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The subscription (r)evolution

bevh, 21 January 2020:The subscription economy is more than the further development of existing business models. It revolutionizes whole sectors and makes others redundant. Video rental stores, which used to be on every second street corner, have virtually disappeared. Customers want to stream from their sofas and get out a subscription to do so.

Like the industrial revolution before it, the digital revolution is changing our global society in ever newer ways. The spread of high-tech innovations has raised the expectations of buyers. Companies are forced to further develop their business models. Led by Generation Y, today’s customers prefer experience-oriented services. They often decide in favour of use instead of ownership. Subscriptions are preferred to one-off purchases. This also means, however, that consumers enter into a long-term relationship with their brand or their product. As a company, you therefore have invest in die customer retention in order to prevent the migration of subscribers to competitors.

“The subscription economy is a game-changer and is increasingly becoming a strategic success factor for companies. In a couple of years, it will be normal to have a subscription for nearly all products and services. I’m certain that anything that can be billed in a subscription will be offered in a subscription.”

Lars Heucke, Managing Director, nexnet GmbH

To be able to survive in a customer-driven economy requires agility. Customers wan immediate, lasting value and trouble-free experiences. And it doesn’t matter to them how complex the implementation in the background is for your company.

From property

to subscription

A few years ago, the range of subscription services was still limited to the print media, and items like books, newspapers, and magazines. The music industry followed later. With growing digitalization, the subscription model exploded. Driven by the desire of customers for more convenience, countless products are now available on subscription

Netflix
With over 158 million payed memberships in over 190 countries, the world’s leading streaming provider. Members can watch as many series and films as they want, also offline, and without interruption from commercials. 

Dollar Shave Club
At regular intervals that can be chosen freely, the Dollar Shave Club delivers razor blades and care products to the homes of its members. Launched 7 years ago in the USA, there it now several imitators throughout the world.

Amazon Subscribe & Save
A range of foods, household products, and toiletries can be ordered on Amazon via a subscription. The items in the subscription are usually offered at lower prices than for the same product in a one-off purchase. The buyers decide themselves about the desired delivery cycle and no longer have to worry about follow-up orders of their consumer goods.

Box subscriptions
A popular form is the delivery of product boxes at predetermined intervals. On a weekly, monthly, or quarterly basis, the subscribers get a box containing a variety of products delivered conveniently to their door. Well-known examples of this are suppliers of beauty products (Birchbox), pet food (BarkBox), toys (Hoppi Box) or food (Hello Fresh). A noteworthy form of this subscription model is offered by curated shopping providers. For example, those providers who put together clothing boxes (Outfittery) for their subscribers. The delivered box contains a selection of clothing items. The customer pays what he or she wants, and the rest is returned.

The subscription model has continued to develop and is now an inherent part of the marketing of product and services. The range of things that can be subscribed to has expanded dramatically in the course of time. And the way in which subscriptions work has also changed, becoming much more flexible and customer oriented. The focus has shifted from the product to the customer. And they, of course, are very happy about being the object of so much increased attention.

Current state

of the Subscription Economy

The subscription economy is booming. And not only in the pioneering US market: start-ups in particular are increasingly targeting long-term customer retention through a subscription model. Customer acquisition costs can be reduced, and revenues better predicted. But even companies that are already well-established on the market can’t afford to ignore the subscription business model.

A study by McKinsey has shown that 15% of online buyers have concluded at least one subscription in order to receive a product regularly. Subscription services offer consumers a convenient, personalized and often better value opportunity to buy things. The migration rates are high, however. Consumers quickly cancel services that don’t offer better customer experiences. It’s thus more than just the price or the convenience that persuade consumers to opt for a subscription.

Opportunities

and challenges

At first glance, the introduction of a subscription model might seem straightforward: develop a monthly price for use, repackage the product or service and get a software tool that issues customers with bills at regular intervals and can process payments. The reality, however, is different – even for companies that have a low degree of complexity. Companies that are successful with subscription models know what effects the changeover to a subscription model can have on the whole business and transaction infrastructure. Yet many companies underestimate this influence. 

In order to be successful in the subscription field, the new subscription-oriented strategy has to be taken on by the company as a whole. This also involves understanding that long-term customer relationships demand more time and attention. The primary challenge is a smooth transition to the subscription model. In this context, the following factors need to be taken into account:

  1. Subscriptions are relationships. The longer customers are prepared to pay for services, the higher their lifetime value is, and the higher your profits. To keep your customers happy as subscribers, you have to strike the right balance between price and service. You will be successful as long as you supply long-term value andconstantly nurture your relationship with your customers.
     
  2. Adaptability is crucial, as subscriptions dissolve the boundaries between products and services. Innovative companies develop subscription-based, experience-oriented service models for everything. In principles, there is no boundary between what you can offer in a leasing model and what you can offer for a one-off payment.
     
  3. Subscriptions are supposed to make life easier. Your subscription should thus offer long-term added value with consistent and pleasant user experiences. 
     
  4. The effects of changing over from one-off payments to recurring billing cycles are not to be underestimated. New technologies, business processes and revenue management practices are necessary in order to support a shift of this kind.
     
  5. If you want to optimize your profitability by reducing migration rates and raising customer retention, you should find out what customers expect from you.

Which is the suitable subscription model

for your target groups?

Before a subscription model is introduced, a range of decisions has to be made. Which subscription model will best address the target group? Which subscription model is suitable for the product? And which subscription model best suits your company goals? In general, we can distinguish between 3 types of subscription:

 

  • Replenishment subscriptions provide consumable supplies and offer subscribers a practical opportunity to ensure that they never run out of certain items. The Dollar Shave Club or Amazon Subscribe & Save are well-known examples of replenishment subscriptions. At fixed intervals, the subscribed product is sent out without an additional request for it. For your customers this has the advantage that they don’t always have to search again for the same product. For you it has the advantage that the customer will continue to receive goods from you regularly, until they cancel the subscription.
     
  • Curated subscriptions are intended to surprise and excite by offering new items or personalized products like clothes, care products, or food. Examples include Hello Fresh for groceries, Outfittery for clothes or Glossybox for beauty products. Your customer selects some setting or answers questions. With the aid of this parameters, you define the contents of the boxes.
     
  • In the case of club membership the user pays a monthly fee in order to receive reductions or access to special offers. This subscription form is popular in the categories of clothing and food in particular. Well-known examples of this include JustFab, NatureBox or Thrive Market. Through paid access to selected products for a limited target group, a sense of exclusivity is conveyed. 

Making up 55% of overall subscriptions, the individual beauty- or fashion-boxes are the most popular among the curation services. This points to a strong demand for personalized services. The customers of today want to receive products that have been tailor made for them. Second place is taken by replenishment subscriptions, at 32 % of all subscriptions. Its main advantage is convenience for customers, who don’t have to constantly search around for a product and the best provider. At 13%, subscriptions make up the smallest segment of the overall market for subscription services.