By Roxanne Voidonicolas
Finding an Idea
Some research suggests that the subscription e-commerce market is expected to exceed $450 billion by 2025, compared to $15 billion in 2019 – making it an interesting opportunity for both current and aspiring business owners.
If you are interested in adding subscription services to your Shopify store or starting a subscription e-commerce business from scratch, this is the right post for you. Below, I will outline the benefits of recurring revenue, different subscription business models, and how to get started on Shopify.
What is Subscription Commerce?
Essentially, subscription-based e-commerce companies offer a convenient, personalized service at a lower cost for online shoppers to buy what they want and need on a recurring basis. This transforms one-time shoppers into repeat customers (often for life). By receiving the anticipated monthly recurring revenue, businesses can predict future growth and expansion.
Benefits of the Subscription Commerce Model:
1. Predictable Revenue
Knowing how much money comes in each month helps you streamline everything from sales forecasting to inventory planning. It also means you know how much you can reinvest in the growth of your business.
2. More Cash Flow
Many subscription businesses require full payment upfront at a discounted price. In addition to being great for cash flow, this can provide the cushion that startups desperately need.
3. Lower Customer Acquisition Costs
Companies that rely on product-based pricing models have to continually invest in marketing and sales to attract new customers and thus increase revenue. Rising customer acquisition costs are one of the reasons startups fail. With a subscription model, customers pay you regularly, so you don’t have to invest as much as you do in acquiring new customers to keep your business running. Acquiring a new customer can cost 5-10 times more than retaining an existing one.
4. Loyalty
The recurring nature of subscriptions creates a virtuous cycle: regular purchases provide deeper insights into your customers’ behavior, allowing you to enhance the personalized experience you offer, thereby making customers return.
If done well, subscription companies create highly loyal and repeat customers – and repeat customers spend 67% more than new ones. This is foundational to customer lifetime value, and one of the most significant factors in determining business success.
5. Makes Upselling and Cross-Selling Easier
Thanks to the subscription model, you are in a unique position to increase revenue from existing customers. Since you have a continuous connection with your customers, you are building a relationship of trust with them. This makes it easier to market additional products or services to them, as they already know you provide a valuable service.
Selecting the Right Subscription Commerce Model
There are three main types of subscriptions: curation, renewal, and access. Each has its advantages and disadvantages, so you need to determine what’s best for you based on the types of physical and digital products you sell, your capabilities, and your unique business ideas and goals.
Curation Subscription Commerce Model (Subscription Boxes)
This is the most common model for a subscription business, which has gained popularity from companies like Birchbox, Blue Apron, and Stitch Fix. These are subscription box companies, striving to delight customers by providing new products and highly personalized experiences.
These companies typically sell products in categories like clothing, beauty, and food, but the model works well across a broad range of products and continues to expand into more industries each year.
Advantages
– High profit potential. Subscription boxes can be very profitable – in fact, market growth and subscription share are driven by a few curated brands. Subscription boxes are considered a “luxury” by most people’s standards, costing anywhere from $15 to $100 a month and enhancing the discovery of new products. This profitable model can rapidly evolve compared to other business ideas in the food industry.
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Risks
– High churn rate. The newness drives the initial enthusiasm for these businesses, so this model may face higher customer transition rates. Additionally, because these products are often non-essential and specialized, subscription boxes thrive when the economy is good, but they are the first to be affected in a recession.
– Operational complexity. Not only is customer acquisition more expensive in the subscription box sector, but it also has significantly higher operating costs, including packaging, branding, and regular shipping.
Renewal Subscription Model
This model is about convenience and cost savings. Renewal subscriptions allow consumers to receive essential products automatically – often at a discount.
Most products do not need to be renewed regularly, so the types of products you sell are an important consideration when using this model. Essentials and convenience products such as razors, diapers, vitamins, and pet food are suitable for the renewal model.
Advantages
– Higher conversion rates. 65% of customers considering a renewal service subscribe, which is significantly higher compared to other models (50%).
– Higher retention rates. Due to the nature of the products these companies sell, the renewal model has particularly high long-term subscription rates: 45% of members have subscribed for at least one year.
? Risks
– Slim profit margins. In many cases, this model requires competition on price and offering generous discounts. This means companies need to keep their costs very low and operate at scale to achieve profitability (in other words, sell a lot of products).
Access Subscription Model
Subscribers to this model pay a monthly fee for lower prices or special member benefits. JustFab, NatureBox, and Thrive Market are examples of subscription companies with an access model, and their core value is providing exclusivity to customers.
Advantages
– Greater customer value. Since customers pay for exclusive access to benefits, there’s an opportunity to offer personalized deals that will help deepen your relationship with the customer. This value can be expanded by creating a community of members, where they can interact through forums or Facebook groups.
– Bundling opportunities. The chance to offer a bundle of products (and intangibles like discounts on future purchases) as part of a single membership.
? Risks
– Greater time investment. Since access does not require a single service or product you can add at checkout, you need to put in the effort to ensure your membership offer is compelling enough and regularly maintained to provide value to your customer.
Supplemental Subscription Model
Well, this is not a business model, but a mixed approach that allows you to add subscription services to your existing business. More and more companies are leaning toward this profitable model, as it is a flexible way to explore the subscription system without committing to a single profit model (or changing the direction of your business).
Tips to Make a Subscription Business Model Work for You
Across the board, high churn is the biggest risk of subscription business models. The good news is that consumers who subscribe can become extremely loyal once they find a service they like. Here are some tips to mitigate churn rates and operate a subscription model profitably:
1. Value your product
The first step in any business is to assess product/market fit and the viability of your product. In the subscription realm particularly, there are highly saturated product categories, making it more challenging to enter the market.
For example, the category of ready-to-cook meals has very high cancellation rates within the first six months, reflecting competitive pricing and a wide similarity among key players. Conduct the necessary research to ensure there’s a need for your product in the market and track your competitors.
2.
Be clear about your business goals
Is it a revenue number, customer acquisition, or number of units sold? Whatever your business goals are, you should keep them in mind – especially when choosing your business model.
3. Be conservative with pricing at first
Many subscription members convert quickly, so you shouldn’t overspend on free trial periods or large discounts unless there’s a clear return. Additionally, pricing should be tested, adjusted, and evaluated over time as the company evolves.
4. Invest in personalization
For all business models, but especially the subscription model, customers expect personalized subscriptions to become even more customized over time. 28% of subscribers to personalized subscriptions said the tailored experience was the most important reason for continuing their subscription.
Do you have internal expertise in data or technology to expand personalization efforts? If not, do you have the budget to invest in it?
5. Prioritize retention strategies
In the early stages, you should prioritize acquisition to drive sales. But once you start seeing results, it’s time to shift tactics and focus on customer retention strategies.
Remember: acquiring a customer costs more than retaining one, and you can always extract more value from a loyal customer base. Most subscription companies put all their efforts into acquiring new customers, but that isn’t the most effective way to grow the business.
6. Diversify marketing channels and tactics
Subscription business models use different channels to attract new customers and engage with current subscribers. If you’re just starting out, influencer marketing can help you gain traction on social media.
And since subscription-based companies rely on frequent and meaningful engagement with subscribers, email is a crucial tool for all business models. Remember that each subscription model has a “marketing fit.” For example, for the subscription box model, affiliate marketing is the best acquisition channel. Then, recurring packages provide a built-in marketing surface to engage with those customers.
7. Monitor your churn rate
Clearly, you need to monitor and analyze your voluntary churn rate – customer cancellations – in order to continuously improve your service.
8. But what about involuntary churn?
Expired, lost, or stolen credit cards, address changes, and network errors contribute to involuntary churn throughout the subscription customer lifecycle.
According to Profitwell, involuntary churn accounts for 20-40% of total churn, so you should stay informed about these common causes to maintain a significant impact on net profits.
How to Start Your Subscription Business
Subscription business models can be added to an existing business or used as the foundation for a new venture. If you’re interested in starting your own subscription business, we have an easy five-step guide for you.
1. Choose your subscription idea
The first step is to determine the type of subscription model your company will use and the product(s) you will offer.
If you already have a successful clothing brand, adopting a subscription model can be a great way to achieve guaranteed monthly revenue. On the other hand, you might have a fantastic idea for a subscription box theme that you want to start from scratch.
Regardless, the first step should revolve around defining your subscription idea and determining what that idea will look like in execution.
Some subscription business ideas include:
– Clothing: Stitch Fix, Fabletics, Rent the Runway
– Pet toys: BarkBox, meowbox
– Skincare/Beauty: Birchbox, Dermstore, IPSY
– Games: Loot Crate, Dungeon Crate
–
Food/Drink: SnackCrate, Winc, Craft Beer Club
2. Define Your Subscription Products
Choose the types of products you want your subscription company to deliver each month. This is also the point where you may want to start reaching out to brands to create partnerships so you can offer their products in your monthly subscription at a lower cost to your business.
This is also a good time to build a “sample box” or trial subscription so new subscribers can get an idea of what kinds of products they will receive each month. These samples don’t have to be exact just yet, just ensure that the products you start gathering for marketing photos match the same types of products you will actually be sending out.
3. Set Your Subscription Pricing Options
Once you know what types of products you will offer and how much you can afford to purchase for your new subscription service, you can start pricing your subscription. There may even be different subscription levels depending on how committed the subscriber is.
For example, Variety Fun’s snack box offers two different options: “Fun Box,” which is cheaper and has more traditional snacks, and “Fit Box,” which is more expensive and focuses on healthy snack options.
Check out all the different options Birchbox offers in the image below:
You should price your subscription box at a level that is attractive to your target customers but also ensures that your business is profitable. It won’t be feasible for your business to spend $25 for each box while charging only $20 per box.
4. Build Your Website
Once you know the type of subscription you’ll offer and how to price it, it’s time to create your website. Here, you will showcase product images, allow customers to subscribe to their next box, and share information about the products they will receive each month.
You can easily create your subscription commerce website using Shopify. Whether adding recurring order options to your existing business or creating subscription boxes from scratch, Shopify makes starting a subscription commerce business easy.
And because you can manage everything through our all-in-one platform, running your subscription commerce business is straightforward. When getting started, there are two general approaches: adding a Shopify app to your store or building your own custom solution.
You can easily create a subscription offering by installing any of the following subscription management apps:
– PayWhirl Recurring Payments. Create, manage, and sell subscriptions through our native platform.
– Awtomatic Subscriptions. The Awtomatic app (formerly Bundle Subscriptions) gives you the ability to easily add subscription options to your products and it is fully integrated with Shopify’s native checkout.
– Assemble Subscriptions. Built by a team of Shopify experts with a decade of experience across the platform, this is not your average subscription app.
– Bold Subscriptions. Built with large companies in mind, Bold allows you to customize, manage, and scale your subscription commerce business.
– Recharge Subscriptions. Launch and manage subscriptions quickly for your Shopify store.
– Native Subscriptions. Supports subscription payments, seamless checkout, and recurring orders.
– Seal Subscriptions. Increase sales with subscriptions and automated recurring payments.
– Appstle Subscriptions. A comprehensive subscription solution that allows you to offer products and services to your customers on a recurring basis.
For more options, check out the Shopify subscription app collection to find an app that fits your business.
5. Market Your New Subscription Business
Now that your new subscription business is ready for sale, you need to put it in front of your target customers and start getting sign-ups. Marketing any business is key to success, but it can feel overwhelming when you’re staring at a blank slate.
In terms of…
Here are some key tips for marketing a new business:
– Create and name all your social media platforms
– Take multiple product photos to have creative resources for promotion
– Start building an email list and send newsletters regularly
– Allocate a small portion of your budget for ads that you can use to start building awareness
– Reach out to small influencers who you might collaborate with for lower fees
– Write and distribute press releases about the new product
– Engage in online communities to raise awareness further
– Organize contests and giveaways to attract more people interested in your product
Here’s an example of a giveaway conducted by Loot Crate on Instagram to give you an idea of how to implement this:
While it may seem like things move slowly at first, business growth is gradual. You just need to put in the effort and patience as your subscription business grows.
Recommended Apps
You can easily create a subscription offer by installing any of the following subscription management apps:
– PayWhirl Recurring Payments. Create, manage, and sell subscriptions through our native platform.
– Automatic Subscriptions. The Automatic app (formerly Bundle Subscriptions) allows you to easily add subscription options to your products and integrates seamlessly with Shopify’s checkout.
– Assemble Subscriptions. Built by a team of Shopify experts with a decade of experience across the platform, this is not your regular subscription app.
– Bold Subscriptions. Built with large businesses in mind, Bold allows you to customize, manage, and scale your subscription commerce.
– Recharge Subscriptions. Launch and manage subscriptions quickly for your Shopify store.
– Native Subscriptions. Supports subscription payments, seamless checkout, and recurring orders.
– Seal Subscriptions. Boost sales with subscriptions and automatic recurring payments.
– Appstle Subscriptions. A comprehensive subscription solution that allows you to offer products and services to your customers repeatedly.
For more options, check out the Shopify subscription apps collection to find an app that fits your business.
Building Your Own Custom Subscription Solution
We recently introduced APIs and tools to empower partners and developers to build new subscription experiences directly into Shopify’s checkout. For the first time, developers can now build at Shopify’s checkout, meaning merchants no longer have to choose between selling subscription products and using Shopify’s native checkout.
The following resources are available to you today:
– Shopify’s subscription APIs and subscription product extension. Check out our detailed developer documentation and developer guide on migrating existing subscription contracts to Shopify.
This is the first step towards improving the extensibility of checkout so that developers can help customize our checkout to meet more of merchants’ needs. Visit the partner blog for more information on how to apply for access to subscription APIs.
Are you ready to start your business? Begin your free trial of Shopify – no credit card required.
Frequently Asked Questions about the Subscription Commerce Model
What is an example of a subscription model?
An example of a subscription model is a streaming service like Netflix or Hulu, where customers pay a monthly fee to access content. Customers can choose different subscription plans based on the features they need. Other examples of subscription models include magazine and newspaper subscriptions, software as a service (SaaS) subscriptions, and subscription boxes.
Can subscription commerce be profitable?
Yes, subscription commerce can be profitable. Subscription
Source: https://www.shopify.com/blog/how-to-start-a-subscription-business
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