With the subscription economy expected to grow to an eye-watering $1.5 trillion by 2025, it’s no wonder that many businesses are turning to this convenient, revenue-driving model. If your business is set on expansion and you haven’t yet considered adding a subscription option to your product offering, you might be stunting your growth potential.
But just what are the advantages to an ecommerce business of setting up a subscription model? Here, we explore the 6 primary benefits of ecommerce subscriptions.
But first, let’s define what we mean by an ecommerce subscription model.
What is an ecommerce subscription model?
An ecommerce subscription model is a business approach whereby customers pay a recurring fee to have access to products or services over a set period of time. This type of model is becoming increasingly popular for businesses in the digital economy, including SaaS companies as well as ecommerce businesses.
The subscription model offers customers convenience, as they can sign up for an ongoing service and receive regular deliveries without having to make frequent purchases. The subscription model also provides an additional revenue stream for businesses, as customers pay a recurring fee for the service.
A subscription model works by allowing customers to select the product or service they wish to receive and then agree to an ongoing payment plan. This payment plan can be weekly, monthly, or yearly depending on the type of service the customer has signed up for. The customer will then be billed on a recurring basis until the end of the contract period.
Ecommerce subscriptions can come in many different forms, including:
- Replenishment: A replenishment-based subscription model enables customers to automate the purchase of everyday consumable products — such as toiletries, groceries, or pet food — and receive them at regular intervals for a discounted price. A good example is Amazon’s Subscribe & Save service.
- Curation: Most commonly referred to as a ‘subscription box’, a curation model provides customers with a tailored selection of products each month (or at an interval of their choosing). This works well with products such as cosmetics and alcohol, with popular examples being Allure and Beer Drop respectively.
- Access: The access model extends to digital products and services. Services like Hulu and Spotify or SaaS products like Experro, Salesforce use access-based models where customers pay a recurring fee for ongoing access to their product, while Amazon Prime charges customers for access to benefits such as free shipping.
What are the benefits of an ecommerce subscription model?
A subscription model offers a number of unique benefits for both businesses and customers. For customers, those benefits include added convenience, better value for money, access to exclusive subscriber-only perks, and the ability to discover new products. Here, though, we’re going to focus on the primary benefits to an ecommerce business of setting up a subscription model.
1. Reliable recurring revenue
In a traditional ecommerce business model, revenue will typically fluctuate each month — affected by factors such as seasonality, market trends, and changing consumer demands — whereas in a subscription-based ecommerce model, you can generate a more reliable ongoing revenue stream, which increases the potential for long-term profits and helps to safeguard your business’s financial future.
There are a number of advantages to generating recurring revenue, which include:
- A streamlined payment system: Collecting regular payments is often far simpler than processing multiple one-off payments.
- Increased scalability: Businesses who generate recurring revenue have greater potential to scale, as you can more accurately plan for growth.
- Reduced risk: If a business relies on one-off purchases, a market downturn could have a serious and rapid impact on the company’s future, whereas recurring revenue is less volatile and therefore comes with less risk.
2. Increased customer lifetime value (LTV)
One of the most important metrics when running an ecommerce business is customer lifetime value, which refers to the amount of revenue generated by a customer over their entire relationship with your company.
This is important because it enables you to understand and maximize the value of each relationship, segment your customers effectively, and calculate the return on your acquisition spend — as a general rule, your LTV should be at least 3x higher than your acquisition costs.
A subscription model can help to improve your average customer LTV because it encourages customers to build a long-term relationship with your brand, meaning they’ll be generating more revenue over a longer period. This can increase your overall profitability and help you make informed decisions about your product and marketing strategies.
3. Lower customer acquisition costs (CAC)
In a pay-per-product model, ecommerce businesses need to continually look for ways to attract new customers — which means significant spending on marketing and lead generation. In a subscription-based model, however, you’ll be able to retain customers for longer, meaning you can avoid having to spend too much on generating leads and acquiring new customers.
It’s well-documented that retaining a customer is far more cost-effective than acquiring a new one — it can be up to five times cheaper, in fact — while it’s typically much easier to sell to a customer that has an existing relationship with your brand. Generating recurring revenue through a subscription model, therefore, can have a significant impact on your potential to turn a healthy profit.
4. Reduced customer churn
One of the biggest challenges faced by ecommerce companies is customer churn. Sometimes referred to as customer attrition, this refers to customers who stop using your product or service for whatever reason (it’s essentially just a way of describing the loss of a customer).
Customer churn can be split into voluntary and involuntary churn:
- Voluntary churn refers to a customer ending their relationship with a business through their own choice; they may decide that the product is no longer suitable, for example, or that they can find it for a cheaper price elsewhere.
- Involuntary churn is when a business loses a customer due to factors beyond their control, such as a payment failure or an outdated payment method.
Both types of churn can be damaging for an ecommerce business, but a subscription model can help to reduce churn — and in turn boost retention — by encouraging customer loyalty.
Involuntary churn might be unavoidable, even for a subscription business, but you can mitigate it using a subscription management tool (such as the ecommerce subscription software by Chargebee) which employs automated dunning features to recover missed or failed payments and minimize churn.
5. Improved forecasting and inventory planning
An additional benefit of the predictable revenue generated by a subscription model is that it assists with financial forecasting. Because you have a steady and consistent revenue stream, you can more accurately predict your income vs. expenditure each month, enabling you to budget effectively and make more informed decisions about your business’s finances. In a one-off purchase model, on the other hand, your revenue can be volatile and impacted by seasonality, which makes it more difficult to forecast and budget.
It also enables you to manage your inventory more efficiently, since you’ll have a clearer idea of how much stock will be going in and out of the business each month. You can anticipate demand based on the number of subscribers you have, and plan your inventory needs ahead of time to ensure you have sufficient stock of each product without overstocking — which can lead to higher storage costs, less working capital, and the risk of ending up with unsellable stock.
6. More upsell opportunities
As we alluded to earlier, it’s typically much easier to sell to an existing customer than it is to a new one: in fact, the likelihood of converting an existing customer is 60-70%, while for a new customer this is somewhere between 5% and 20%. Now, you may be happy generating steady, predictable revenue through your subscription model, but what if you could increase your sales potential by offering upsell opportunities to your current subscribers?
A key advantage of building long-term customer relationships is that you can generate a deeper understanding of their needs, preferences and pain points, enabling you to optimize and — crucially — personalize their shopping experience to keep them engaged. This might involve offering them additional products or services (or an upgrade to their existing subscription package) which are tailored to their needs, which may enable you to increase revenue and maximize their lifetime value (LTV).
Thought subscriptions were just for SaaS companies and streaming services? Think again. Subscriptions in ecommerce are big business, with customers increasingly buying into the convenience and value of an ecommerce subscription model. Get it right, and you can boost customer loyalty, generate more recurring revenue, lower your acquisition costs, and improve your financial and inventory planning.