Why now is the time to think about your subscription business

Covid-19 has changed the way we buy everything from clothing to groceries, resulting in an eCommerce boom. Beyond transactional eCommerce, however, the smart money is on introducing subscription models to increase customer loyalty and lock-in recurring revenues - as Amazon has successfully done with Prime (Prime customers spend more than double what the average customer spends on Amazon) and with Subscribe & Save. In this article, we have looked at what attracts consumers to subscriptions, what the advantages for producers are and how the pandemic has impacted the model.

Over the past years, we have been seeing subscriptions being launched over all kinds of product categories – from body care (the female company, estrid), to grocery or drinks (etepetete, Hawesko Select) or plants (The Sill, Bloombox Club). However, subscription models are not new. In fact, in the late 19th century, the United States saw the rise of a new profession: the door-to-door milkman. Back then, milk delivery, along with delivery of the daily newspaper, became the standard subscription business model. Today’s tech firms are giving the business model a modern twist, triggering the rise of a new era in the subscription economy. Inspired by digital media giants such as Netflix and Spotify and fueled by the growth of e-commerce, subscription models have regained popularity in consumer industries— with companies such as HelloFresh, BarkBox and Lillydoo defining a new way to buy consumer goods.

Getting the consumer’s attention

 To get to the bottom of what draws consumers to subscriptions, we surveyed over 2,700 consumers in the United States, France, and Germany. We questioned them on two types of subscription service: “replenishment”, meaning regular refills of everyday items such as groceries, and “kits”, subscription boxes which are typically based on a theme and whose contents vary from delivery to delivery, such as meal kits. The results showed that there are three major factors drawing consumer to make a commitment to a subscription service:

a)    Firstly, price. Especially for replenishment subscribers, the lower price of the subscription offer is the biggest trigger for the decision with 40% stating a lower price as the key reason they subscribed. By selling their subscription directly to consumers, companies such as Dollar Shave Club are able to significantly cut costs and offering their products at a lower price, making a regular purchase attractive for consumers.

b)   Secondly, convenience. Subscriptions are an easy way to ensure the supply of consumers’ favorite products without the need of remembering to order them over and over again. Replenishments ensure that consumable items are available at home when needed. A great example for this is Lillydoo’s diaper subscription. Consumers can plan their demand for diaper’s very reliably. By signing up for a subscription, they get the convenience of having them delivered right to their doorstep.

c)    Thirdly, fun. This is especially important for subscribers of kits, with 12% stating it as the most important reason to sign up. Subscription boxes focus on a personalized surprise, e.g. beauty products and clothing. Glossybox, available already in 10 markets, offers monthly delivery of five beauty products including offers for special edition boxes.

The value to producers

Subscriptions enable producers to gain a competitive advantage. They can offer products to consumers at a lower price while also improving margins. By selling direct to consumers, producers regain control over discounts and pocket the retail margin for part of their sales. In 2011, Mark Levine and Michael Dubin founded Dollar Shave Club (DSC), a subscription service for white-label razors and blades. They were frustrated by the cost of branded shaving products and proposed a simple value proposition: unbranded high-quality razors at competitive prices paired with transparent pricing and direct delivery—full stop. DSC took off and was acquired by Unilever in 2016 – for an astounding $1billion. On top of that, selling direct to consumers enables producers to gain consumer insights from the behaviors they see from direct sales. Rather than buying demographic information from their retail partners, manufacturers can directly access and own data about their customers. Combined with smart product configurators and automated recommendations (mass customization), data can lead to significant cross-selling and upselling and allows producers to develop their products closer to the market.

Subscriptions create a “One win, longer victory”-scenario for producers. Subscription requires investment in consumer acquisition but once a consumer becomes a subscriber, the marketing activities require less effort and money. By default, one-time purchase models require more deliberate actions from both customers and producers: The customer needs to initiate a purchase and go through a decision-making process—for every product. The producer then needs to reactivate the customer, for example, with marketing or promotions— for every product. Reactivation is costly and uncertain. Product delivery is also a challenge as customers expect their orders to arrive soon after they click the “buy” button. With a subscription model, the customer and the producer agree on a default deal and then take action only once the deal no longer works. The customer takes action to stop the subscription, and the producer acts to manage the churn, continues to deliver value, and aims to keep customers happy.

Lastly, subscriptions allow producers to increase their valuation and get a glimpse into the future. Subscription business models create recurring revenue without the need to repeatedly and expensively activate customers. Recurring revenue increases company valuations significantly, as the customer acquisition cost is spread over many transactions, resulting in 3x - 10x higher valuations. The top-line stability is coupled with operational predictability. Subscription businesses see less demand volatility, improved the demand forecasts, and reduced inventory management costs. At the economic core is a win–win: Customers receive products and associated services, such as recurring delivery, for a potentially lower price than the standalone product, and they get the convenience of regular replenishment and a fun, surprising element to the products they receive. Meanwhile, producers lock-in recurring revenue streams once a consumer is subscribed. Producers benefit from better capacity planning and savings in storage, which compensates for the delivery service fee

Subscriptions in a pandemic

Global lockdown has added a new chapter to the subscription business creating new needs and shaping new consumer behaviors. In the result, it has accelerated the growth of subscription models.

As stores went into lockdown, consumers sought a fun shopping experience elsewhere – and turned to subscriptions. Instead of browsing in the shops, they resorted to surprise boxes of goodies delivered to their doorsteps. Birchbox, a subscription service for beauty products, has noticed the increase in both subscriptions and consumer engagement in their channels (website, newsletter, e-commerce). Additionally, the new subscription rate across all Birchbox subscription tiers has been increasing since the lockdown. With restaurants closed and customers suddenly faced with the challenge of cooking every day – and demand for meal kits skyrocketed – HelloFresh increased its expected revenue growth for 2020 from 22-27% to 40-55%. Due to the rapid developments in the Covid-19 pandemic, it remains to be seen which of these changes will stick beyond the pandemic and whether the same services will be popular in case of another lockdown.

Either way, establishing a successful subscription model requires more than simply shipping a good product on a regular basis. How can your business benefit from the power of the subscription business model? Find out more on the pitfalls of subscription models and how to make them work for your organization in our next article, check out our white paper or get in touch with us!

Authors:

Sebastian Schoemann, Partner, Munich

[email protected]

Isik Aysev, Principal, Vienna

[email protected]

Ann-Kathrin Beuther, Senior Consultant, Munich

[email protected]

Ewa Kaczynska, Senior Consultant, Zurich

[email protected]