How to make subscriptions work for your organization

The subscription series continues!

In our previous article, we discussed what makes CPG subscriptions so attractive—both for consumers and providers. However, as with most things, success is not a given for subscription models. In the past, we have seen a lot of seemingly great ideas fail. This shows that subscription models require more than just a good product to take off. In today’s article, we want to take a closer look at the ingredients that go to make subscription models a success: leveraging data, excelling in customer experience and generating added value.

1.     Leverage data

Subscription models give companies direct access to consumer data, creating an opportunity to define consumer profiles and develop products closer to real market demand. However, many providers fail to leverage this opportunity when all they do is collect the data and then neglect to adequately analyze it. This is especially important today if subscription providers are to stand out among the growing number of competitors as subscriptions become more mainstream. In 2010, Birchbox was one of the first subscription services for beauty products. While they were able to provide a compelling offering to consumers by including high-quality products in their boxes, they did not manage to keep up with the competition once other providers entered the market. This was mainly due to their focus on one-sided consumer interactions by selecting products themselves rather than gathering insights on which products consumers actually prefer.

Ipsy on the other hand launched their beauty box in 2012 and focused on building an emotional relationship between their offering and their target demographic by working with beauty influencers and equipping them with resources to produce strong content. Involving the individual in curating the right products, for instance asking for skin tone, give a sense of personalization (even if only 'perceived') as well as collect data on the consumer:

This way, they were able to build a community that engaged with the products and provided continuous feedback, which in turn enabled Ipsy to continuously improve their offering. Today, Ipsy is offering a personalized subscription specifically crafted to individual consumers’ needs, for example level of familiarity with makeup:

What would you love to know about your customers? How can involving the customer in a personalized offer development increase NPS and conversion rate? Subscription models are a great way to help answer these questions.

2.     Excel in customer experience

Tricky thing about subscription models is that they live or die based on retention - in other words, the business case is only positive if you have loyal customers. To build a long-term relationship over supposedly low-involvement products, CPG subscription companies must focus on providing the best consumer experience. To do so, the operations behind product delivery need to be reliable and cost-effective to enable them to turn a profit. This is particularly crucial for products that go off quickly, for example, groceries or prepared-meal kits. These products require efficient last-mile delivery, which can be challenging for incumbent CPG subscription providers that are not experienced with D2C logistics as well as for new entrants that lack the infrastructure.

One company that has excelled in operations and has therefore managed to outrun its competitors is HelloFresh. Over the past year, HelloFresh succeeded in growing its customer base by almost 70%. A larger customer base allowed the company to offer more kinds of recipe, with different variations of ingredients, at a higher profit. As the company grew, they were able to deliver meal kits at a competitive price while other providers fell short and were unable to offer their kits at a mainstream rate. Another important aspect of HelloFresh’s supply chain has been its flexibility to be able to cater to an ever-growing customer base quickly. At the beginning of the Covid-19-induced lockdown in Germany, HelloFresh ramped up its operations in anticipation of increased demand. Together with a strong supply chain partner, they were able to cater to the rapid growth in demand and serve their customers fresh ingredients within only a few days–consistently.

A year after the initial lockdown, cracks are starting to appear. Lately HelloFresh appears to have challenges in keeping up with the demand, as late delivery and delayed invoicing become a more common experience - aptly demonstrating the challenge of delivering a good and consistent customer experience as business grows in scale.

3.     Generate added value

Forward-thinking providers identify subscription models that offer continuous value to consumers so they will be more willing to make a long-term commitment. This value has to go above and beyond the product itself! Many subscription models fail because they lack a long-term vision, and consumers leave because they don’t need the product on a regular basis.

One example of this is Brandless, an online retailer for essential products for home, personal and baby care founded in 2017. They launched their subscription service in 2019, but halted operations early 2020. While their products were well received, they struggled to convert visitors into regular shoppers for a sufficient number of products. However, consumer commitment, along with a consistently packed shopping cart, is key for providers when it comes to subscriptions. This proved to be a challenge for Brandless as the products they sold were, put bluntly, very cheap, making the average order value only $34. Too low for the company to become profitable.

Another brand that had unbranded products at its core is Dollar Shave Club. Mark Levine and Michael Dubin founded their venture in 2011, frustrated by the high price of shaving products. They launched their subscription-based business with a viral video campaign. With a mission to sell unbranded high-quality razors at competitive prices, paired with transparent pricing and direct delivery, they were able to grow their business into a multi-million-dollar idea, eventually selling the company to Unilever for $1 billion in 2016. So, what differentiates Dollar Shave Club from Brandless? Even though both companies sold unbranded products, Dollar Shave Club managed to tell a compelling story and thereby build a strong brand itself. Their efficient marketing strategy attracted consumers, who signed up for a subscription. Convinced by the product offering and good service, consumers were willing to try more products—increasing their basket size and thereby Dollar Shave Club’s profit.

This leaves us with three ingredients for successful subscription business models: Customer data, excellence in customer experience and added value. To learn more about subscription businesses and how Kearney can help you to implement a subscription business model in your organization, check out our white paper or contact the authors directly.

Sebastian Schoemann, Partner, Munich

[email protected]

Isik Aysev, Principal, Vienna

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Ann-Kathrin Beuther, Senior Consultant, Munich

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Noemi Hipper, Senior Consultant, Berlin

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