Box on mat

The Subscription Economy

Subscription economy services have gone from novel to ubiquitous. Still, the business model can prove profitable for any industry—if you do it right.

It was barely a decade ago that most people’s monthly memberships included maybe a subscription to Netflix DVDs and a magazine or two.

Then, Birchbox burst onto the scene in 2010, followed by Stitch Fix in 2011, and customers were delighted by the concept of subscription boxes. Fast-forward to today, and we’ve passed the tipping point: The novelty has worn off, but the delight remains. Companies in virtually all industries are eyeing the subscription model as a means of improving profits.

The average American now spends hundreds of dollars each month on various subscriptions, according to West Monroe Partners. We can purchase just about anything via a subscription, from clothing and makeup boxes to theater tickets and meals. In fact, the subscription economy has more than doubled every year over the past five years, McKinsey & Company reports.

Subscription businesses have proven so profitable that larger brands are entering the space, either via their own subscription services or by acquiring smaller brands. Unilever, for instance, shelled out $1 billion to purchase Dollar Shave Club.

For businesses, a change to the subscription model has meant a transition from selling products and services to selling memberships for the long term. It has also emphasized the lifetime value of each customer, since the goal is to keep the relationship going for as long as possible.

“Understanding the dollar amount associated with each customer over the course of a customer relationship—CLV, or customer lifetime value—will ultimately determine how much to invest in sales and marketing to avoid churn,” says Mark Heller, VP of global brand and communications at Zuora, a provider of cloud-based subscription management software.

Heller recommends that subscription services also monitor annual and monthly recurring revenue. By tracking these metrics, companies can determine how to make improvements and elevate the experience for their members.

“It’s about shifting to a relationship mindset and making sure that you’re constantly getting feedback from your customers so that you can improve that relationship and increase the value of it over time,” Heller says.

The subscription model does face challenges. Although the services offer novelty and convenience for customers, cancellation rates are high. Nearly 4 in 10 e-commerce subscribers have ultimately opted out of their subscriptions, according to McKinsey. So many players have entered the field that competition is fierce.

A close look at the subscription services that have found success, however, provides several important takeaways for business leaders.

Don’t box yourself in.

Boxes and streaming media aren’t the only ways to get into the subscription economy. Companies in fields as diverse as software and health care have established recurring revenue and long-term relationships from delivering subscriptions to their customer base.

Farmers can even subscribe to services that allow them on-demand access to tractors and combines, instead of paying full price for costly equipment. No matter what your business niche—and whether it’s B2B or B2C—there may be potential to convert some of your revenue into a subscription model.

Offer a unique value proposition.

Consumers today are more discerning than ever, and while they request top-notch items and services, they also want to feel like they’re getting a bargain, says Liz Cadman, founder and CEO of My Subscription Addiction, a website that reviews hundreds of subscription boxes each month.

“The most popular boxes are the ones that provide a high retail value compared to the cost of the box,” Cadman says.

BarkBox subscribers, for example, receive $40 worth of dog toys and treats each month for $22-$29.

How do these companies keep prices low? Ordering in bulk and guaranteeing sales to suppliers months in advance.

Make customer service your core.

The most successful subscription services make it easy for members to subscribe—and unsubscribe. Boxes like Dollar Shave Club and Ipsy are transparent about fees and renewal policies. They allow customers to pause their membership, alter delivery dates or change the frequency of boxes via their app or website.

They also respond quickly to customers’ problems. “We have found, more often than not, that companies underestimate the amount of time and expense it takes to run effective customer service, and not accounting for it can literally sink a subscription program,” says Paul Jarrett, co-founder of wellness subscription service Bulu Box and CEO of Bulu, which creates private-label, branded subscriptions for companies like Crayola and Clorox.

That’s especially true for brands today, when it’s easier than ever for unhappy customers to share their experience via poor online reviews and social posts.

Keep it customizable.

Allowing customers to personalize their subscriptions not only adds value to the service but also creates a closer connection to the brand. Wine subscription service Winc gives members an online quiz about the types of food they enjoy, then sends wines selected specifically for their tastes. Stitch Fix asks subscribers about their fashion and fit preferences, price range and occasions for which they need clothes before sending them a personalized box.

Nurture the relationship.

The best way to truly reduce churn is to connect with customers by listening to them, taking their feedback and quickly addressing concerns. Shipping delays are a common issue. When a customer reports a missing delivery, Pete’s Paleo, a weekly meal-delivery service, always sends a replacement box free of charge—no questions asked.

“Business is becoming more about relationships and less about the transactions themselves,” says Amir Elaguizy, co-founder and CEO of Cratejoy, a website where consumers can research and purchase subscription boxes. “Businesses that get that—and not just in the subscription world—will do better than those that don’t."

We have found, more often than not, that companies underestimate the amount of time and expense it takes to run effective customer service.
— Paul Jarrett
CEO Bulu

Ticking All The Right Boxes

With thousands of subscription service boxes out there, the marketplace has become oversaturated. You have to differentiate your business to succeed. Here’s how.

1. Think niche.

Given the crowded field, the more tailored you can make your service, the better you’ll be able to stand out. If you’re able to offer something that’s personalized or customized, that’s even better. The goal: Provide something customers can’t get elsewhere.

“The pet box space is saturated,” says Paul Jarrett, CEO of Bulu. “But pet medicine—that’s wide open.” His company has worked with partners on a monthly box with fitness supplements for dogs.

2. Be the expert.

One of the reasons that consumers subscribe is to discover the best new products or learn more about an area they’re passionate about. Make sure that each delivery not only includes items that are new and different, but also contains thoughtfully designed information about how to put them to use. Sephora, for example, encourages subscribers to bring items from their box into the store for an in-person tutorial from a sales associate.

3. Deliver your best.

Given all the options out there, consumers won’t stand for boxes that deliver mediocre products. “You can’t miss two months in a row,” says consumer psychologist Kit Yarrow, author of Decoding the New Consumer Mind. “That’s rule No. 1. You might get leeway for one delivery that doesn’t hit the mark, but you won’t get more than that.”

4. Think social. 

Maintain an active presence on Instagram, Facebook and other visual social media platforms, and consider ways to encourage clients to engage by using specific hashtags or asking questions. Yarrow says that packaging boxes to feel like gifts can also generate excitement and shares. “The ability to share subscription boxes with others is part of their allure,” she says.

You might get leeway for one delivery that doesn’t hit the mark, but you won’t get more than that.
— Kit Yarrow
Author Decoding the New Consumer Mind

 

Trends rocking the shipping world

 

1. Fast—and free—shipping

The rise of same-day delivery has changed consumers’ expectations when it comes to shipping, regardless of the price or weight of the items.

To compete, big-box retailers have instituted their own free, two-day shipping programs, and consumers have come to expect such service from all e-commerce players. Delivering boxes quickly and efficiently is a heavy lift for many smaller subscription services, but it’s vital to competing in today’s market. 

“When we first started, we charged for shipping and handling and the packaging costs,” says Sarah Servold, CEO of Pete’s Paleo. “That was standard. People paid it, and nobody balked.”

The recent free shipping trend forced the company to change its business model. “In terms of pricing, we had to work backwards to absorb the cost of the shipping and the packaging materials,” Servold says. 

Pete’s Paleo has opted to handle packaging and shipping in-house rather than working with a thirdparty logistics firm. That keeps costs down and is more efficient for the shelf life of the meals.

2. Reducing environmental impact

Another big focus when it comes to shipping is the environmental impact of the subscription economy. There’s growing concern about the waste generated by meal-kit subscription boxes and the carbon footprint of shipping so many items. Consumer perceptions are negative, even though the impact is actually lower than that of traditional commerce, after factoring in the cost of trucking and warehousing, according to a 2019 study in Resources, Conservation and Recycling.

Forward-thinking subscription services aim to reduce the amount of waste they generate and embrace greener methods of shipping. For example, Allure Beauty Box and PopSugar Must Have no longer package and ship their boxes inside an external box, says Liz Cadman, founder and CEO of My Subscription Addiction. 

Photo by Belchonock/Getty Images