The Rise of Subscription Services: Origins, Economics, and Predictions
Subscription services with home delivery are becoming an increasingly popular way for consumers to acquire regularly purchased products. From food to clothing, subscriptions are popping up in a wide variety of consumer verticals as well. The “subscription economy” is set to grow to $1.5 trillion by 2025, The Washington Post reports, more than double its estimated worth in 2021.
?But questions remain about what is driving this trend, and why it is disrupting consumers’ traditional methods for buying goods. In this article, we explore the economics behind emerging subscription services and what their popularity might mean for both B2C businesses and consumers in the future.
The Unique Nature of Modern Subscription Models
?There are a few key reasons why subscriptions have become more popular in recent years. For starters, the rise of eCommerce has made it easier than ever for consumers to purchase items online. Today, consumers can access just about any type of product—whether it’s a houseplant or a prescription drug—without leaving their homes. And with the increasing number of subscription services available, it’s becoming easier and easier for consumers to find a service that meets their needs in areas traditionally serviced by in-store retailers.
Compared to traditional retail, subscription services offer far more convenience and flexibility. With a subscription, consumers can schedule deliveries according to their personal schedules. The sophistication of online eCommerce platforms supports consumers’ confidence that they are purchasing the right products as well.
Types of Subscriptions Taking Off Today
?There are dozens of products we buy regularly and on a recurring basis. There are products where there are highly variant levels of quality in the market as well. Products that we buy regularly, that vary in greatly in quality, or both are viable candidates for subscription services.
?Simple examples include Purple Carrot, which offers premium vegan grocery products not available in most retail groceries; and Stich Fix, which offers personalized, designer-selected clothing—a service unavailable in traditional apparel outlets.
Other popular types of subscriptions include:
Comparing Subscription and In-Store Retail Models
?Subscriptions are often less expensive than buying the same products in stores. This is due in part to the economics of the subscription model, which lock in certain value reduce B2C companies’ costs associated with traditional supply chains, such as building relationships and aligning distribution with traditional in-store retailers. Cost savings allow B2C companies to provide products at reduced prices or provide more premium-quality products at reduced costs.
?Also, unlike physical retail, subscriptions allow for customization of products based on a consumer’s needs—not just what is made available at a store based on market metrics.
?For example, if a person only wants to receive organic produce in their subscription box, they can find a service that meets this need. Or, if they only want to subscribe to products from specific brands, there are services for that, too. They needn’t rely on the distribution decision making of corporate retailers.
?Modern eCommerce technology and the ubiquity of high-speed internet make subscription models more viable as well. Many new services provide websites with in-depth details and experiences; many provide person-to-person or self-service consultations with experts before consumers subscribe to the products they need.
?In fact, 50% of prescribers are comfortable prescribing routine medications for non-severe problems (e.g., acne, acid reflux, and herpes) without seeing a patient in person; and 75% are comfortable doing so for refills on ongoing treatments (e.g., birth control), according to GoodRx Health. This makes healthcare a more viable market for subscription-based home delivery services.
Clear Business Benefits for B2C Companies
?There are clear financial and brand benefits for B2C companies who offer subscription services. Subscriptions offer businesses a way to reduce the costs of shipping and handling, as well as packaging materials. Retailers effectively pass on distribution responsibilities to small package goods providers such as UPS and FedEx as well, saving them some administrative and logistics costs.
?Perhaps most importantly, subscriptions can be a way to build loyalty with customers. This is especially important in an increasingly competitive marketplace. And if subscriptions offer customizable products based on consumer needs, it’s easier for companies to appeal to a wider range of potential subscribers.
Potential Pitfalls of Subscription Services
?Despite several advantages, there are potential pitfalls for B2C companies who choose a subscription model. First, the company becomes the responsible party for all customer experience problems consumers may incur when using their services. Some of those responsibilities might otherwise be mitigated by in-store retailers or even online marketplaces that might otherwise sell their products.
?What’s more, products that are already highly affordable and convenient in retail locations might not be good fits for subscription services. Products that consumers may not require or demand on a regular basis may be poor fits for subscription models as well.
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?Finally, subscription models can become very rigid, locking businesses—and consumers—into certain production, product, and distribution models that might become unappealing or unprofitable over time. It is more difficult for a company with existing, ongoing subscriptions to trade one product for another, even if subscriptions for the existing product become too limited or less than profitable.
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Five Predictions about the Future of Subscription Services
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?The COVID-19 pandemic has increased the appeal of subscription services, eliminating the need for some trips to retail stores. But the popularity of subscription services is not likely to subside, even after the COVID-19 pandemic does. Rather, consumers’ exposure to subscription services likely has made them “stickier” in terms of their market appeal. Her are five predictions about the future of subscription services for retail products based on these trends.
1. Saving Time Will Never Go Out of Style
Subscriptions allow consumers to stay home when they would normally drive to stores and still get the products they need. Consumers therefore spend less time sitting in traffic, standing in line, or walking through aisles in physical stores—experiences that are not particularly fulfilling in the first place. They can apply that saved time to work, recreation, or family instead.
2. Consumers Enjoy Quality Combined with Cost Savings
?In-store retailers must be highly selective about which products appear on their shelves. Each of those products must transition through a complex, volume-based distribution chain to arrive in their limited- capacity retail stores as well. Subscription models avoid these costs as well as the limitations associated with physical retail spaces. That means they can offer more exclusive products for selective customers—products that are often hard to find or too expensive in retail stores.
3. Remote-Work Models Mean Consumers Are Available
Many people are now working from home. As companies shift towards permanent “hybrid” work models, working from home likely will remain popular among some employers and their workers, as Gallup reports. Consumers who work at home may have more time to order subscription-based products. They are available when those deliveries arrive at their front doors as well. This represents a stark difference compared to only a few years ago when consumers might have been reluctant to have deliveries arrive in front of their homes while they were away at work.
4. Small Package Tracking Capabilities Increase Visibility for Consumers
Consumer-facing tracking systems supported by UPS, FedEx, and USPS remove all ambiguity about the delivery process. Subscription providers can use tracking metrics to anticipate delivery times, then provide customers with a consistent experience based on those estimates. Consumers can easily track any one of their orders so that they can be nearly certain as to when they will arrive.
5. Subscription Services Will Perform Better Over Time
No matter the economic climate, subscriptions offer advantages for both companies and consumers. Companies will hone best practices as the market grows more mature. As eCommerce, communication technologies, and high-speed internet become more sophisticated, the online experiences that facilitate subscription services will continue to improve as well.
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Getting Started with Subscription Services
If you’re a B2C company thinking of offering subscriptions, there are a few things to keep in mind:
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Find Your Winning Approach There is no single best strategic approach to creating a successful subscription business. But there are some characteristics all successful subscription services companies will share.
“The winners will be brands and retailers that use a customer-centric approach to offer the right combination of value, flexibility, product options, and novelty to create customer devotion and business resilience,” as McKinsey describes. “Those companies will successfully delight customers, reimagine their businesses, and help shape the future of retail.”
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Partner with Uvation as You Transform Your Business Model
The B2C experts at Uvation can help you as you transform your business model to provide subscription services for consumers. Contact one of our experts directly to discuss your options today.
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