a decade into this and the market has grown by more than 100 percent a year over the past five years.
Shopify’s review of the Subscription Economy Index (SEI), which tracks subscription ecommerce businesses on the Zuora platform, reveals that subscription ecommerce businesses grew revenues approximately five times faster than S&P 500 company revenues (18.2% versus 3.6%) and U.S. retail sales (18.2% versus 3.7%) from January 1, 2012 to June 30, 2019.
Subscription ecommerce businesses raised approximately $2.5 billion in venture capital funding over the past three years, including $400 million in the first eight months of 2019.
Very impressive growth and future prospects indeed!
But don’t take my word for it!
If you’re not convinced by subscription ecommerce model leaders like The Dollar Shave Club and Birchbox, check out some additional example Shopify stores that are crushing it here. Also, given its recent introduction of its Subscriptions API and investment in this space, Shopify is clearly gung ho about subscriptions.
Ok, before we dig in, let’s take a step back and discuss some basics.
What is subscription ecommerce marketing and why are we seeing this level of adoption?
Subscription marketing is a business model that generates recurring revenue through subscription pricing.
Existing customers opt to receive the goods or services on a recurring basis for a monthly or annual fee.
The goal of a subscription offering is to increase customer retention and lower customer acquisition cost.
Netflix is a perfect example of a successful subscription based business model, as is any other SaaS (software as a service) company.
Outside of SaaS, a subscription offering usually involves a monthly shipment of goods such as a subscription box.
Convenience is a primary driver of the popularity of the subscription based model for goods and services.
Modern shoppers value the ‘set it and forget it’ mentality that a subscription company offers.
It’s just another way to deal with the fast-paced information overload culture of the 21st century.
Subscriptions also typically offer flexibility and options as to how and when your product or service is delivered.
From the stores perspective, above and beyond the consistent income, subscriptions make it easier to build loyalty, reduce customer acquisition costs and increase customer retention.
Of note, and as shown in the graph below, subscriptions also increase your customer lifetime value.
Per the graph above, which shows “the ratio of subscription customers’ LTV (customer lifetime value) to transactional customers’ LTV among online merchants who work with the two models, you’ll create consistently higher income with subscription services if your products are under $75.
Also, merchants working with an average transaction value below $25 have customer lifetime values 1.78X higher for subscriptions than for non-subscription customers (LTV ratio).
Equally important, ecommerce subscriptions likewise help brands increase repeat purchases since you don’t have to win the business ad hoc every time if you have a loyal, subscribed customer base.
You have a 60-70% chance of selling to an existing customer, versus a 5-20% chance of selling to a new prospect.
What are the types of subscriptions?
As detailed by Shopify here, there are two primary types of subscriptions: curation and replenishment.
Curation business model (i.e., subscription boxes)
This is the most common subscription ecommerce business model, popularized by companies like Birchbox, Blue Apron, and Stitch Fix.
The general idea is that customers receive a package delivery every month (or the interval of their choosing) and get the exciting surprise of opening it up and discovering an assortment of great new products.
It’s exposure to a lot of goodies that you might not ordinarily buy, at an attractively low cost.
According to Forbes, 55% of all subscription products are curation-based, making this the dominant category.
Typically, these businesses sell products in the apparel, beauty, and food categories, but the model works well across a wide range of products and is expanding into more industries every year.
Replenishment business model
This model is all about convenience and cost savings. Replenishment subscriptions allow consumers to automate the purchase of essential items—often at a discount.
Everyone needs toilet paper each month (well, at least my family does!). And razors. And a gazillion other basic needs that used to require a trip to the store.
Now with this subscription ecommerce model, businesses like The Dollar Shave Club, Sol de Janeiro, Amazon Subscribe and Save, and Joe Grooming are offering a big convenience advantage by delivering these basics on a prearranged schedule.
Replenishment just when you’re about to run out – without you needing to even think about it.
Most products don’t need to be replenished regularly, so the types of products that you’re selling are an important consideration with this business model.
Commodity and convenience items like razors, diapers, vitamins, and pet food are good fits for the replenishment model.
Replenishment services have particularly high long-term subscription rates: 45% of members have subscribed for at least one year.
Some stores have adopted a hybrid approach that allows you to add subscription services to your existing business.
More and more companies are shifting toward this revenue model, as it’s a flexible way of exploring the subscription ecommerce ecosystem without committing to one revenue model (or pivoting your business).
Which subscription model is right for you?
It depends on your existing business and products (if you already have them) and your customers preferences and needs.
What products are most suitable for subscriptions?
Per Shopify, due to the recurring nature of subscription boxes, the best products for the subscription model generally fall into one of two categories: consumables or collectibles.
- Tea and coffee
- Organic and wellness products
- Food: gourmet, region-specific, niche (vegan, gluten free), farmer’s market, protein powder
- Supplements and vitamins
- Beauty and personal care: makeup, skincare, hair care, men’s grooming, tooth paste
- Baby supplies: diapers, wipes
- Pet products: litter, poop bags, treats
- DIY supplies and craft kits
- Socks and underwear
- Gaming, Toys, and Comics
Beauty and consumables have shown to be the heavy-hitters, while books, plants, and other collectibles also make effective choices.
Clothing, jewelry, and adult toys are other categories with significant potential for subscriptions.
Given the number of stores adopting a subscription ecommerce model, and experimenting with a hybrid approach, more and more great apps have been introduced to meet the need.
This in turn has reduced the costs associated with introducing a subscription model, resulting in a virtuous reinforcing cycle of growth.
There are a number of great applications available to help you implement a subscription model on your store.
Most of them deliver the same primary benefits:
- Letting customers purchase subscriptions and one-time items in the same order
- Enabling customers control as to cancellations and when they want to receive their next order
- Offering a free sample of a product, and then switching their subscriptions to include the full product
- Letting customers build their own subscription boxes
- Providing analytics and reporting to help merchants track subscription revenue and customer trends
- Shipping and taxes pulled from the Shopify app so they are real-time accurate
- Integrating with fulfillment apps and payment processors
- Syncing inventory with Shopify and loyalty programs
We are not affiliated with any subscription app company but, for convenience, we list below some of the ones we have encountered:
Shopify will be taking over the checkout process for subscriptions and will handle the first charge but will continue to rely on third-party apps, like the ones listed above, to manage the subscription contract and scheduling for the remainder of the payments – and so the subscription app ecosystem survives!
There’s no end in sight for the popularity of subscription products. If you think your business might be a good fit for this model, it’s absolutely worth a try!