What is a subscription service? And why does it work as a business model? Including a list of 7 advantages.
The subscription model business has been around for a long time, ever since publishers pioneered it in the 17th century. Today, many brands offer products that are available via subscription – magazines, fitness clubs, software, and streaming services.
But it wasn’t until the recent boom in subscription box companies that more and more brands started opening their eyes to the possibility of offering a subscription service, box-based or not.
Before, you either were or you weren’t a subscription company. Now, many companies are realizing that definition was unnecessarily limited.
These year-over-year numbers are, to be frank, insane. What’s driving these huge gains? Meeker hypothesizes it’s the ease of access, low price, and personalization inherent with subscription services.
Independent studies support Meeker’s findings. According to 2017 data from marketing firm Hitwise, the monthly visits to subscription box sites now match those of traditional retailers.
To stay competitive, larger retailers are joining the subscription trend. Sephora’s PLAY! by Sephora sends users a monthly beauty product gift box, Starbucks offers a coffee subscription through its “Reserve Roastery,” and Amazon’s Prime program is essentially a subscription for “free” 2-day shipping.
Across the board, subscription services appear to be incredibly lucrative for brands, no matter your industry. As Shopify so aptly put it, “Subscription e-commerce is the golden goose of online sales: a gift that keeps on giving.”
7 ways subscription services are beneficial for brands
Subscription services are popular for a reason. If you’re not convinced, take a look at the top benefits brands enjoy when they launch a subscription-based business model.
1. Customer loyalty is built-in
Foundational to marketing psychology is the setting of and meeting customer expectations. Nothing exemplifies this tactic more than subscription services.
With tangible products: When customers sign up for a subscription box or opt into autoship, an expectation is set that they’ll receive products from you on a regular basis. You meet the expectation by delivering said products.
With intangible products: When customers subscribe to your software, they expect to have access as long as they keep paying. You meet their expectation by providing uninterrupted access.
In either scenario, you also meet and set expectations on the budgeting side. Customers know how much they’ll be billed each month, and when those payments will be made.
Through this simple act of consistently setting and meeting their expectations, customers come to view your brand as reliable and trustworthy. That builds loyalty, which keeps them subscribed. And at the same time, this works as one of the advantages of a subscription model
Subscription services establish a continual, positive feedback loop between your brand and your customers. As Katina Kenyon of the Forbes Agency Council said, “Users continue to come back to these subscription providers because they’ve been able to deliver the Holy Grail with consistency. Brands that can be true to their voice while providing the Holy Grail are undoubtedly positioned to establish a recurring revenue stream with content subscriptions.”
2. Easy, convenient, and “cheap” for customers
With a subscription service, you save customers the hassle of thinking. They don’t have to remember to purchase from your brand, to research your website, or visit your store. They only have to put in the work of signing up once. Then, they can just sit back and enjoy the subscription.
This makes customers’ lives easier. They don’t have to remember to keep refilling products or renewing their subscription; your brand does that for them, ensuring they always have what they need.
This not only keeps your revenue steady and prevents them from window-shopping other brands; it also makes them like you more. With less decisions to make, their cognitive load is reduced. Your brand seems easy, and therefore more likeable.
Another thing people like? Saving money. When subscribers think of your brand, they’re likely to focus on the total they see on their monthly credit card bill, which is much lower than the total cost they’re paying over time. This makes them feel like they’re getting a good deal.
Ironically, while many customers opt into a subscription service for the deal-saving aspect, many end up spending more with the company. Amazon’s Prime program, which happens to be one of the best subscription business models in the world, is a prime example of this, pun intended. In addition to their $99 annual membership, Prime members also spend $1,300 more per year and shop twice as often on Amazon.
3. Low, one-time acquisition cost with increased lifetime value
With subscription-based services, you only have to pay once to secure the customer. You do a lot of upfront marketing work to get them to opt-in. Then, the value of the product keeps them subscribed, producing recurring revenue for your brand.
This differs from other products, where you have to be constantly marketing and interrupting your competition to persuade customers to pick your brand over them—even just for a single, one-off purchase.
Funnily enough, it is precisely for these brands with lower average transaction values that subscription customers are especially valuable.
Other LTV estimates are even more positive. According to Fast Company, turning single purchasers into repeat purchasers through subscriptions can triple their lifetime value.
The longer your customer stays subscribed, the more their lifetime value ticks up. This comes at no additional marketing cost to your brand. You solely focus on maintaining the software (a cost you would be managing anyway), and supplying and shipping the products (which the customer is paying for through their subscription).
As any brand owner knows, sales fluctuate. There are holiday dips, seasonal slumps, and the freak drop in revenue. Offer a subscription service, and you’ll be better prepared to weather the storm, whenever it happens.
The more customers you have on a subscription model, the more you can rely on a set amount of revenue coming in every month. This helps your brand grow faster because you’re better equipped to meet the revenue goals you set.
And because you know how many customers you have, you can make better estimates around supply. Then you can optimize your inventory to actually meet demand, instead of having a ton of unsold product sitting around in a warehouse.
Subscription services leverage your most valuable customers – your repeat customers – to drive more revenue for your bottom line. In the U.S., repeat customers represent only 8% of all eCommerce visitors, but they account for nearly half (41%) of retail revenue.
Subscription services instantly transform customers from one-time shoppers into repeat customers, delivering a steady revenue stream for your business. Then, you can put that money into growing your business, developing new products, and marketing to new audiences.
5. Customer touchpoints provide a personal touch
Subscription brands simply provide more customer touchpoints than brands that don’t offer subscription services.
When a customer subscribes to you, they’re engaged with your brand on a regular basis, perhaps even daily if they’re using your software. This consistent engagement makes you a part of their life in a way that feels very personal—almost like a relationship.
Each time a customer logs in or receives their subscription box is an opportunity to deepen your relationship with that customer.
It’s also an opportunity to cross-promote, market, and highlight additional things going on with your brand – such as blog posts, sales on related products, events, and social media promotions. Because they have a history with you, subscription customers are more likely to engage further with your brand. It’s up to you to let them know how they can do so.
Subscription services tick the box on a lot of things that make customers feel good: personalization, convenience, value. The more you entrench yourself in their lives, especially if it’s done in a positive way, the better.
6. Free market research and product development
The behavior subscription customers engage in—how they use your service, which plans or boxes they choose, and how they talk about it on social media—gives you valuable customer intelligence. You can observe what resonates better with different customer segments and which products you should invest in further.
For instance, you may note that one month’s box is a huge social media hit, so maybe it’s worth developing a full-fledged product line. If you sell software, you may test making your most heavily-used features more or less accessible with different-priced plans. You might even create a spinoff software, tool, or app focused on those needs specifically.
The more data you collect on your current customers, the more you can use it to suggest other services, upgrades, and add-ons to them. There’s no need for them to fill out a detailed survey. You can just magically predict their needs.
Sephora’s PLAY! by Sephora is a clear market research play. The box introduces existing customers to products they may not have learned about yet. They may then go out of their way to start buying those products on their own, independently increasing revenue for the brand.
Pay attention to your subscribers– use social listening. Note which channels drive customers, what sparks customers to change their subscriptions, and how their communications or social media shoutouts change over time.
7. More options means more conversions
Perhaps with the exception of mattresses, there is no “try before you buy” with non-subscription products. This is one key area where subscription services have a distinct advantage over traditional products. Offering a limited or freemium model of your service enables interested prospects to try out your product or service before converting into paying customers.
The freemium strategy works. When Spotify first launched in 2008, they had zero paid subscribers. As of 2017, nearly half (45%) of their users were paid subscribers.
When brands have a subscription service, they have a solid cash foundation to work from. Because your brand is bolstered from the revenue of your current paid subscribers, you can experiment with different “free” models to attract new subscribers.
You may offer a freemium service, extended free trials, or fully free plans that lack certain features, to entice new customers to “try out” your brand. Then, as they find value in the service and want more, they convert into paid subscribers.
Should your brand offer a subscription service?
Subscription services are appealing to brands and consumers alike, but is it the right choice for your particular brand? If the benefits above are any indication, the answer is yes.