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What is a subscription business model and why should you move to one?

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Linnworks

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A customer opening up a package as a part of a subscription.

The subscriptions business model has never been so popular as it is now and doesn’t show any signs of slowing down.

It seems that every sector is jumping on the membership bandwagon – including beauty, pet supplies, clothing, software, wine, shoes, coffee and the list goes on.

A session from Linn Academy recently dove into the idea of the subscription business model with three area experts – Jay Myers, Co-founder and VP of Growth at Bold Commerce, Tad Frost, COO of golf apparel subscription business Short Par 4, and Scott Hoiland, Co-founder at KetoKrate.  

They weigh in on the popularity of subscription business models, marketing tactics, the difference between members and subscribers, and the pros and cons of implementing subscription models.

What is a subscription business model?

A subscription business model provides customers the ability to sign up for a recurring purchase, often monthly. This often consists of a set monthly price then customers receive a variety of curated products.

Our recent panelists all agree that in addition to the convenience factor, the subscription business model is all about giving customers an exceptional experience. With monthly subscriptions, it’s less about the actual product and the ease of acquiring it, and more about the experience – discovering something new and being a part of a community. 

The growth of the subscription model.

Years ago, it was just a handful of items a consumer would have a subscription to: a newspaper, a few magazines, and cable TV, but that has now changed drastically. 

Jay Myers, session moderator, suggests subscription models are continuing to grow. He points out that Gartner research shows by 2023, 75% of direct-to-consumer companies will offer a subscription or membership offer.

Myers says that he’s seeing brands in every vertical trying to implement subscription services. Some examples of popular subscription services include Barkbox, Birchbox, Blue Apron, Dollar Shave Club, Hello Fresh, and Winc. Besides products, there are also subscription services for computer software, education platforms, and of course, streaming services, such as Disney+ and Netflix.

According to an article on CB Insights, from January 2012 through June 2019, subscription businesses revenue increased about 5 times faster than both the retail sector and the S&P 500, according to data from Zuora.

Research from McKinsey & Company suggested that 15 percent of online shoppers have signed up for at least one subscription service, frequently through monthly boxes. The same survey showed that 46 percent of consumers have subscribed to an online streaming service, such as Netflix. Nearly 35 percent of consumers surveyed with active subscriptions have three or more, with the median number of active subscriptions being two. 

Why use a subscription model over traditional retail?

The panelists agree that using a subscription model could offer various benefits, including building a community, strengthening brand loyalty, understanding customers better, and predicting revenue more accurately.

Myers points out that with using a subscription versus traditional retail, brands tend to have better information about their customer. He also adds you can spend more money to acquire subscription customers since the value is often greater. 

Hoiland points out it’s easier to predict revenue with this model. 

Both Frost and Hoiland say this model allows for customers to discover new brands and try a product that may not have otherwise been tried. Depending on the product, there could possibly be an option to trial things and return unwanted items.

Treating your customers like members.

One of the biggest pros of having a subscription model discussed at the session was the fact that this creates a community. The panelists point out there is a definite distinction between the subscriber experience and the member experience. A subscriber may be just looking for convenience, say someone who gets recurring orders on toilet paper and paper towels to simply refill a need. There isn’t as much focus on a connection with the brand. However, for that membership experience, it’s more about experience and there’s more value than just the product.

Hoiland feels that with all subscribers receiving the same product, they are having a shared experience with other members. For the brands he includes in each one of his boxes, it takes away competing with Amazon and offers better value.

In that previously mentioned McKinsey & Company survey, 28 percent of people surveyed said personalized experience was the most important reason for continuing to subscribe.

It’s also important to add value to memberships, outside of the items they receive in a monthly box. Some non-product things that could add value to a membership can include access to exclusive content and access to a member shop.

How to acquire new subscribers.

Marketing tactics for attaining new subscribers vary by niche and audience, of course. What works for one monthly subscription may not work for the next.
For Frost and Short Par 4, the best acquisition strategy is digital ads, including Facebook ads. He also says weekly text deals of offerings can help find those who have slipped through. 

For Hoiland and KetoKrate, a beneficial move has been influencer marketing and building relationships with influencers in the keto community. He says really, it’s all about finding ways to build the community and being along for the journey during a customer’s lifestyle and diet change. This requires not just any influencer, he adds, but those that truly believe in your brand and mission. 

Myers says one consistent thing he sees with brands that keep growing is a strong referral program, which further echoed the importance of building a community with subscription models. He suggests finding the best offer you can give them for referring a friend and figuring out how many referrals you need from each customer to sustain growth. 

Hoiland adds that customers aren’t going to refer your brand if they don’t believe in the mission of your company. “In order for your customer to feel like they want to refer you, they need to feel some sort of connection with your brand and that starts with building that community and having a mission they believe in,” he says. 

One acquisition tactic that doesn’t always work so well with subscription models is offering discounts, according to the panelists. Myers points out that customers that come for the discount tend to be less loyal customers. The reason why they’re buying the product is more associated with the discount than the brand itself, he says.

Instead, allocating towards charity has shown to have better results. When offering a discount of 20 percent off or allocating 20 percent of the purchase to a charity, there was a higher conversion rate for the charity, Myers says.

Challenges with a subscription model.

There are always challenges that come along with breaking the mold. For one thing, a subscription model may work great for certain industries and products, but may not have the same success in others.

Hoiland saysone challenge with a subscription model is it could be easy to focus on continuing to grow subscribers and lose sight of focusing more on the mission of your brand and providing more value to your customers and the community you’ve already built. He says it’s important to stay true to what you’re trying to accomplish and not get distracted, which ultimately can help set the business up for long-term success and further support the mission, instead of just benefitting the short-term economics. 

Some other challenges the panelists mention, include: 

  • Understanding what can be realistically provided on a monthly basis
  • Getting the proper member that fits the brand for retention
  • Logistics of fulfilling orders monthly, especially with supply chain issues
  • Working with multiple vendors on a monthly basis 
  • Continuing to offer quality products
  • Trying to predict inventory properly, and potentially hurting the business if you predict wrong

There’s no doubt that the subscription business model isn’t going anywhere anytime soon. As our panelists all agree, a great way to go about it is to really understand your customer and what would work best ultimately for a positive customer experience.

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