Why are retailers implementing Subscription Models?

Subscription commerce has been an effective and reliable tool to help customers receive goods, services, or content straight to their doorsteps and screens in exchange for recurring payments. It has proven to be an irresistible opportunity for retailers to engage with their core consumer audience.

Why retailers are implementing a subscription business models

In the last three years, the trend for subscriptions has grown exponentially. It’s common to find subscription services across every facet of retail, from fashion, hair and beauty products to consumable items like food and drink, as well as hobbies and household products. Subscription- only retail brands such as Stitch Fix, Fabletics, Birchbox, Hello Fresh, Gousto, Freddie’s Flowers, Birchbox, Smol, and Who Gives a Crap have revolutionised the potential of online retail.

When managed correctly, subscription commerce offers new opportunities to bring additional revenue streams to your business. In addition, you can align your subscriptions with your customer service promises while simultaneously stabilising sales forecasts. In short, it’s a win-win situation for shoppers and retailers alike.

Writing for Forbes business magazine, Jia Wertz declared that if the market does reach the $904.25bn global projection in 2026, it will be "an increase of approximately $784 billion, compared to the current year."

Wertz added that in 2021 alone, "Existing subscription brands grew their overall customer base by 31%", referring to the research compiled by Recharge Payments in their report, The State of Subscription Commerce 2022.

What are the challenges of a subscription based business model?

Success is not guaranteed with a subscription model because of high-levels of customer churn and consumer demand for value. Customers can drop out the funnel at any given time, giving retailers new headaches and challenges to navigate.

Despite the sector's worldwide growth, we wonder how sustainable subscription commerce is in the UK and whether retailers can take action to stabilise their customer base. Data from Barclaycard Payments shows a "5.7 percent fall in subscription spending in May 2022 compared to May 2021."

This could be attributed to the reopening of society, where consumers were no longer asked to remain at home, and a time when the High Street officially reopened for business.

It should also be noted that the subscription commerce model is built around high levels of customer churn, so these figures may not yet be cause for concern.

However, while 2021 saw record levels of subscriptions, it was also estimated that "48% of those using a new subscription service back in 2021 cancelled after just the first two months." (Source: 2022 Trends for Subscription Marketing, Sagacity Solutions). This high cancellation rate could be directly correlated to retailers' focus on discounted introductory rates as part of the customer acquisition plans. As a result, many customers may be looking to cancel once the introductory period is no longer applicable.

As we move into 2023 and the cost-of-living crisis continues to impact consumer spending, we predict that shoppers will move towards subscription models that prioritise value for money.

The challenge for retailers is how to respond to the high churn nature of the market. Should investment be placed into customer acquisition, or should the emphasis be placed on customer retention?

The benefits of a Subscription Model

Due to the many benefits of subscription commerce, retailers across different sectors are investing in new technology to integrate subscription plans into their platforms.

• Increased sales: The first is an obvious boost in regular sales. Transactional retail may only involve one-off or semi-regular purchases from the same customer— however, subscription commerce results in a regular payment managed via direct debit or other automated payment. From the retailer’s perspective, this remains a consistent income and increase in sales that remains as long as the customer chooses to remain subscribed.

• Improved customer lifetime value: Subscription commerce offers a unique way to enhance your customer’s lifetime value. A subscription payment (whether paid weekly, monthly, quarterly, or annually) will significantly increase the amount of money a customer will spend with your business throughout the business relationship. A 2020 article published by Salesforce indicated that “companies that do build a subscription model often unlock more revenue — subscribers are an average of 217% more profitable than one-time customers.”

• Brand advocacy: They do this by consistently giving good customer service, making subscriptions that are flexible and easy to change, and making it easy to pay. If the customer likes the service, they are more likely to keep using it for a long time. They are also more likely to be strong brand advocates, spreading the word about their customer experience and giving lots of opportunities for user-generated content.

• Effective inventory and supply chain management: The subscription model allows retailers greater control, which they can then pass along to their suppliers and third parties. With accurate predictions on your sales forecasts, retailers have the potential to improve their profit margins, either by reducing unit costs or by reducing wastage.

The impact of Subscription Models on Brand Loyalty

Subscription models allow retailers to build brand loyalty through repeated purchases. However, shoppers could choose to cancel their subscriptions with minimal notice. Identifying their expectations allows retailers to implement solutions likely to keep shoppers satisfied and more likely to retain their subscriptions.

Surprisingly, our research has highlighted that shoppers are less influenced by initial introductory discounts than retailers may expect. Instead, they would prefer a consistently low price, offering value for money. While time-limited offers will entice shoppers, they also lead to significant customer churn. We discovered that 20% of subscribers who plan to cancel their subscription soon will do so because they “only signed up to benefit from an introductory discount.”

To enhance your expectations, retailers should focus on creating flexible self-service solutions that allow customers to take control of their subscriptions. Today’s subscribers want a system that allows them to adjust the frequency of their deliveries with minimum fuss. They want to set delivery days that match their priorities. They want easy refunds, and they want to set their personal preferences easily.

Customers are not interested in referral schemes, although they want to collect loyalty points and want to see direct customer service links incorporated so they can easily speak to an advisor if they need help or support.

With the right technology in place, these expectations are reasonable and should be relatively simple to implement. An improvement in customer retention goes hand-in-hand with customer loyalty and brand advocacy.

For more on Subscription Models, our latest Whitepaper, The Future of Subscription Commerce is up for Renewal can be downloaded in full, for FREE, directly from sherwen.com.

We partnered with YouGov to survey thousands of UK consumers to try and discover how retailers can deliver the subscription commerce package that their customers are looking for.