Online retailers should consider offering a subscription model for their products. An ecommerce subscription model can provide better marketing results, higher customer retention rates, improved margins, easy inventory management, and less expensive shipping.
While there are many different kinds of subscription ecommerce businesses, they often provide products which the average customer regularly needs to replenish. Subscriptions save customers from the hassle of having to frequently reorder.
Some ecommerce subscriptions are standalone services, such as BarkBox or BirchBox, while others are presented as an option from a retailer who hopes to sell to a customer on a more regular basis. For example, a shopper could purchase a pack of 24 or 48 double length rolls of toilet paper from Who Gives a Crap as a one-time order or choose an “auto-restock” option to receive fresh rolls of toilet paper every 6, 12, or 16 weeks.
Here are 5 ways an online store can benefit from offering subscriptions:
1. Improved ROI
An ecommerce subscription can become a fantastic return on investment, because a newly acquired customer is more likely to make repeated purchases. This increases the average CLV (lifetime value) per customer.
While new customer acquisition is a common marketing goal, it’s also one of the most expensive marketing investments a business can make. It’s far cheaper to retain current customers than it is to acquire new ones. A subscription service is likely to provide a better return on investment or higher returns on advertising spend than solely one-time sales. For retailers, a subscription is the gift that keeps on giving.
Let’s say you sell a product for $50. If the cost of the item from your supplier is $25 and it usually costs you $10 to acquire a new customer, you will earn about $15 profit on each product. Hence, a $10 marketing investment yields a $15 profit.
However, if you offer a subscription service, then even if a shopper subscribes and makes only two purchases before canceling her subscription, your return increases. You earn a total of $40 profit on the two transactions even though you only spent $10 to acquire the customer. Therefore, a $10 marketing investment returns $40 in profit.
2. Increased Customer Retention
As in the above example, a subscriber can cancel after just two orders, but this isn’t likely to be the norm. More likely, the customer will not terminate the subscription that quickly. Therefore, you can probably expect an increased customer retention rate.
There isn’t much data available to indicate whether the average customer retention rate for subscription-based business models is superior to that of other retail business models, but, according to Practical Ecommerce, many insiders will tell you to expect better rates for subscriptions.
3. Solid Retail Margins
Some ecommerce subscription businesses report better retail margins than those that come from one-time sales. There are two possible explanations for the improved margins:
- Box subscription: In this case, the retailer can sell “box” subscription services that package a variety of products together for a set price. Since not every individual item is priced, the retailer can charge a bit more for some items than they would if they sold the items individually.
- Lower selling costs: In some cases, the retailer may incur lower costs associated with generating a subscription sale. This is because subscription purchases allow for greater predictability, which helps the seller know how much to order from suppliers and when to ship. Since the seller knows in advance what will sell next month, the seller can take measures to better optimize inventory, packaging, and shipping.
4. More Inventory Control
Knowing in advance what you will be selling makes it easier to optimize inventory and reduce costs. Once a business has subscribers, it has a good idea of how much product to order from suppliers, ensuring that the seller will be less likely to over-buy.
For example, if you have 200 subscribers who ordered cat food from your website, you know that you will need to order at least 200 bags of cat food. This allows you to place the proper order from your cat food supplier. You may even earn a discount for placing orders months in advance.
In a traditional retail business model, it’s much harder to gage how much to order. The only way to figure out how much you need is by analyzing sales history, but this makes it much harder to predict.
5. Reduced Shipping Costs
An ecommerce subscription model can also result in lower shipping costs. The customer expects to receive their order on a schedule. Since all you need to do is make sure the order gets to the customer on time, you don’t have to do a rush delivery. Rather, you can ship it when it makes sense for your business, which means you can select a slower and less expensive way to ship your subscription orders well in advance of the expected time of arrival. Your customer won’t care, as long as the items arrive when they are expected.