[Replay & update - Eng version] Despite "subscription fatigue" and inflation, subscription models still promise B2C/B2B opportunities - 2022
However, at the same time, several major brands have tried this model ( 耐克 , BIC , Kindy Project , SEPHORA ) to finally abandon it.
Among all the existing business models, the subscription model is certainly one of the most sought-after. It offers the advantage of generating regular and more predictable income beyond the short term. It then makes it possible to precisely anticipate the evolution of its Opex, with limited and delimited Capex from the start and to significantly improve its cash flows.
Praised by consumers, the subscription model is now considered a real vector of growth.
But, if the subscription seems natural for repetitive and calibrated services from month to month (mobile phone or fitness for example), it is less so for consumption which can certainly be regular but sporadic and evolving according to cravings.
A subscription is a contract between a supplier and its customer for the regular delivery or the provision of products or services in exchange for a regular and fixed payment
In a few facts and figures:
Because of the situation observed in the United States, which is often a forerunner of purchasing behavior, the potential for growth remains significant. Indeed, the average amount of subscriptions devoted to subscriptions by American households amounts to 2,800 euros per year on a wider and more diversified range of services..
A solution sought by the customer
The subscription corresponds perfectly to changes in consumer behavior, which are more and more oriented toward use than toward possession. These rules out all questions related to the residual value of the object purchased for the most high-end or expensive of them.
The subscription has thus, by its focus on use, “disrupted” many industries. Few consumers today consider owning a DVD important, but most value the experience of enjoying a good movie. This example can also be observed in many other sectors such as music or the automobile and may eventually spread to clothing, catering, or cosmetics.
For certain purchases, such as that of a vehicle, the administrative burden or the need to resort to a bank loan can be significant and partly disappear or are facilitated via the subscription.
Credit: Fiat
Like other car brands, Fiat launched a subscription formula for the electric Fiat 500 in April 2022, with 100% online sales via a dedicated space. In a few clicks, the customer can discover the car and the offer, choose the most suitable package then select the distributor where it will be delivered and finally validate his order and pay.
The subscription then makes it possible to bypass an acquisition cost that may be too high. This is of course the housing case. This can also be for other expensive purchases such as the electric bike for example, which is the basis of the success of Veligo in Ile-de-France offered by La Poste.
Credit: Véligo Location
Véligo Location is the first offer in France to propose the rental of an electrically assisted bicycle for a maximum of 40 euros per month. An interesting solution for users who often hesitate before investing in this type of equipment. Training by tutorial or school bike allows even beginners to tackle cycle paths with complete peace of mind.
Consumers no longer want to buy a product for too long. They prefer, in many cases (although the exception of Apple seems to prove the rule), to return somewhat dated products in exchange for newer versions. The subscription then allows them to facilitate use at a more affordable price, formerly inaccessible due to very high prices for offers newly placed on the market.
Credit: Bocage
All sectors are trying the subscription model today. Bocage recently launched an offer with the possibility of obtaining a new pair of shoes every 2 months. The returned shoes will then be repaired and sanitized and then proposed to the second-hand market. If the customer wishes to keep the pair of shoes in the end, he can then buy it at half its price.
Paradoxically, the use of a subscription gives the consumer the feeling of greater freedom, with the omission of all the obstacles linked to ownership and all the advantages that the subscription can offer: the possibility of trying different offers or changing them, to pause or even cancel and then resume their subscription.
In addition to the cost of acquisition, subscription makes it possible to erase or at least smooth out and reduce the maintenance costs linked to the possession of a material asset, which are often unpredictable and uncertain.
The different forms of subscription
Four types of subscription are generally offered:
Restocking subscriptions (coffee, razor blades, nappies, etc.), in addition to recurring revenue, offer brands the advantage of partly freeing themselves from traditional distribution channels, selling directly, recovering more margin and creating a more personal relationship with the customer (and thus get to know him better).
Credit: HP Gillette Nestlé Nespresso SA
The main retail brands have for the most part recently launched subscriptions giving access to price reductions.
Few are still those who offer, via subscription, advantageous offers on recurring purchases accompanied by replenishment services, making it easier to repurchase. The ultimate goal is to offer a personalized relationship with ever more services to facilitate their daily lives.
In 2022, personalization is no longer just about personalizing the title of an email with a first name. Effective personalization must understand the customer journey in detail and use data to deliver an effective experience. Each point of contact with the customer should strengthen loyalty and reduce a potential willingness to cancel the subscription.
Today, replenishment subscriptions are used by 70% of subscribers while 50% use subscriptions for curated kits.
Replenishment subscribers are primarily looking for price (40%) and convenience (30%).
Credit: Poiscaille
The example of the start-up Poiscaille
This platform with 25,000 subscribers delivers shellfish and fish a maximum of forty-eight hours after leaving the water. Fished along the French coast using sustainable practices, they cost no more than a quality fishmonger.
Concretely, subscribed customers select a rack on the website (one kilo of fish or two kilos of shellfish, or a mixture, depending on the arrivals), i.e. a meal for two to three people. The weekly formulas (19.90 euros per locker), every two weeks (22.90 euros) or monthly (24.90 euros) – the amount varies according to the frequency, not the quantities – are non-binding and flexible with a possibility of a break for absence. Everything is naturally supplemented with cooking recipe proposals.
For retailers, the path of “retail as a service”
Retail as a Service offers retailers, physical or digital, to create experience capsules, physical or digital, focusing on service beyond sales, in a more meaningful and less transactional approach.
The concept is spreading rapidly from the observation that the requirements and needs of consumers are changing, and that the customer expects more than a simple act of purchase in his relationship with a brand. The fact is widely shared today that the consumer is looking for a solution to his needs more than the acquisition of a product itself.
“For an increasing number of customers, 沃尔玛 will be seen more like a service” – Doug McMillon – CEO de Walmart
The experience, the emotion and the relationship are key, at the same time as online commerce has been able to facilitate the act of purchase but by reducing the pleasure factor during it.
Retail as a Service then consists of a reinvention of traditional stores, in which several distributors or several brands promote their products in the same shared space.
The main difference is, rather than focusing primarily on inventory management, merchandising and hard selling, these new spaces are more oriented towards customer immersion and brand attachment. In the end, there may be fewer products on the shelf, but the story told by this new form of distribution is strengthened and the staff in contact become more of an "actor" than an "assistant" or simple salesperson.
In the other direction, pure digital retailers are reaching the limits of their growth with their current economic model. They seek to invest in physical space but without the structural costs and habits of traditional distribution, by providing more services via subscription.
Credit: 宜家 CVS Pharmacy 欧迪办公
This approach has several advantages:
Credit: 迪卡侬
Like 迪卡侬 which, through its e-club, started from its core business, sport, to offer additional services directly related to its image and its know-how (live fitness classes and line via subscription), different brands are adopting the same approach.
Develop subscription offers
To help identify subscription potential, a matrix crossing value for the customer or depth of offer and frequency of purchases can be used.
Reading the position of the sectors, shown here for illustration, is instructive?:
The tried and then discontinued experiment of the 耐克 Adventure Club in 2019
The growth of children is a problem for all parents wishing to dress their child. The size of the feet growing at high speed, the amount spent on the purchase of shoes can be high.
Ranging from ages 2 to 10, the Nike Adventure Club operated by level. Indeed, Nike has set up three different levels allowing parents to obtain between 4 pairs per year for the first level, up to 12 pairs per year for the third and last level.
In exchange for a flat fee per month, Nike would ship the customer up to one new pair of shoes per month, chosen from a selection of 100 models from Nike and Converse. The package was decorated with stickers, activities and games for children.
The subscription can then also have the advantage of targeting and captivating consumers from an early age.
Thus, 耐克 emphasized that this formula made it possible to forge a relationship with children from the age of 2 and to build a good image of the brand.
This is also the reason why Netflix takes care of its family offers and tolerates the sharing of accounts: children can be future customers.
Many sectors are trying subscription
Credit: HelloFresh
Home catering has particularly developed in recent years via subscription. HelloFresh, for example, is the largest supplier of meal kits in the United States. Founded in 2011 in Germany, the company is now a European unicorn and has grown through acquisitions. HelloFresh's business model is to prepare the ingredients needed for a meal, and deliver them to customers, who must then cook the meal using recipe cards, which takes around 30–40 minutes. It generally provides about three two-person meals a week for about $60 to $70. It offers a choice from about 19 recipes. In the United States, HelloFresh offers a wine-subscription service.
Credit: FabFitFun
The fashion and cosmetics sector is also trying to break into this business model. FabFitFun , for example, was founded in 2010 in Los Angeles and offers a subscription box containing beauty and fashion products. FabFitFun is a lifestyle eCommerce and media company that sells subscription boxes of lifestyle merchandise; and publishes newsletters and lifestyle content. The company's primary product is the FabFitFun Box, a quarterly subscription service that includes a collection of products across beauty, fashion, wellness and fitness. Memberships also include access to the company's streaming video service of wellness videos, lifestyle content, a digital lifestyle magazine, and access to online sales and shopping. The product offering is accompanied by content on different media (on-demand TV, live Facebook program).
Credit: Chewy
The subscription is gradually spreading in the pet market. Chewy , for example, offers food and medicine for dogs and cats, generates more than €2 billion in sales, mainly by subscription, has more than 20 million active users and accounts for more than half of online sales in the United States in this sector. The service specializes in everyday pet supplies, medication, and prescription foods that some dogs need to manage medical conditions. They are known to have incredible customer service and to show a lot of empathy. If a client cancels its subscription because its dog died, Chewy sends flowers and a whole thing in tribute of the dog.
Assessing subscription interest
The transition from a classic model centered on the unit sale of products and services to a subscription model containing many challenges: training of sales representatives, organization, process from customer registration to invoicing, after-sales service and complaint management...
It is then necessary to assess, among the decision support criteria, the expected performance of such a mutation integrating the indicators of the new model.
For this, it is common to use the ratio "customer lifetime value" (CLV) on "customer acquisition cost" (CAC). This ratio highlights the health of a subscription market and its attractiveness.
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A promising trend for subscription
Individuals today seem more interested in using a product than in owning it. This trend is even more evident in the younger generations.
The price and quality of the product or service are necessary but no longer sufficient. Flexibility, simplicity and even emotion or surprise are a critical loyalty criteria in the experience expected by consumers.
When the economic context hardens, the subscription also has the advantage for the customer of better forecasting and planning his budget. There are fewer spontaneous purchases or erratic expenses. Charges are fixed from month to month.
But GenY and GenZ do not always prioritize use over possession by conviction and expression of values. Financial capacity (financial means to buy or not) often comes into play. Thus, the value proposition to legitimize the use of more than the purchase must be strong, clear, tangible and accompanied by services and tailor-made.
The explosion of digital, accelerated by the pandemic period, has naturally reinforced the relevance and implementation of the subscription. When a consumer visits a brand's website, sometimes opts for additional services or information, enters his personal and banking data, these are the beginnings of a form of subscription.
The subscription can no longer be conceived in the sole interest, sometimes selfish of the company, with regard to the Eldorado of long-term and regular income. It must provide additional value compared to a "spot" offer.
In this perspective, subscriptions simply driven by a low price or the sheer convenience of replenishment might not last long without a new and unique complementary value proposition.
Also, the subscription is driven by the development of digital technologies, secure payment facilities on the Internet or automated contract management, for example.
The development of “as a service” offers confirms the trend. These offers have many advantages for the user who benefits from a personalized and flexible solution.
Thus, the subscription economy is booming and is conquering new markets every day.
The benefits of an “unnatural” subscription for the customer
Movie theaters have, in their time, led the way with “unlimited” cards. The main interest for the viewer of this subscription was primarily the price. The ticket for a cinema ticket continued to increase and the aficionados of the big screen quickly saw their economic interest in this formula.
Gyms have also long offered subscription packages that almost all customers subscribe to. Here again, the obvious advantage is that of the price because that per session remains prohibitive and this option is not necessarily offered by all the fitness networks.
However, the use of subscription for this use may raise questions. Indeed, attendance at the gym is often non-linear. The customer goes there irregularly (months with a strong desire and availability and others less) and he can be absent for long periods (holidays in particular). The sports halls have also built their business model on this inventory: sell the greatest number of subscriptions possible by discounting the lowest possible attendance, because the capacity does not allow them to accommodate all subscribers. For this industry, the economic model that would best meet customer expectations seems to be that of "pay as you get" at the most affordable price possible or a subscription with the possibility of a break.
?Other interests then emerge in the subscription beyond the attractive price: the interest of discovery by being surprised each month with new products offered by the brand. The interest of comfort too and of not having to think about purchases that we know are by nature recurring (coffee with Nestlé Nespresso SA , razor blades with Gillette, ink cartridges with HP , etc.). The combination of the two, value-added offer and recurring purchases reinforces the attractiveness of the subscription formula.
4 criteria motivating and legitimizing the use of the subscription can then be highlighted?:
Credit: tacobell
In the United States, Taco Bell tested a subscription offer in October 2021. It entitles you to one taco per day at a price of $5 to $10 depending on location, while the tacos offered in the offer cost $1 to $2. The challenge for Taco Bell is, in addition to strengthening loyalty, to encourage other purchases around the free taco. Also, while the subscription offer is only accessible via the digital app, an increase in the number of downloads is expected.
A necessary ultra segmentation
If the subscription is by nature attractive, it can hardly be considered for its entire customer portfolio.
In the movie theaters, for example, potential customers for unlimited cards are those exhibiting strong attendance for this activity and sharing a certain passion.
Credit: Nestlé Nespresso SA
For coffee, customers will be those with a minimum daily consumption, or even heavy consumers with several coffees in a day.
According to several studies, a typical “subscriber” profile emerges:
The subscription model also applies in the BtoB universe. The company is indeed historically accustomed to this formula, in particular for the provision of operational services (cleaning, security, etc.). The generalization of solutions in SaaS mode (Solution as a Service) also contributes to the anchoring of this culture in the professional world.
The subscription model has gradually shifted from a BtoBtoC (business to business to consumer) situation to a DtoC (direct to consumer) approach, requiring brands to adapt in terms of storage, delivery to the last kilometer, customer relationship management and digital marketing.
A preliminary volumes analysis to be carried out in order to secure decisions
If the subscription is attractive by the regularity of its income and by its upsell and cross-sell potential, it is advisable to ensure beforehand that the income (and the margins) that it will generate will be higher than purchases. single or frequent.
A sensitivity, price and volume analysis thus makes it possible to best adjust the prices of subscriptions and unit prices.
A customer relationship to rethink
The subscription moves from a “spot” or “multi spot” relationship to a recurring and regular relationship. It is no longer just a question of delivering a product or service once and then issuing an invoice, but now of establishing a long-term relationship and working even more on loyalty (to avoid churn).
Customers do not naturally turn to this economic model. On the contrary, the fact of having to register, to have to commit and to have to pay regularly rather tends to complicate the interest and then the passage to the act of purchase of the customer. Customer acquisition is structurally more complex in subscription activities.
For the 4 factors motivating the subscription (price, facilitation, discovery, emotion), the personalization of the offer ranks first among expectations alongside the quality/price ratio and convenience.
The personalization of the subscriber experience is also by far the main retention factor. The success of these subscription models is largely based on a good knowledge of subscriber preferences and on the brand's ability to develop an offer that is as personalized as possible (possibly relying on artificial intelligence solutions).
The customer journey must be particularly fluid and optimized to concretize the customer's commitment to the subscription. Taking out a subscription requires greater involvement on the part of the latter, more reflection on his part and a more complex decision-making process and act of purchase than a spot or spontaneous purchase.
Any difficulty encountered during the subscription process is thus highly counterproductive.
But the subscription process is sometimes tedious and inefficient: long forms to fill out, a verification code sent that is never received, confusing and plethoric online assistance, chatbots that do not provide more answers... The process seems having been designed by IT, the technical, legal or financial management or worse the accumulation of all the constraints of all the company's departments. It does not work and therefore can lead to the abandonment of subscription by the customer.
The notion of a trial in a subscription can sometimes also be important. The Financial Times recently conducted an experiment to understand this phenomenon, reducing the number of free articles (without subscription) from 3 to zero for non-subscribers. The newspaper then observed a 30% decrease in visits to its website and a lasting reduction in the number of new subscribers. Forcing all visitors to subscribe on their first visit would have led to a loss of 79% conversion and thus tens of millions of dollars in customer lifetime value.
The choice of a subscription must be considered by the company as a supreme gift made by the customer, an ultimate commitment and a desire for greater loyalty. The subscription process must then both be simplified as much as possible and then seek to enhance the experience.
The company offering the subscription must at the same time control its supply chain. One of the fundamentals of the subscription is reliability. The product or service provider must deliver on their promise. In complex times from a logistical and delivery point of view, companies must be transparent about product availability and provide customers with regularly updated information on the situation. One of the most important objectives is to maintain trust with the consumer and constantly remind him of the added value provided.
The company that offers subscription plans must then implement a more motivated anti-churn policy. It must take care of the three main types of churn (voluntary churn on the part of the customer, natural churn if the customer changes his habit as well as financial churn, at the initiative or not of the company linked to an increase prices).
Indeed, while this market is dynamic, a certain fatigue of the subscription is already observed. When clients analyze their budget each month, they can choose to reduce the number of their commitments and eliminate those that do not bring them enough value.
Several analyzes can then be carried out:
The reasons that lead a customer to cancel a subscription are mainly the price (about 30%) then an effective lack of use (about 25%).
Several indicators are useful to improve the management of the subscription by the company:
o??New MRR (new accounts)
o??Expansion MRR (upgrading)
o??Reactivation MRR (customers left then returned with a new subscription)
o??Churned MRR
o??Contraction MRR (downgrading)
o??Net MRR?: New + Expansion + Reactivation – Contraction - Churn
A “subscription fatigue” or sharp decrease to anticipate?
As strong inflation eats away budgets in a competitive market, subscription services might be in trouble.
In the same time, US consumers vastly underestimate how much they spend on subscriptions.
According to C+R Research (a Chicago market search company), when asked, consumers estimated they spend $86 a month when it’s actually $219 on average—a $133 difference. About three-quarters of consumers said it’s easy to forget about recurring charges, and 42% reported having a subscription they’re paying for but forgot about.
Client set up these subscriptions and then forget about them. But when they face a tightening budget, they start to find where that money is going and you find a subscription. The worst part is that they find a subscription at a time where they are actually seeing no value in it.
Take Netflix as an example. The streaming giant recently told shareholders its revenue growth “slowed considerably” in the past year due to shared accounts, increased competition and macro-economic factors like inflation and the war in Ukraine. Netflix then reportedly lost 1 million subscribers in spring 2022 and stock prices plummeted.
According to several analyzes and studies, approximately 40% of consumers believe that they have too many subscriptions and this proportion tends to increase.
Faced with this trend that subscribing customers have to forget the subscriptions to which they have subscribed, new applications, which can also be offered by banks, are becoming widespread. They make it possible to track subscriptions and the corresponding expenses from month to month.
MINT is one of the most popular in the United States, like Rocket Money too. Sometimes, some companies offering these applications go further by helping to lower monthly bills by offering negotiated prices from suppliers.
The actors present on the subscription model must then adapt their development strategy, by continuing to acquire new customers and encouraging existing ones to remain loyal to them.
What to remember, what actions to seize the subscription opportunity quickly and before others?
The subscription is an attractive economic model that is accessible to everyone, whatever the activity. It is not intrinsically innovative but it can be if it introduces the first subscription formula in the industry concerned (precursor status) or by expanding the services offered.
To achieve this, it is then a question of carrying out a detailed analysis of the segmentation of its portfolio (which customers can potentially be interested?) then of adapting the organization (supply chain, invoicing, payment) and the customer relationship accordingly. (aftersales service in particular).
The subscription model can still evolve and be enriched by multiplying the services offered to the customer. Work on the strong and specific value proposition justifying the subscription is necessary. Discount or low price subscriptions are indeed still very numerous and deserve to be enriched.
By subscribing, companies benefit from direct access to customer data, thus creating the opportunity to better define customer profiles and develop products and services that meet their expectations as closely as possible, in an optimized customer journey.
The subscription makes it possible to offer a real customer experience, based on the long term, more accessible than “one-shot” experiences at the rate of sporadic consumer purchases.
Offering quality products and services is necessary but not sufficient. The subscription model makes it possible to combine services and products of excellence that are as close as possible to the needs of the customer, with an experience that delights them. The customer then becomes aware that he obtains a higher value via the subscription than that of the unit and spot purchase.
It is also a question of significantly optimizing the retention process by guaranteeing a personalized and lasting relationship, based on trust. Thus, it does not seem relevant to overly complicate the termination process to retain the client by force (long-term commitments, tacit renewal, concealment of contact details to terminate) but on the contrary to demonstrate transparency, freedom of choice and a quick and easy termination process.
The switch to subscription represents a major change in model and organization. It must be carefully prepared in advance to meet the expected success. To date, many initiatives have been launched by major brands and then finally abandoned.?
Eric GALLARDO?– Partner at onepoint, leading "Marketing & Customer Experience" pratice.